DXP Enterprises Inc (DXPE) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you so much for standing by. Welcome to the DXP Enterprises, Incorporated 2009 second quarter results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions.)

And I would now like to turn the conference over to your host, Mr. Mac McConnell, Chief Financial Officer. Please go ahead, sir.

Thank you. This is Mac McConnell, CFO of DXP. Good evening, and thank you for joining us. Welcome to DXP's second quarter 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 earnings press release is available on our website, www.dxpe.com.

I will begin with a summary of DXP's second quarter 2009 results. David Little will share his thoughts regarding 2009 results. Then we will be happy to answer any questions.

Sales for the second quarter decreased 23.1% to $144.4 million from the second quarter of 2008. Excluding second quarter 2009 sales of $12 million from businesses acquired in 2008 on a same-store sales basis, sales for the 2009 second quarter decreased 29.5% from the 2008 second quarter. Sales for Precision Supply Chain Services decreased 23.3% to $32.5 million compared to the 2008 second quarter. Sales of Innovative Pumping Solution products decreased 54.9% to $14.3 million. Sales of MRO products by our service centers decreased 14.2% to $97.7 million. Excluding sales of acquired businesses, sales of MRO products by our service centers decreased 24.7% on a same-store sales basis.

Gross profit for the quarter decreased 20.2% from 2008 in connection with the 23.1% decrease in sales. Gross profit as a percentage of sales increased to 28.7% from 27.6% in 2008's first quarter. The increase in gross profit percent resulted from an increased gross profit percent for Precision Supply Chain Services and MRO.

SG&A for the quarter decreased 10.2%. Excluding the $3.8 million of SG&A expenses associated with the businesses acquired in 2008, SG&A decreased $7.9 million on a same-store sales basis. This decrease is primarily the result of decreased salaries, incentive compensation, employee benefits, travel expenses, and transportation expense. As a percent of sales, SG&A increased to 25.1% from 21.5% for the second quarter of 2008. The majority of this increase results from the effect of sales decreasing more than SG&A decreased.

Interest expense increased 13.5% primarily as a result of increased debt to fund acquisitions completed in 2008. We reduced total debt by $23.6 million from December 31, 2008. Debt, including current portion at June 30, 2009, was $145 million compared to $168.6 million at December 31, 2008. Availability under our bank lines of credit decreased to $36.2 million as of June 30, 2009 compared to $37 million at December 31, 2008 primarily as a result of the reduction in accounts receivable and inventory which reduced the amount which can be borrowed under the asset test. In consideration of the current economic environment, we are very focused on continuing to reduce inventories and collect receivables so we can additionally reduce outstanding borrowings during 2009.

The leverage ratio, which declines to 3 to 1 at December 31, 2009, is the most restrictive covenant at June 30, 2009 and was approximately 2.75 to 1 at June 30, 2009. EBITDA as defined by the credit facility for the 12 months ended June 30, 2009 was approximately $53.1 million, which is approximately $4.4 million or 9% greater than the amount required to meet a 3 to 1 ratio.

We are monitoring our compliance with our loan covenants very carefully. We have plans to pay down debt and to increase earnings by reducing expenses. We have held informal discussions with the majority of our existing banks and with other banks. We want to see how the second half of the year is going to shape up in terms of performance and debt pay down and determine whether or not we will need to amend the agreement before formally approaching the banks with a request. And that way, if we need to amend, we will have more information that will help us formulate exactly what we might need in terms of covenant relief and how long we might need it. We will be able to push off any higher pricing and any amendment fees that will likely come with any formal request.

EBITDA for the quarter decreased 41.6% and pre-tax income decreased 53.5% compared to the second quarter of 2008. Net income decreased 54.8%. Diluted earnings per share for the second quarter of 2009 decreased 66% to $0.15 from $0.46 for the 2008 second quarter.

Sales for the first half of 2009 decreased 15.2% to $302 million from the first half of 2008. Excluding first half 2009 sales of $26.2 million from businesses acquired in 2008 on a same-store sales basis, sales for the 2009 first half decreased 22.6% from the 2008 first half. Sales for Precision Supply Chain Services decreased 18% to $67.6 million compared to the 2008 first half. Sales of Innovative Pumping Solution products decreased 40.8% to $32.3 million. Sales of MRO products by our service centers decreased 7.9% to $202 million. Excluding sales of acquired businesses, sales of MRO products by our service centers decreased by 19.8% on a same-store sales basis.

Gross profit for the first half of 2009 decreased 10.6% from 2008. Gross profit as a percentage of sales increased to 29% from 27.5% in 2008's first half. The increase in gross profit percent resulted from an increased gross profit percent for Precision Supply Chain Services and MRO. SG&A decreased 0.2% compared to the 15.2% sales decrease and the 10.6% gross profit decrease.

Excluding the $8.2 million of SG&A expenses associated with the businesses acquired in 2008, SG&A decreased $8.3 million on a same-store sales basis. This decrease is primarily the result of decreased salaries, employee benefits, travel expenses, and transportation expense. As a percentage of sales, SG&A increased to 25.1% from 21.3% for the first half of 2008. The majority of this increase results from the effect of sales decreasing more than SG&A decreased.

Interest expense increased 8.9% primarily as a result of increased debt to fund acquisitions in 2008. EBITDA decreased 33.5%, and pre-tax income decreased 53.5% compared to the first half of 2008. Net income decreased 54.8%. Diluted earnings per share for the first half of 2009 decreased 55% to $0.38 from $0.85 over 2008 first half. Sales for the second quarter of 2009 compared to the first quarter of 2009 decreased 8.4%. Gross profit for the second quarter decreased 10.2% from the first quarter. Gross profit as a percentage of sales declined from 29.2% for the first quarter to 28.7% for the second quarter.

SG&A for the second quarter declined $3.1 million or 7.9% from the first quarter. EBITDA for the second quarter declined $1.5 million or 16.1% from the first quarter.

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

Thanks, Mac, and I want to thank our participants for joining our conference call today. The economic conditions for the oil and gas industry and industrial manufacturing have proven to be more severe than we had anticipated. Our single quarter sales compared to the first quarter continued to contract an additional 8.4% after the first quarter contraction of 18.6% when compared to the fourth quarter of last year.

On a sequential first quarter to same quarter basis, Precision Supply Chain Services segment sales declined 7.9%. The reason for the decline are existing customers are buying less and we have lost two customers which on an annual basis accounted for $9.5 million in sales. The good news, as previously stated, we have won projected total of $40 million in new business. This should result in Precision Supply Chain Services sales bottoming in the third quarter and improving in the fourth quarter into next year.

Innovative Pumping Solutions segment declined 21% on a sequential quarter-to-quarter basis. Capital projects in the oil and gas industry are mostly what I would call have-to projects and they are small. The good news is the smaller projects keep our core experts busy, plus our quoting activity is strong and we hope that some of these larger orders will be released in the fourth quarter as this industry starts executing its plans for 2010. The bad news is the sales in this segment will continue to decline through the first quarter of 2010.

The MROP segment, maintenance, repair, operating, and OEM, sales declined 4.9% sequential quarter to quarter not including acquisitions. The result for this is twofold. One, the good news is building supercenters is slow, but we are gaining market share. Two, the bad news is the oil and gas industry and original equipment manufacturers, OEMs, are contracting as they manage their cash flow. We see some signs of improvement in other industries, but because oil and gas is such a big part of our sales, we see continued small declines in our MROP segment through the fourth quarter. Gross margins declined from 29.2% in the first quarter to 28.7% in the second quarter. This is a segment mix issue as Innovative Pumping Solutions has higher margins.

SG&A expense not including depreciation and interest expense was reduced $3.2 million in the second quarter. We are taking these economic opportunities to consolidate our corporate functions such as IT, accounting, inventory control, management, and human resources. We continue to execute our strategy to have everyone on one computer system so the field can leverage resources such as inventory, our Ballistic Distribution Center, help desk, data lines, exchange servers, customer-first centers, and our corporate product experts.

Our strategy is to right size corporate and operations to establish one culture that is highly incentive-based and ensures those incentives are in line with DXP's goals for growing the top line and the bottom line. We feel that highly incentive compensation, which DXP has had in place for years, drives behavior and creates the benefits of making a big portion of compensation expense variable. We have additional plans to reduce expenses and increase productivity which should generate an additional $1 million per month savings starting in August.

In conclusion, we believe these unprecedented conditions will continue to adversely affect our industry and our business in the short term. However, during this time we will continue to proactively grow our market share, aggressively manage our costs, and position ourselves to take advantage of opportunity when the economy begins to recover. We are continuing to invest in our growth strategy use of supercenters. We presently still have 23. We have 14 under construction. New supply chain customers -- we've added $40 million worth of new business, and new products for Innovative Pumping Solutions we're designing and will have to market a new pump.

These actions combined with our cost reductions will allow the Company to weather these short-term challenges and still be able to invest in initiatives that will drive sustained and meaningful long-term growth. Thank you, and we're now open for questions.

All right. Thank you. (Operator instructions.) Our first question is from the line of Matt Duncan with Stephens, Inc. Please go ahead.

Good afternoon, David and Mac. First question I've got is sort of going back to your debt situation and also as it relates to the S-3 that you guys announced your intentions to file. Should we read anything into that or would your plan for managing the debt situation really be more renegotiating your bank facility if it need be or would you be more inclined to raise equity to pay debt down?

Want me to answer that?

No, that's all right. I think -- I mean, we want to keep all options open, but our -- we're clearly more inclined just to renegotiate our debt. We've been told by our banks when we talk to them about what would happen if we did trip a covenant. And what they basically say is we -- you have a below-market loan and you're going to be taking up to market.

Okay.

So that is -- that could be fairly -- to me, if any -- if they said it was going up $10, that would be significant. Bbut so -- I mean, it's a significant increase, so we're going to do everything we can to avoid -- to keep that below-market agreement.

Matt, we're -- I'd like to add just my own personal experience is that when banks think that you need them, they have a tendency to get a little carried away. And so we want to make sure that we have options. And those options are we're talking to other banks. We're looking at first making -- I guess I'll just first say that we still feel pretty good and strong about making our covenants. But, again, if the sales go down another 10%, then that's probably not going to happen, so -- to be realistic about it. But first -- that's our first option. Second is to have some competition in the room so in case that does happen they don't kill us.

Okay. So you guys are obviously talking to the banks, and it sounds like your first choice would be to renegotiate as long as it's not going to cost you too much before you would raise equity. Is that a fair characterization?

Well, I can't imagine us raising equity period, by the way. And the reason for that is I'm a pretty sizeable shareholder and I just -- I feel like that our long-term outlook is really too cheap to be selling our stock at this point, so I don't ever see that really being the point. I think the point of the filing is to -- should there be a company that is just a perfect fit and now that we're kind of getting closer to the bottom and so therefore we know what we're buying is -- those just start becoming real possibilities again.

Okay, David. That's very helpful. I appreciate that. As you guys look at the just completed second quarter and you look at the month-to-month sales progression throughout the quarter, what did it look like, and then also kind of relative to how the first quarter wrapped up? And what are you seeing so far in July? Are you seeing any improvement since the end of the second quarter?

Well, we're thankful so far that July looks to be flat with our second quarter. I'll tell you our guys are -- we go through quite an elaborate process to re-budget and rethink what our sales are going to be on a quarter-to-quarter basis, so they continue to see a slight decline. And of course, then the -- a pretty good decline in the Innovative Pumping Solution capital project side of the business. So, when we go back to the first quarter, it's so ironic to us that the three months were -- January, February, March -- were -- they all went down in January and then they leveled out. We see the same thing happening again in the second quarter that the sales went down in April and then they were pretty much flat for the rest of -- well, they were flat. And it was almost on a same-day sales basis they were exactly flat. That's a strong word. I better take "exactly" back. But then -- and so, we have some hope versus our forecast that -- I guess we're in July -- that July looks to be pretty flat compared to the second quarter, so --

Okay, so things -- I guess if I'm hearing you correctly, things have flattened out. If August and September look like July, then your total revenue would be fairly flat with the second quarter if you don't see any improvement from the July levels. Is that fair?

Right.

Okay, and then going back, David, to some comments you made about the segments, you said Innovative Pumping Solutions, you expect that to continue to decline until the end of the year. Is that sequential declines or are you talking year-over-year declines?

No, I'm talking about sequential declines and I'm really -- they're burning off their backlog and so -- and then -- and so I really see where -- the sequential declines all the way through the first quarter of next year. What might offset that is that we are now on percentage completion, so if we could get some of these large projects or we could get those turned loose that we've been quoting in the fourth quarter, then we could possibly get some of that started in the first quarter of the next year and, using percentage completion, would get credit for some of those sales. If we were back on completed contract basis of accounting, we wouldn't be seeing some sales and some shipments really until the second and third quarters.

Okay, and then looking at the service center, you also commented about those maybe being down a little bit the rest of the year. Again, was that sequentially or are we still talking year over year with those declines?

They're sequential. Everything I talked about is sequential, but it's --

Second quarter then you think service centers could be down the third quarter? I guess I'm just trying to make --

I think where we're at -- sequentially we think that sales are going to be down in the third and fourth quarter, but they're going to be down pretty small amounts.

Okay, so just to make sure I'm understanding correctly, you think the third quarter revenue will be below the second quarter and that fourth quarter will be below the third quarter on a total sales basis?

I think that. Yes, I do.

Okay, but then if I look at your earnings and look at the cost cutting actions that you guys have in place, should we expect earnings to be up or sort of what is the thought there?

Well, that's exactly right. And so the thought process is that it's very difficult for us to get ahead of the curve on expenses. If you can remember -- I can -- back in the good days where sales went up 10% and the bottom line went up 30, that's when things are going up. And so when they went down for distribution, or at least for DXP, I don't know how it compared against my competition, but for DXP when sales go down 10% when the bottom line's been going down 30, well, if they'll flatten out, we'll catch up with that and we'll get our expenses back in line where they're 20%, 21% versus 23%, 24%. So we'll catch up with expenses and so we -- so if sales will flatten out or only go down slightly then -- and we reduce expenses $1 million a month -- then we'll have improvement on the bottom line.

Okay. That's helpful, and then last thing here and I'll jump back in queue and let some others get in, when you talked about the new Integrated Supply deals, David, I know you've mentioned some of those on earlier calls. Are these in addition to the ones you've already mentioned in previous calls, these new $40 million in Integrated Supply deals?

We have gotten additional deals and, of course, probably since we've talked I feel personally responsible for Avery Dennison that we lost which was an $8 million deal. I think I pushed our gross margin improvement thing a little too hard, but so we've added some. We've lost a couple. And of course, when we lose them, they seem to come off -- they don't come off the books right away. They go down. They seem to go down faster than we were able to implement them and going forward. So we've scheduled all this out. We've got -- we're maxed out on our implementation teams as we speak right now. And we know we are adding new business. And so when we wring all that out with some sort of continued slight decline in terms of what people are already buying because we still feel that we have contraction going on. It's less contraction, but nonetheless we feel like we have contraction going on. And so versus what we're adding we feel like that on supply chain services that we will see the bottom in the third quarter and we will start being able to build incremental increases in the fourth and on into 2010.

Okay. Thanks, guys.

All right, thank you. (Operator instructions.) Holden Lewis with BB&T, please go on with your question.

Thanks. Good afternoon, guys.

Hello, Holden.

Can -- within the Integrated Supply business, I mean, you say you've lost a couple of pieces of business. You seem to be -- we expect you're going to pick some up. From a swap standpoint, what's the relative margin of the business that you're losing versus the business that you're picking up? I mean, is this sort of a richer mix swap or how should we sort of view that once you start [implementing stuff]?

Holden, that's a really good question. I got that question from my board today. What we're doing is the customers want guaranteed cost savings, and so we have -- we've redesigned some of our programs where we're kind of taking our cost to serve model and reducing our expenses. And so the margins have come down a little bit, but at the same time we also realize that our manufacturers that we represent want this business also. So we've been pretty successful at getting rebates and [sale-side] AMC is what we call them, and reducing our cost of product beyond what we were getting last year so that really our margins maybe are down just a tad and -- but our expenses are also down and our model's a little different so that we're still shooting for an operating income of 10%.

Thank you. What was the margin on the business that you -- that walked away? Was it better or worse than that 10% [bogey]?

Well, we got three chances to keep it and I'll just say it went below our 10% operating income to keep it. And so I personally pushed back and in the process of pushing back they gave it to MSC. And actually I think that when we really understood the total picture, MSC had done a pretty good job of reducing their cost to serve model. So I think we fell a little bit asleep at the wheel and we were trying to continue to provide them the great service that we had already been providing. In fact, the plants themselves -- you know, "Man, we can't believe you lost this. We like you guys. You all do a great job," and we were kind of counting on that. But at the end of the day, the corporate purchasing people won out.

Right. But this -- but it does seem to be a trade up. You think that the $40 million in annualized business that you're trying to implement now, that business does look like it's 10% or better business?

Yes.

And the business you walked away from, you were doing a fine job on it, but it was less than that?

Well, it was about the same, but in our eyes to keep it we were going to have to go less than that.

Okay.

I would say it's the same. I would say what we lost and we replaced is the same. Our model's around an operating income of 10%. The question becomes how do you get there? And do you get there with higher gross margins in a model that gives them great service or do you cut some of the service features and lower your expanse and give them a little more on the margin?

Okay. And when you're thinking about that $40 million, how much of that $40 million do you feel that you got implemented and had running through the model in Q2? I mean, do you have any of that $40 million in there yet or is it all still on the come?

No. No, we have some and I would have to -- I'd have to get that answer for you. I don't really have it off the top of my head, but Chris Circo can certainly -- can give me that. I could give you an idea of how much we put in the top of the funnel versus what fell out of the bottom.

Okay, and at the same time, how much of the lost business hit the corner? Did that hit at the end or was that sort of fully in that $9 million?

No, that -- we had -- it hit this quarter and will continue to hit the third quarter.

Okay, so you pretty much felt the full effect of it in Q2?

Yes, well, I'd say half and I'd say the rest of the half in the third.

Okay, but the next big step up on the $40 million chunk you think is in Q4?

Oh, I think it's ongoing. I think we're implementing it as fast as we can and I think we see some of the $40 million in the second quarter and I think we'll see some more of it in the third. And I think we'll see the bulk of all of it start to really make a difference in the fourth quarter.

Okay. So you could see supply chain services at least beginning to tick up at the end of the year or that's not what you would assume?

No, no. I'm assuming a sales increase in the fourth quarter for --

Okay.

-- supply chain services.

But you don't feel that that'll be enough to offset whatever declines you're seeing in MRO and Integrated Pump Solutions at this point?

Well, I hope it is.

All right. Fair enough. Okay. I'll jump back in.

Thanks.

All right. Thank you. (Operator instructions.) Matt Duncan, please go ahead with your follow-up question.

Hey, guys. Just a couple of housekeeping items. Are you still breaking out sales at Precision? What have sales, specifically at Precision, looked like versus last year? Were they down roughly the same amount you guys -- the company total was?

I would like to answer that. First of all, we have -- we talked about combining stores so we've -- there's been about five stores or so that we've -- we're combining those stores all under the DXP umbrella, so I'm not sure we could give you an exact answer to that. I will say that it appears to us taking that into account that Precision started having sales decline back in October of 2008. We didn't see any sales decline through all of '08. December -- the fourth quarter was our largest quarter we've ever had. So, to me it looks like that the oil and gas industry was very strong all the way through the end of the year. The rest of the world started declining before that time. I will tell you that it looks like to us that now the oil and gas industry is continuing to contract. We hope that turns around in 2010, but Precision and its marketplaces are seeing things solidify a lot better than we are.

Okay.

Does that make sense?

It does, and that's very helpful commentary. And then last thing, David, when you talk about $1 million monthly of cost cuts, I gather that's mostly at the SG&A line. Just to make sure I understand you correctly, it sounds like most of those cost cuts are sort of duplicative people that were both in the Precision entity and at DXP that you're sort of consolidating some positions from acquisitions that you've made that you may not need now. Is that --

Yes, there's really three things going on. One is that we still had a lot of corporate people out in the field, Precision being the biggest, Vertex, et cetera other people, and so we're consolidating all of corporate into one group with one leader instead of multiple leaders in multiple groups. That's saving us a lot of money. We're also rightsizing additional operations for our store, our service centers, and that's being done. And then lastly, we're putting people on our comp plans. We -- Precision has people that are making $80,000 a year that on our comp plan would be making 50, and so we don't think Precision -- specifically Precision -- has the right comp plans to be in alignment with what DXP's goals are. And so -- and then you take a store that's marginally profitable, it makes a big difference. And so we're painting the picture that hey, guys, we're not in the -- we're not running a charity here. We have to make money, and we're going to align your goals with our goals. And of course, this is a good time to do those kinds of things because people don't have options. And so we're making a lot of those kinds of changes also -- so corporate, rightsizing, and then putting people on incentive plans that agree with our objectives.

Okay. That's helpful. Thank you.

Thank you, and a follow-up from Holden Lewis. Please go ahead.

Yes, just related to that, I was just curious about the progress in other elements of the integration of the businesses, I guess both Vertex, as well as Precision. I guess -- do you have more stores to combine? What about the IT systems? Anything coming off of that? Any sort of further comments on integration progress?

We've totally integrated Vertex and with the last step here, really within the last couple of weeks, their administrative staffs have been eliminated or combined. Precision, we want to have all of their service center stores on DXP's system by -- really by November 1st. And we think that'll be enough to make us get really close to being [stocks] compliant, too, by the way, another benefit. But we're -- we've put them under our regional structure. We have a lot of DXP comingling with Precision, developing the right cultures and processes.

In that process, we've probably identified a few stores that really need to be closed down and combined with another store. We've also just taken management out. Precision -- how do I say all that? I've been lecturing about this for months now, but they kind of had a branch, a branch manager type structure, and we don't believe in that. We believe that you need a customer service manager who's a lot less paid. He's more a -- he'll do what you tell him to do. The problem with the branch manager is he thinks he's king. And as king you tell him what our objectives are and he may say yes and when he walks out of the meeting and says, "Well, I'm not going to do that," or, "I'm going to do whatever I want to. I'm king." And so there's a lot of that going. As you know, we have a regional structure. Instead of kings we have a regional operations guy and a vice president of sale -- regional vice president of sales guy, and those people drive the activity in these stores. So what they need in the stores is somebody that's going to do what the Company wants them to do. And so that's -- there's a pretty big culture change going there. I think I have buy-in. We'll know better in six months.

Okay. How many -- when all is said and done if you've merged five stores now, how many do you think you have to do?

I think there's probably not more than about four more to do. I think there's a couple to close down and just merge into another Precision store. That's -- we don't -- we try never to leave any sales behind, so we're going to -- if we close a store, we try to leave a salesman behind and have that person work for another location that's close by. And so what did I say, about three of those and four of the others.

Okay, and is -- when you think about the $3 million per quarter of savings that you have on the come, I mean, is that what that's from? Where are you finding the incremental $3 million on top of what you've already done?

We're -- we just got out of three days of management meetings and I have line by line detailed expense execution that's going to be put together, which is a combination of closing stores, consolidating stores, putting people on our comp plans, and driving higher profitability. And so I have that data from all the regional managers.

Yes, so for the most part though it sounds like it's costs that's a function of process or structure which will remain in place. It's not just temporary costs or anything of that sort.

No, that's exactly right. No, no, it's -- we've spent a lot of time building an organizational chart for a service center and a supercenter and assigning pay ranges and job descriptions of each of those positions and it's just simply -- it's something DXP's already been doing and it's something that just will drive cost savings in Precision. Precision -- if you'll remember correctly, one of our reasons for buying Precision was that we felt like they were much better than we were on the supply chain service side of the business. And so we've taken our $40 million worth of business, and I have moved that over to Precision. And Precision and the people that support that segment under Chris Circo's leadership, that was done pretty much at the beginning of the year. And that's -- and then Chris has likewise taken some costs out through looking at those consolidations. And some of that is just now happening. Some of it has already happened, but some of it is just now happening.

We as a company, were much better at running these service centers, and as you know, I've took on that hat. I'm wearing the hat of senior vice president of service centers in terms of operations, not sales. We have John Jeffery, who's senior vice president of sales for service centers and building supercenters. And as we've worn that hat, we're getting -- there's a neat balance between standardization and centralization versus having local take care of the customer, not too much red tape. There's a balance between those two things, and you can't centralize too much in distribution in my opinion, but there needs to be some standard processes and some standards around the positions and DXP's been very good at that. And so we're -- as you know, we left Precision alone for a period of time because they were doing all right. But as soon as they started doing bad, well, then, we felt like we had to step in and I've got both feet in that process.

Okay. Now, last quarter I think you talked about $30 million to $35 million in annual sales in integrated supply. I assume that going to $40 million now represents new business, right?

Yes.

Okay. So that does represent the new business. And then what was the -- need to refresh my memory -- what was the cost reduction that you were striving for last quarter in the SG&A [and all]?

No, I didn't tell you.

Okay. This is the first time you've given us any insight into the savings.

Yes, I think we're trying not to give guidance in terms of really, really specific numbers, but we feel like during these times if we can give you all better numbers to deal with, hopefully, that'll help you all.

Okay, but that $3 million decline from Q1 to Q2 in SG&A, is that a function of savings or just a function of the lower volumes?

No, that's a function of two things. One is savings where we've actually combined some stores, where we actually -- and then volumes where -- I can't overemphasize the fact that DXP is a very incentive-driven company. So a lot of volume -- lower volume will dictate lower pay without us having to do anything.

Okay, and then lastly, the supercenters, 14 under construction, 23 in place. I mean, that didn't change from last quarter. Is it difficult getting the under construction up to a supercenter standard just because volumes [don't always do it.] You can't get to those thresholds and so you're not likely to make that progress, or how should we sort of view progression in the supercenter?

Okay, a great question. And we're still investing in hiring the competitor's outside guy and his inside guy and bringing them over and that has become easier. What's become harder is that they don't bring a book of business as big as they say they're going to and then our abilities to grow that business to that supercenter status is just slowed. And I think I can point to examples where a supercenter was a supercenter and no longer is a supercenter. And yet we have one under construction that became a supercenter, but the one that became an un-supercenter will certainly go back in the category of under construction. So it's just been difficult to overcome the contraction in the marketplace.

All right. Great. Thank you.

All right, thank you, and there are no further questions at this time. With that, that will conclude our conference today. We thank you very much for your participation and wish you a very pleasant rest of your day. At this time you may disconnect.