DXP Enterprises Inc (DXPE) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the DXP Enterprises Inc. second quarter 2008 results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Wednesday, July 30, 2008.

I would now like to turn the conference over to Mac McConnell, Senior Vice President of Finance and Chief Financial. Please go ahead, sir.

This is Mac McConnell, CFO of DXP. Good evening, and thank you for joining us. Welcome to DXP's second quarter 2008's results conference call. David Little, our CEO, will also speak to you and answer your questions.

Before I begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings, but DXP assumes no obligation to update that information. Our second quarter press release is available on our website, www.dxpe.com.

I will begin with a summary of DXP's second quarter 2008 results. David Little will share his thoughts also regarding the 2008 results, then he will be happy to answer your questions.

Sales for the second quarter increased 120% to $187.8 million from the second quarter of 2007. Excluding second quarter 2008 sales of $76.1 million from businesses acquired in 2000 and 2008, sales for the 2008 second quarter increased 30.9% from the 2007 second quarter. Sales for our Supply Chain Solutions Group increased 339% to $42.3 million compared to the 2007 second quarter. Excluding sales of acquired businesses, Supply Chain sales increased 8.5%.

Sales of Innovative Pumping Solution products increased 77% to $31.6 million. Sales of MRO products by our service centers increased 97% to $113.9 million. Excluding sales of acquired businesses, sales of MRO products by our service centers increased by 20.4%.

Sales by Precision Industries were $67.4 million for the second quarter of 2008, up $3.9 million from the first quarter of 2008 sales of $63.5 million.

Gross profit for the quarter increased 112% from 2007. Gross profit as a percentage of sales decreased to 27.6% from 28.7% in 2007's second quarter, primarily as a result of the lower margins on sales by Precision, which was acquired in September 2007. Precision's gross profit margin for the second quarter of 2008 was 24.8%.

SG&A increased 119% compared to the 120% sales increase and the 112% gross profit increase. Excluding the $16.2 million of SG&A expenses associated with businesses acquired in 2007 and 2008, SG&A increased $5.8 million. This increase is primarily the result of increased payroll-related expenses. These expenses increased partially as a result of increased profits, which increased incentive compensation, and hiring more personnel for the purpose of increasing sales. As a percentage of sales, SG&A decreased to 21.5% from 21.6% for the second quarter of 2007.

Interest expense increased 127%, primarily as a result of increased debt incurred to fund acquisitions. This was partially offset by the approximate 260 basis point decrease in market interest rates on floating rate debt. EBITDA increased 90.7%, and pretax income increased 82.6% compared to the second quarter of 2007. Net income increased by 86.5%. Diluted earnings per share for the second quarter of 2008 increased 66% to $0.93 from $0.56 for the 2007 second quarter.

Sales for the first six months of 2008 increased 111% to $356.3 million from the first half of 2007. Excluding the first half 2008 sales of $147.9 million from the businesses acquired in 2007 and 2008, sales for the 2008 first half increased 22.3% from the 2007 first half. Sales for our Supply Chain Solutions increased 325% to $82.5 million compared to the 2007 first half. Excluding sales of acquired businesses, Supply Chain sales increased 11.8%.

Sales of Innovative Pumping Solutions products increased 49.9% to $54.5 million. Sales of MRO products by our service centers increased 94% to $219.3 million. Excluding sales of acquired businesses, sales of MRO products by our service centers increased 15.2%.

Gross profit for the first half increased 98% from 2007. Gross profit as a percentage of sales decreased to 27.4% from 29.3% in 2007's first half, primarily as a result of lower margins on sales by Precision, which was acquired in September 2007.

SG&A increased 107% compared to the 111% increase in sales and the 98% increase in gross profit. SG&A for the first half of 2008 includes $2.5 million of amortization of intangibles compared to $800,000 of amortization of intangibles for the first half of 2007. Excluding the $32 million of SG&A expenses associated with the businesses acquired in 2007 and 2008, SG&A increased $7.1 million. This increase is primarily the result of increased payroll-related expenses. These expenses increased partially as a result of increased profits which increased incentive compensation, and hiring more personnel for the purpose of increasing sales. As a percentage of sales, SG&A decreased to 21.3% from 21.7% for the first half of 2007.

Interest expense increased 131%, primarily as a result of increased debt incurred to fund acquisitions. Long-term debt during the first half of 2008 increased by $3.8 million, primarily as a result of the acquisition of Rocky Mountain Supply in the first quarter of 2008. Long-term debt at June 30, 2008 was $105.8 million.

Working capital increased $15.9 million as of June 30 compared to December 31, 2007. Availability under our bank lines of credit increased $12.5 million as of June 30, 2008 compared to December 31, 2007, primarily as a result of increased accounts receivable and inventory.

EBITDA increased 85% and pretax income increased 66% compared to the first half of 2007. Net income increased 65%. Diluted earnings per share for the first half increased 44% to $1.73 from $1.20 for the 2007 first half.

First half of 2008 was a very successful beginning to what we expect to be a very successful year.

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

Thanks, Mac, and welcome, everyone.

As you know, DXP Enterprises has a three-prong growth strategy that focuses on year-over-year organic growth, operational improvements, and strategic acquisitions. And DXP's mission is to be the best solution for the industrial customer's needs of MROP Products and Services, Innovative Pumping Solutions and Supply Chain Services.

The question is, how are we performing? Mac talked about the financial results, which we're proud of, but what drives these results?

First and foremost is our associates, and the associates that join our team through acquisitions. Their accomplishments are many, and I would like to highlight a few of their successes.

First, the MROP Products and Service segment has grown our DXP super centers from 8 to 11. And the 14 that were under construction has obviously been decreased to 11. We've also started up five new service centers. We had three and now it's five. And with the Rocky Mountain Supply acquisition and the new store openings we have had, we have increased our total number of stores to 108, giving us a growing national footprint.

Second, Innovative Pumping Solutions continues to grow its backlog, and quoting activity for capital pump projects is strong. These projects can take over a year to complete, so to reflect their efforts more accurately, we record revenues on a quarter-to-quarter basis using a percentage of completion accounting. IPS has had organic growth of 50% for the first six months compared to the same six months last year.

Third, Supply Chain Services continues to grow, and with the acquisition of Precision, we are considered one of the best Supply Chain Services companies in the industrial market.

Our third growth strategy is strategic acquisitions. If we do acquisitions right, we help our organic growth by leveraging the people, products and services the acquired companies present; plus the acquired companies leverage DXP's products and capabilities.

I am very pleased that since 2005, we have acquired 10 companies. They have all exceeded our organic growth expectations of them. What makes these acquisitions successful for DXP?

First, people. We just concluded 1.5 days of strategic planning with over 300 associates from sales to management. We had openness, innovation, enthusiasm; we created a list of great opportunities for growth and efficiencies. All of our acquired associates have in common a passion to serve the customers, and it was nice to hear them all say, they really understand customer service at DXP.

Second, complementary products, categories, and services. DXP offers product categories including pumps, bearings, power transmissions, seals, hose, safety, electrical, industrial distribution supplies, fiber glass pipe, fasteners, fluid power, handling and power tools, linear products, lubrication, material handling, and pipe valves and fittings. These product categories give us greater product depth and value-added services to grow our existing customers.

Third, complementary geography. We continue to acquire people that give us increase to our national footprint.

Fourth, end market diversifications. As most of you all have been with us for a long, long time, you know that we had 40% in the oil and gas sector, and that is -- we've moved that downward, as we have acquired other companies in different parts of the world. And it has lessened our concentration in any one industry.

Fifth, combined companies will benefit tremendously from improved purchasing power as we get bigger.

Sixth, Precision is an established and market leading integrated supply platform. We believe that integrated supply will continue to gain importance to customers, as they continue to drive more of their supply chains to outsource providers.

Finally, revenue enhancement opportunities. DXP has consistently spoken of our desire to be the ultimate destination for the industrial customer. To accomplish this, we need to have products and services to support customer needs. The combined companies provide tremendous opportunity to drive broader product offerings into our respective customers.

We will continue to look for additional profitable acquisition opportunities, which add complementary geography, customers, product and services. We are excited about the opportunity DXP has before us. We look forward to a strong third and fourth quarter with confidence that our three-prong growth strategies are generating substantial market share gains, sales growth, and increased profits.

I would like to thank all the DXP associates for a great quarter. Thanks again to all the participants on our conference call today. We will now be glad to answer your questions.

(OPERATOR INSTRUCTIONS). Matt Duncan, Stephens, Inc.

Good afternoon, David and Mac, and congrats on a very nice quarter. The first question I've got -- I just want to make sure I've got these numbers right. On the number of super centers that you guys have, you said 11, but if I remember correctly, it was actually 11 last quarter, including three at Precision that you classified as super centers. So is it now 14 including those three?

You're correct in your analysis. I forgot to include the Precision ones.

Okay. So you've got 14 super centers and 11 more that are under conversion. So you didn't add any more under conversion this quarter, but I assume that's just to kind of let the guys you've got working on the ones that you're working on now kind of do their thing before you add any more expense to the SG&A line, is that accurate?

That's right. As you remember, last quarter, we felt like we had high expenses. And expenses are still a little high as we have invested in these stores. And then revenues are coming, which they have; you know, we were glad to convert the 11 to 14, as you pointed out.

Sure. Yes, you guys beat my revenue number pretty substantially there, and I would assume that a lot of that is these super center conversions.

David, I'm trying to get a handle around this SG&A expense line and maybe try and better understand. And maybe, Mac, it's a question for you -- if I look at the $5 million sequential increase in SG&A expenses, how much of that is incentive comp and how much of that is extra people that you had for a full quarter in the second quarter versus a partial quarter in the first quarter?

Well, that's a good question. I didn't really --

I guess what I'm looking at is, do you feel like there's a pretty substantial amount of operating leverage at that SG&A line, since you haven't added any more people in the second quarter, you continue to ramp the sales from those guys going forward. Do you feel like you've got some good operating leverage there? Kind of talk to us about what you expect that SG&A line to do going forward?

Well, actually, EBITDA would be 10%. So, we're always focused on it but, as you know, as business is a little tougher out there; not in every market, but in some of them, we invest $1.00 and we expect a return on that. Some of that return is a little slower than we would like to see. But we're going to continue to invest. We're going to continue to grow the company. And if the economy improves us wrong, well, then we're going to look pretty silly. But right now, we're doing pretty good.

Okay. And then David, if I look at your very good 31% organic revenue growth, what end markets do you think are driving that right now? Is it across the board? Are there some in-markets that are weaker? Or is it really everything is still pretty good for you guys right now?

We feel good. The ag market, food and beverage, certainly oil and gas -- we see some softness in refining and -- but chemicals good -- not all chemicals; some other chemicals, not quite as good. But every one of our regions is producing really good results -- and mining, I should have mentioned mining, even though I think we are seeing commodity prices come down a bit. Mining is still really good. So we just try not to read the newspaper. That's all I can say.

Fair enough. Looking at the Innovative Pumping Solutions sales, that was up quite a bit sequentially. Were there any sort of big projects that you finished? I know you're using percentage of completion, but there's still a big chunk that happens at the end with those. Or is that really just an indication that going forward, this is probably a new base that we build off of and demand is still pretty strong for those products out there?

Looking through the level of sales for each of the locations that supply the Innovative Pumping Solutions products, I mean, they all did well. None of them were large -- there were not any large jobs, like in fourth quarter, we had a $13 million job. There weren't any super large jobs in any of this.

Okay. And then Mac, what is your backlog today at the end of the second quarter? And what was it at the end of the first quarter for IPS?

I can probably answer that. It's about the same. And it's around -- it varies from, like, $37 million to $39 million. I think in our crystal ball or at least what our guys are saying is that they expect the second half of the year to be as good or slightly better than the first.

Okay, fair enough. And then the last couple of things then I'll jump back in queue.

First of all, do you have any idea sort of what the impact of price was on your sales year-over-year?

Our estimate is 5%.

About 5%? Okay. And then last thing, David, you talked about acquisitions. You guys have clearly done a good job making those over the years. What is your acquisition pipeline look like right now? And do you expect to make some acquisitions here in the second half of the year?

We have a very active acquisition pipeline. We like the pricing on those acquisitions; it's gotten a little softer, which has made it more attractive for us. And yes, we see ourselves making some acquisitions in the remaining part of the year.

Okay, thanks. And congrats, again, guys.

Holden Lewis, BB&T.

To sort of piggyback off of Matt's questions, I guess I'm now confused about the super center question. I guess as I kind of heard it, you said that you basically went from -- if you had 14 originally, then you added three, does that mean you're at 17 including the three from Precision? Or you're at 14 including the three from Precision?

I got these numbers from our marketing department, and they just left off Precision. So we had -- I said eight super centers by our definition being more than three product categories, and each product category doing more than $0.5 million.

We had eight, but we really -- Precision had three. So we really had 11 at the end of the first quarter. We have now -- of the 14 that we had under construction, three of them have now met the criteria. And so we have 14, and then we didn't add any more under construction because we had kind of gotten a little ahead of ourselves. That's quite a few to have under construction at one particular point in time. And as you remember, the expenses were a little higher in the first quarter and are still a little higher in the second quarter, even though I'm not sure we can quantify that amount.

So the 14 has gone to 11. And then we had three new store openings -- they're not super centers; they're just a new store -- openings in the first quarter. And we have added two more new store openings in the second quarter.

Got it. Okay. And now -- and I guess this is kind of the softball part of the question is -- why are your revenues up so big in the MRO side? And I guess are you able to look at the service centers and sort of how you define service centers and the new stores and say, the revenues from these sources are X higher than maybe they would have been prior to achieving service center designation?

Or -- I mean, are these truly the sole reasons for what is a pretty remarkable acceleration in revenue growth? Or is there -- did your markets get better in terms of your mix? I mean, how do we look at your acceleration in revenue growth?

Well, we don't have a mathematical formula. Sorry, Holden. We just don't. But we do know a couple of examples -- we know we took a branch that was doing just pumps in Oklahoma and they used to do $200,000, $300,000 a month. And now they sell four different product categories. And they do $1.2 million a month. So we know that if we add to our pump business with these other categories -- and basically, pumps, by the way, one of the smaller markets we serve; bearings and power transmission would be a much bigger market; industrial supplies would be a much bigger market -- that we grow these stores.

We also know that every salesman is charged with the ability to go to a customer and say, you know, I've been your pump supplier, but you know, I know you buy bearings and power transmission also; why don't you buy your bearings and power transmission? So we have cross-selling also going on at the same time.

And then we've had pretty consistent growth in our project -- pumping system project business. And that's worked really, really good. And then in Supply Chain Services, Precision is implementing new stores -- I mean new integrated supply stores inside the customer's facilities. And so that is bringing a revenue stream onboard also.

And so, just everything we're doing is designed -- including acquisitions, which you all don't tend to give us much credit for -- but given the fact that we are organically growing those acquisitions and we're batting 100%, it -- we just -- and we're doing that because we're buying profitable companies, people that know how to win, know how to make money, and then we add more product categories to them. They can leverage our Innovative Pumping Solutions. They can leverage Supply Chain Services. And they can do all those things -- it's just all working.

Okay. And then setting aside the Precision for a second and looking at your integrated supply business, if memory serves, I think that you kind of considered your SmartSource sites to be about 19 at the end of Q1. I think that that was the number. Are we still at 19 now? Did we add anybody? What's sort of the prospects for your organic integrated supply business?

Yes, I think Mac pointed out that it was -- for the quarter, it was only 9%, something like that, in growth.

Right.

And the reason for that is that we've had a customer for 10 to 13 years, I can't remember exactly what -- Hoover. And Hoover got sold. So half of Hoover is going away for us, and yet we're replacing that business with new business.

So our integrated supply people are relatively flat, which is unusual for them, and will be unusual going forward. But they have had this one account that got sold. And they elected to go a different way -- half of it did; the other half we maintained.

So, just like Precision, a number of years ago, they lost a catalog account, I guess. And so you kind of have blips. But the business itself -- a lot of publications are pointing to the fact that it's growing at 20%. And we typically see that.

Okay, sure. So how many sites do we have now for your SmartSource? You mentioned that Hoover -- some of that was going away. I think that was a few branches. If you finished up Q1 with 19 SmartSource locations, how many did you finish Q2 at? And are those the right numbers?

I don't know the answer to the question. I think the 19 was right because I looked at my notes and that's what I quoted. But I did not look at that this time. I think there's been four sites of Hoover that have gone away. And I think they've added a couple of new ones. But don't hold me to that. I'll be glad to get you an answer more affirming.

And then one more thing and I'll jump back into queue. But do you know how much accretion you got from Precision, bottom line? And then the rest of the acquisitions that are in the mix?

The accretion for Precision in the first quarter was $0.07 and in the second quarter it's $0.11. And some of that is driven by interest. Interest costs are down; it's part of why the accretion went up.

Great. Thank you.

Chris Bamman, Morgan Joseph.

Just a quick housekeeping item. Can you just run those numbers again for the three businesses, the amount and the percentage they were up -- IPS, MRO, and Supply Source?

For the quarter?

Please.

Okay, Supply Chain revenues for the second quarter were $42,318,000. And that was up 338.7%, so 339%. And Innovative Pumping Solutions was $31.6 million, and that's up 77%. And the MRO solutions were $113.9 million, and that's up 20.4%.

Okay. That's helpful. Thank you very much. As you look at the backlogs for the Innovative Pumping Solutions, does the margin profile in that backlog look -- how does that look compared to the margins that you've been getting currently?

I'm not sure I'll answer your question exactly, but you do raise a good point. We're having -- a lot of these jobs are -- they're quoted and worked for over a year. And they also sometimes take over a year to build them. So in that timeframe and in that lag, we oftentimes get caught -- especially here of late, with steel prices going up an awful lot -- and so we have seen some erosion in our Innovative Pumping Solutions margins that we haven't been experiencing in years past.

Now, I'm not quite sure that was your question, but it's an important part.

Okay. Well, it sounds like you and a lot of other people are faced with the same commodity pricing pressure. Is there any sort of ability or is the resistance too great, the competition too great, to even pass a portion of that increased cost on? Or is there just too much pushback?

Yes, I think when we -- when I said that, by the way, I was [sort of thinking], you know, we represent Goulds Pumps, as an example. And Goulds Pumps raises their price to us, then we're typically able to raise the price on to the customer. And there's a little more pressure today as the end user customers, some of them that are maybe not doing as well, they're reluctant to have those price increases. But we still work really, really hard to get them.

What I was talking about on the Innovative Pumping Solutions, though, a little bit is oftentimes -- and we have some part of our business, it's under fixed contracts. So, if we sold them a pump, let's say, four months ago, and in between that and now, Goulds has a price increase, we try to get Goulds to honor the old price. If they won't, oftentimes we'll get kind of caught in the middle.

But that doesn't happen a lot. We don't see any big deterioration. I am just kind of giving you our dirty laundry, and what we're battling every day is just to try to make sure we pass on price increases where we can. And when we get caught, well, then we just try to adjust for that on the next [jump].

Is your question -- is it specifically Innovative Pumping Solutions, or general?

We can bring it out to general if you want, but I was just -- I know that on the last call, you guys had mentioned that margins were down on IPS as well as Precision, which brought down your margins a little bit. So I was just curious if there's been any change to the upside or even downside, I guess, in the profile then.

Well, the upside is that 5% price increase, and so sales go up 5% because of the price increase. Okay. That's over the upside. Now, the margin may stay the same, but nonetheless, the selling price and the gross profit dollars we make go up.

The downside is, is that we don't always get to pass that on. So sometimes we get caught and our cost of goods sold goes up 5%; we didn't pass it on, so we make 5% less than we had hoped. But it varies and both happens -- all of the above happens.

Okay. And just finally with that, I think you said the backlog was about $37 million, $39 million, something in that range, if I heard you correctly?

That's on Innovative Pumping Solutions. And that's the most significant backlog -- we have a backlog of general everyday business, but it truly turns in 45 days. So it's (multiple speakers) --

It turns over within the quarter, so --

Yes, exactly.

But is that number -- did you say that that number was flat year-over-year?

Yes.

And so basically the stuff comes off and it's pretty much coming on at a similar rate?

Year-over-year since year end -- in the first quarter.

Since year-end, relating it to -- from year-end till now, it's about somewhat the same. Not year-over-year. That would (multiple speakers) --

Not year-over-year; from year-end to the 30th of June or whatever it is.

Right.

Okay, that's all I have. Thank you.

Paul Resnik, Dutton Associates.

Well, congratulations again. I was just checking here, I started covering this stock back in February of '05 at a price of $4.20. And in the aftermarket today, it's up $5.62.

That's good, Paul.

It's come a long way. A lot of the questions have been asked. I have a couple of small ones. Interest rates -- what's your strategy there on LIBOR? What maturities have you chosen to go with?

What I've always done is we borrow that LIBOR on the 30 day LIBOR to stay on track. We do have a swap in place for $40 million of our borrowings that goes out -- when we did that in January or February, it goes out -- it didn't last for two years.

Two years. And secondly, the tax rate, which has had a tendency to creep up, kind of took a pretty fair step down in the quarter. Any guidance on where the trend might be there?

Yes, we think the rate that we had recorded in the second quarter is our best estimate of the rate for the rest of the year. And the reason for the decline is the state of Texas has changed to something called a margin tax from an income tax -- an income tax, they call it franchise tax. And now it's on gross profit margin. And the rules, even though the law went into effect more than over a year ago, the rules are still just coming out. And so, based on our interpretation of the rules now, the rate has gone down a little bit.

Great. Very good. Once again, congratulations.

Richard Nelson, Jesup & Lamont.

Good afternoon, guys, and congratulations; a very nice quarter. One of my questions was just answered. I was curious about the tax rate as well. That's very interesting.

A second question I have, and it has to do with the acquisition of Precision, obviously it diversified your customer base. And one segment of their strength has to do with the automotive business. And that's sort of a red flag with some of our salesmen and clients and what-not. But I suspect that that has not been a problem for you at this point, or at least up to this point.

Could you elaborate on that? And also, I apologize, Mac, but if you could tell me what your cash balance is, I'd appreciate that.

Cash balance is $5.9 million, $6 million (multiple speakers). And the automotive really should be primarily called transportation. I mean the biggest -- that's International Harvester. It does have some -- the closest to automotive would be there's a plant that builds the H2 Hummer. They also have plants that -- they build the H2 military vehicle, but they're also building a car -- auto of that or SUV or whatever it is.

So that business is exposed. The truth is that at one time, they think that they're -- or well, I guess Precision thinks they may actually get an order, a bigger order, because that plant is going to convert to do other things. They had a contract to do things for Monarch motor coaches, which --

Well, that was a new deal. They had a motor coach deal that they were already to sign up, and then they ended up closing half their plants. So that was -- it was negative but it wasn't negative to their financials, because they never had it to start with.

So it's mainly a commercial focus. And from your perspective, it hasn't been a problem at all?

No. It did hit -- I guess it did hit them on some growth they thought they were going to have.

Okay. Are you seeing any pushback at all in any of your sectors? Or is it just the momentum just carrying on pretty nicely?

Well, we're certainly happy to not be a bank or in the real estate business.

Or to be selling to US automotive.

Yes, so, you know what? We have some markets that are down. And then we have a lot of them that are up, obviously, so.

Okay. Well, thank you very much.

Ray Rund, Shaker Investments.

Mac, I was wondering if you could give us any sort of guidance as to what your year-over-year sales growth -- core sales growth might be going forward? Do you expect it to slow up from the rate it's been going at? Or do you expect to maintain the sort of momentum that you've established over the last couple of quarters?

Well, I think that the second quarter last year was sort of a weak quarter for us -- weaker quarter. So it did give a nice comparison. So I think the 31% organic growth is -- part of that comes from the fact that the prior year was sort of -- was a weak quarter. So, I guess I wouldn't --

I think we're going to see -- I don't know what the year-over-year growth will look like in the third and fourth quarter, but the third and fourth quarter will be in line or greater than the first half of the year.

In terms of --?

Volume. Sales volume. And we think as some of these stores come online and start covering their expenses, that profitability will be better.

I'm sorry, I didn't quite understand what you said. You said that the third and fourth quarter will be in line with the first half in what sense?

In the sense that we don't think that the third quarter is going to be 10% greater than the second quarter. We think it is going to be in line with or slightly above than the second quarter.

What David said was that the second half of 2008 we expect to be better than the first half of 2008. But I guess we haven't --

Yes, I don't think we're going to see -- and of course, that was the same thing that was true last year. So -- and that's typically true based on our business. So, I don't know -- but I don't know what the number is, because I'm not looking at it. But I might do the math.

Okay, well, perhaps I can take it up with you off-line after the call some time.

Oh, okay, sure.

Okay, thank you.

Matt Duncan, Stephens, Inc.

Let me get at that last question maybe a little bit differently. David, is there any reason that the sales that you guys put up in the third quarter should be below what you did in the second quarter? Or do you expect the third quarter to be higher than or equal to the second?

I expect it to be higher or equal to the second.

And then if I were to look sequentially to the fourth quarter beyond that, is there any seasonality reason for us to expect the fourth quarter to be below the third? Or should it also be higher than the third?

Well, it's more likely that it will be equal to -- sort of a combination of things. One is we do have the holidays, we have less actual working days. And so that kind of works against us. But at the same time, a lot of people will go out of their way to spend their budgets and do things like that. So -- or gear up for the next already.

So I think we look -- it's better to almost say that we expect the second half of the year to exceed the first half of the year, but not by 10% or 20% or 30% kind of numbers.

I guess the main thing I'm driving at is I just wanted to make sure this very substantial sequential increase in your sales from the first to the second quarter -- there's nothing unusual there; this is just really a good indication of what we should see from you guys going forward?

Yes, there was no significant event that caused our second quarter to be what it was.

Okay. And then another question I've got with kind of regard to your sales -- if we think about the ramp of the Supply Chain Services agreement at Precision, if we think about the two big agreements that they signed in '07 that you are currently in the process of ramping, how is that process going? And when do you expect those agreements to be kind of fully ramped up?

As we continue to say, they've been ramping up slower than we would expect. And that's the customer is not ready for us. And yet, they are now ramping up. And so we do see Precision sales continuing to grow quarter-to-quarter.

And then at what point in time do you think these agreements will be fully ramped? Or is it still a little too early to tell, given that the customer is dragging their feet on you a little bit?

They're going to go all the way through '09.

Through '09? (multiple speakers) And is it still -- are those still in the aggregate roughly $50 million, if I remember correctly?

The aggregate of both of those deals was over $50 million.

Over $50 million? Okay. All right, guys. Thanks for the extra color. I appreciate it.

(OPERATOR INSTRUCTIONS). Holden Lewis, BB&T.

I guess you commented that the margins in IPS eroded a little bit through the steel costs. What happened in the integrated supply and what happened in the MRO business? What were those internal margins looking like, stripping out Precision?

Most of our integrated supply contracts, we have the ability to raise prices every quarter. So we're not seeing much erosion on DXP's integrated supply business.

Precision has some that are quarterly, some are six months and a few of them are yearly. And they're struggling a little bit harder. But they also go back to the manufacturer and say, look, we can't accept this now; it will have to come at a later date. So they're managing that the best they can.

On the MRO side of the business, there's not a -- there's normally not a time lag between our ability to pass that on and the time that the manufacturer does that. So there's really not a problem on the MRO side.

Okay, which is fine, but when you look at the overall margins of those two businesses, setting aside the raw material stuff specifically, but looking at the margins of those two units -- were they up? Were they softer? How should we look at those?

Innovative Pumping Solution was down and the integrated supply side was down. And the MRO side, I believe, is up.

Well, it has to be up, because if you go sequentially, it's first quarter to second quarter, gross profit margin is up. And we know that Precision was down second quarter compared to -- just slightly -- second quarter compared to first quarter.

Yes. And so what drove the gross margin improvement? Was that your pricing? So was it the pricing? The new -- the software that's in? I mean, to what do we attribute the organic improvement there?

Well, we certainly see our new software and Precision has adopted not necessarily the software but the same mentality of looking at segments of their business and raising prices, and has successfully done so. And so have we. But that kind of gets offset by other areas that -- where we might have not been able to raise our price.

We have also, on the acquisition side, especially on the MRO side, we're kind of targeting -- we have a lot of opportunities, so I'd rather buy a company that makes a lot of money. So we're looking at companies that have higher gross margins in that particular area. So, it's kind of a combination of a lot of things -- some negative and some positive.

Okay. And then essence speak to your SG&A for a minute -- I mean, you did add a fair amount of SG&A during the quarter. Although it looks like organically, again, you levered actually pretty good. And I guess really the question is, first quarter, you didn't do as good a job leveraging the organic margin. I think the organic operating margin was down like -- maybe it was just the gross margin down 40 basis points. This quarter, you did a great job, it looks like, getting gross margin, leveraging the SG&A in a way that you didn't last quarter.

What was the difference? What allowed you to do that this quarter that was sort of not there last quarter that allows you -- that created a difference?

More sales.

Yes, more sales. Well, and more sales -- we had a lot of new startups in the super centers. They were new, so they were bearing 100% of the expense. Well, now they're still not classified as a super center because they don't meet the criteria. But maybe they're bearing -- maybe they're covering half of their expense now.

So there's some of that. And then, of course, Mac is laughing about the fact more sales covers overhead. But there is a fixed component of our business, so more sales does cover fixed overhead. So, just a combination of those two things.

Okay. And then lastly, if sales hadn't come -- how -- to what degree are you able to control your spend versus your sales? How quickly can you adjust that? Because obviously you added a fair amount of new SG&A this quarter. If revenues hadn't come in as strong, were we going to be in trouble? Or truly, is it just the variable nature of your model and most of the increase is a function of higher bonus accruals?

Well, we're very highly incentivized at DXP. And we have -- even our managers, their bonuses are two times their salary. So, salesmen, it might be 100% commission; sometimes it's -- looks like 100% because they make $800 a month, and then they can't live on that, so they sell a lot of stuff. So we have a very high variable selling expense, bonus, commission-oriented Company. Every person in the Company gets a bonus. And that's variable based on results.

So there's a lot of that. But at the same time, we are hiring college kids and paying them $45,000 to come to work. And they don't pay for themselves right off the bat. So we're always investing in hiring new people. We've hired a ton of people this year.

So -- and as you point out, on the MRO side of our business, we only have a 45 day backlog. So, we've kind of -- we'll have a disconnect for maybe a quarter or two where sales don't come in as high and we've overdone it; then we're going to have to make adjustments to get back where we were. But I don't know how to answer it any better than that, I guess.

And then you added, I think, 51 salespeople or 51 people in Q1. How many did you add in Q2?

Oh, I didn't get that number, sorry. I'll get it for you.

Okay. All right, thanks, guys.

Wally Wadman, Constitution Research.

Just to get some clarification. Like the predecessor already asked about margins, but specifically, Precision -- you gave the margin of 24.8% for Q2. What was it for Q1?

Q1 was 25.1%.

And on the balance --

So they went from 25.1% in the first quarter to 24.8 in the second quarter.

Okay. And on the balance sheet, do you have a figure for how much debt you had?

Yes, the total long-term debt was $105.8 million -- $105.8 million.

Okay. And then back to Matt's question on the quarterly outlook on the second half outlook, and you said second half would be better than the first half -- if I look back over the last few years, Q4 usually has a nice seasonal -- I call it seasonal jump. I don't know what's in there, whether it's the timing of acquisitions or store openings or whatever. Why wouldn't that happen this year?

What's happened in the previous years is that we oftentimes get a capital project, called -- Innovative Pumping Solutions, a very large package. And we'll start on the thing in January. And we hope it gets shipped by December -- or it gets shipped in December.

And we were on a completed contract method of accounting. That was really unfair to everybody because it looked like we had just a one-time sale. But that's not the case. We have actually lots of those. So we have changed our accounting to percentage completion. And so as we work on them -- and so it's having a smoothing effect of that. And so you won't see that big jump at the end of the last quarter.

And last question, getting back to this, some concern, a question about the economy and economic strength -- when you looked at the quarter, was the strength in the quarter spread across all three months? Or was one -- the beginning of the quarter stronger than the end of the quarter? Or how would you characterize that?

If anything, it got stronger as the quarter went on. These sales clearly went up each month during the quarter.

It's actually done that for the whole year, by the way. It started -- back in January, it was kind of soft and it's building -- we're building momentum as we go.

Thank you.

Thank you. And at this time, there are no further questions in the queue. Ladies and gentlemen, this does conclude the DXP Enterprises Inc. second quarter 2008 results conference call. Thank you for your participation. You may now disconnect.