DXP Enterprises Inc (DXPE) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the DXP Enterprises, Inc. 2010 second-quarter results conference call. During today's presentation all participants will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator instructions.) The conference is being recorded today, Thursday, July 22nd, 2010.

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

Good evening. Thank you for joining us. Welcome to DXP's second-quarter conference call. David Little, our CEO, will also speak to you and answer your questions.

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

Now, we'll begin with a summary of DXP's second-quarter 2010 results. David Little will share his thoughts regarding the quarter's results and then we would be happy to answer questions.

Sales for the second quarter increased 15.9% to $167.3 million from the second quarter of 2009. After excluding the Quadna sales of $13.4 million, sales for the second quarter increased 6.6%. Sales for the supply chain services segment decreased 5.7% to $31.5 million compared to $33.7 million for the 2009 second quarter.

Sales for innovative pumping solution products increased 41.1% to $18.7 million compared to $13.3 million for the 2009 second quarter. After excluding Quadna IPS sales of $6.3 million, IPS sales for the second quarter of 2010 decreased 6.4% from the second quarter of 2009.

Sales of MRO products by our service centers increased 19.8% to $117.1 million compared with $97.7 million of sales for the second quarter of 2009. After excluding Quadna MRO sales of $7.1 million, MRO sales for the second quarter of 2010 increased 12.5% from the second quarter of 2009.

When compared to the first quarter of 2010, sales for the second quarter of 2010 increased 13.8%. After excluding Quadna sales, second-quarter 2010 sales increased $6.9 million, or 4.7% over first quarter of 2010. Second-quarter 2010 sales for supply chain services were flat compared to the first quarter of 2010.

Second-quarter 2010 sales of innovative pumping solutions products increased 52.7% compared to the first quarter -- that's not right. All right. Second-quarter 2010 sales of innovative pumping solutions products increased -- oh, I see, I'm sorry -- increased 52.7% compared to the first quarter of 2010. After excluding Quadna innovative pumping solutions IPS sales for the second quarter of 2010 increased 1.3% from the first quarter of 2010.

Second-quarter 2010 sales of MRO products by our service centers increased 13.4% compared to the first quarter of 2010. After excluding Quadna MRO sales, MRO sales for the second quarter of 2010 increased 6.5% from the first quarter of 2010.

Sales for the first half of 2010 increased 4.1% to $314.3 million from the first half of 2009. After excluding Quadna sales of $13.4 million, sales for the first half of 2010 decreased $1.1 million, or 0.4% from the first half of 2009. Sales for supply chain services decreased 9.2% to $62.9 million compared to the 2009 first-half sales of $69.3 million.

Sales of innovative pumping solutions products decrea- -- increased 3.9% to $31 million compared to 2009 first-half sales of $29.8 million. After excluding Quadna IPS sales, IPS sales for the first half of 2010 decreased 17.2% from the first half of 2009.

Sales of MRO products by our service centers increased 8.6% to $220.4 million compared to $202.9 million of sales for the first half of 2009. After excluding Quadna MRO sales, MRO sales for the first half of 2010 increased 5.1% from the first half of 2009.

Gross profit for the second quarter of 2010 increased 15.8% from the second quarter of 2009, compared to, or consistent with, the 15.9% increase in sales. Gross profit as a percentage of sales decreased to 28.6% from 28.7% in 2009 second quarter. This decrease is the result of the acquisition of Quadna, which has a slightly lower gross profit percentage than the rest of DXP. Gross profit as a percentage of sales for the second quarter of 2010 increased to 28.6% from 28.5% for the first quarter of 2010.

Gross profit for the first half of 2010 increased 2.7% from the first half of 2009 compared to the 4.1% increase in sales. Gross profit as a percentage of sales decreased to 28.6% from 29% in 2009's first half. This decrease is primarily the result of the effect of the economy and product mix.

SG&A for the second quarter of 2010 increased $2.5 million, or 6.9%, from the second quarter of 2009 compared to the 15.9% sales increase. This increase is a result of the $2.6 million of SG&A expenses associated with Quadna. The $2.6 million includes $0.5 million of pretax acquisition expenses. For the first half of 2010, SG&A decreased 2.2% compared to the 4.1% sales increase. This decrease is primarily the result of decreased payroll-related expenses. As a percent of sales, SG&A decreased to 23.5% from 25% for the first half of 2009. SG&A for the first half of 2010 as a percentage of sales declined primarily as a result of reduced payroll-related expenses due to reduced headcount.

Interest expense for the second quarter of 2010 increased 20% from the second quarter of 2009 primarily as a result of increased interest rates. On March 15th, 2010 we amended our credit facility. This amendment significantly increased the interest rates and commitment fees applicable at various leverage ratios from the levels in effect before March 15th, 2010. The amendment increased the cost of funds borrowed under our credit facility by approximately 200 basis points beginning on March 16th, 2010.

On April 1st, 2010 we closed on the acquisition of the business of Quadna. We borrowed $11.5 million to fund the $11 million cash portion of the purchase price, which is net of $3 million of cash acquired, and paid a $0.5 million success fee to advisors for the acquisition. This $0.5 million pretax fee was expensed in the second quarter.

We also issued $10 million of convertible notes to the seller of the Quadna business. These notes bear interest at an annual rate of 10%. On April 9th, 2010, $4.5 million of these notes plus accrued interest were converted to 376,417 shares of common stock. Despite the $16 million of debt incurred with the acquisition of Quadna, total long-term debt only increased approximately $1.6 million during the second quarter of 2010 to $111.8 million from $110.2 million at March 31st, 2010. During the first six months of 2010, total long-term debt declined $3.7 million from $115.5 million at December 31, 2009.

During the second quarter of 2010, the amount available to be borrowed under our credit facility increased approximately $7 million to approximately $51 million. The acquisition of Quadna was accretive by approximately $0.01 during the second quarter. If the $0.5 million of acquisition expenses recorded in the second quarter are excluded, Quadna was accretive by approximately $0.03 per share for the second quarter.

Capital expenditures were approximately $215,000 for the quarter and $385,000 for the six months.

I am happy to report that the tone of our business has continued to improve from 2009. Sales per business day increased from the proceeding month each month through the second quarter.

Now I'd like to turn the call over to David Little.

Thanks, Mac. And thanks to all our participants on our conference call today. I would also like to thank the DXP people for their efforts and execution of our sales and operational strategy to be customer driven. Your improvements for the second quarter are certainly appreciated.

We all welcome Quadna, our latest acquisition, to our DXP family and thank you for an impressive first quarter, contributing $13.4 million in sales and pretax profits of $728,000, which includes various acquisition fees. The Quadna people have a great can-do attitude and in a very short time have become a part of the DXP culture. I could not have imagined a better win-win situation by putting these two companies together.

Thanks go to our suppliers and their continued support to produce quality and competitive products that helps us both grow our market share. Thanks to our customers who value our expertise at customer-driven solutions that helps make them more successful.

Our focus continues to be on operational [excellent] programs and consolidation of administrative functions for cost savings, process improvements, and reduced working capital requirements, as well as decentralizing customer service to capitalize on growth opportunities by being experts in customer-driven solutions. Our senior management team of Todd Hamlin, Senior Vice President of DXP Service Centers; John Jeffrey, Senior Vice President of DXP Supply Chain Services; and David Vinson, Senior Vice President of Innovative Pumping Solutions are focused on teambuilding and top- and bottom-line growth. And their incentive plans depend on results.

DXP Service Centers, which represents 70% of our business. The service center segment of DXP is emerging from a positive second quarter and continues with an optimistic outlook for the third quarter. There has been a slight improvement in several markets, primarily onshore oil and gas, which includes terminals, chemicals, and food and beverage. As DXP continues to invest in its people, operations, and sales, plus all DXP's acquisitions and our business units continue to work together to provide greater expertise in delivering customer-driven solutions.

This synergism allows for greater expertise by DXP across various markets, provides a stronger base to leverage business. For an example, Babbitt Bearings, which was acquired by Quadna, DXP belts and DXP hydraulic business units have value-added services that complement current DXP entities, allowing for maximized business opportunities and expanded service areas nationally.

Other support by these business growth are DXP's national accounts. Improved service levels, on-time delivery, increased margins and greater visibility are positive factors resulting from the movement of national accounts from the legacy Neterprise ERP over to DXP's P21 ERP system and our service management team.

As DXP continues to expand its service capabilities from local statewide level to a national one, the presence of DXP Super Centers will grow. During the 2010 fiscal year, DXP will continue to invest in resources and the advancement of service centers -- the number of Super Centers -- and the advancement of Super Centers. That's what I should have said. The number of Super Centers remains unchanged at 23, with 13 under construction, but I'll assure you that the 13 under construction are really starting to gain traction. We closed one service center, bringing service center count from 114 to 113.

DXP's supply chain services represents 20% of our business. First quarter to second quarter was a relatively flat, based on revenues. A specialty chemical company has signed a new contract and will go live in August. We are also implementing a cosmetic company and it, too, will go live in August. Q4 projections are looking at the potential of two more locations being implemented. We have also gone live with two custom web stores for a bottling company and a chemical company. With these implementations we should see increased sales and profits through the end of the year.

Operationally SCS's goal is to move all legacy Neterprise on-site stores to DXP P21 ERP system by the end of the year. That's not correct. Thirty-five of the 45 sites of -- that are using Neterprise will be moved to DXP. Ten of them are critical that need the application of Neterprise and we're glad to have Neterprise. This process is more -- the moving of these stores' sites is more complex than moving a service center because of the customized nature at each site and the customers' needs. The strategy is to leverage the back-office synergisms while increasing customer service through DXP's ERP system. This will also allow greater access to DXP's inventories.

SCS is moving Chase, which is a computerized maintenance management system package supporting 35 locations, to P21 in the third and fourth quarter. SCS is implementing DXP's operational excellence program, sales excellence program, and margin enhancement programs into the group in the Q3 and Q4. SCS opened one site store under the supply chain service segment, bringing the count from 44 to 45 stores.

I want to backtrack just a little bit here and make clear that the Neterprise system is not going away. We have a significant account that enjoys the abilities of Neterprise and that system is not being eliminated totally. We're just taking 35 of the 45 stores and moving them to the DXP P21 system.

On to innovative pumping solutions, which presently runs -- is about 10% of our business. Q1 to Q2 results were relatively flat, excluding Quadna's IP business. Generally, onshore capital projects is trending slightly up and offshore capital projects is mixed to slightly down. Examples of onshore are a BP project, a deepwater field. It has baseline wells drilled and they are wanting to invest in sub-sea structure and production platform, but this project has been put on hold by BP.

BP Mad Dog, a production upgrade to an existing platform, is moving forward. We have IPS units quoted for this and feel positive about the potential orders. Chevron Bigfoot moving forward, new production platform. This indicates the baseline wells have been drilled as well as the production plat- -- (inaudible) had been drilled. We're moving forward with the sub-sea equipment and the production platform. We feel positive about our chances of winning the proposed equipment.

[Test Pony] moving forward is a new production platform. This indicates the baseline field of wells that have already been drilled and they need a production platform to produce those wells. We feel positive about our chances to win the proposed equipment.

Market observations -- comments we hear from major oil companies that are affecting these decisions regarding investments in oil and gas CapEx projects surround the uncertainty of the economy, the current administration's position that will be taken regarding changes to royalties, taxation, injection rulings, new guidelines for offshore drilling. This is related to offshore and land-based drilling and production. We do see overseas, South America may be where investment opportunities transition to.

Our HP-Plus pump -- HP-Plus open quote activity, including pumps and units, is $6.1 million. HP-Plus sales so far is $1 million and some change. CapEx quote activity level for these opportunities has been good. Replacement pump quote activity opportunities is consistent year to date. DXP has some pump sizes that has allowed us to broaden our offering range. DXP has completed R&D and we are now offering HP-Plus for light hydrocarbon applications. Number of HP-Plus pump (inaudible) sold, 14; number of HP-Plus packages sold, 8.

Our cost of goods sold for overseas-sourced product have increased slightly for the HP-Plus inventory and lead times have increased. DXP has successfully -- successful in broadening our scope of suppliers for overseas product and our domestic products required to produce these pumps. This is providing options for cost control and providing additional sourcing options.

Repairs and [rerates] have been a steady revenue producer. Most have shorter lead time requirements. We have been able to meet and demand good margins for doing so. It appears most customers running equipment to operational failure before repairing.

Pipe -- our plastic pipe division. Pipe third quarter should be at or above budget. Fourth quarter should be at or above budget. We have seen a significant increase in fire pump column pipe replacement as well as we have seen a significant increase in fire pump repair business in our service center operations. We believe the driving force behind this is the increased inspection on drilling platforms and production platforms by the Minerals Management Service, the US government agency. This is a difficult -- this is a direct result of the BP Gulf of Mexico incident.

Looking forward, onshore should be slightly up and offshore should be slightly down, which could change depending on our government and the economic recovery as oil and gas prices are stable, if not creeping upward.

Margin enhancements -- our goal is to improve margins, but it is being offset by some manufacturers which are raising prices toward -- to as high as 12%. Looking forward we see gross margins staying level as we improve our level of sophistication in pricing, offset by price increases we cannot pass on to our customers.

Selling and general administrative expense as a percent of sales continues to be too high. As a combination of sales increases and expenses reductions from our operational excellence program in consolidating administrative functions, we should see improvement in SG&A percentage as sales go forward.

I'd like to thank everybody for listening to our call today and we are now open for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions.) Matt Duncan; Stephens.

The first question I've got, Mac, I just want a point of clarification from you real quick. You said that month to month revenues had improved throughout the quarter. Is that for total sales or is that organic DXP excluding Quadna?

It's total sales, but we owned Quadna -- April was up compared to January, February, March.

Okay. So things continued (inaudible - multiple speakers) --

(Inaudible - multiple speakers) -- on April 1st, so each month with Quadna in it, sales got better.

Okay. Are you saying there was (inaudible - multiple speakers) --

(Inaudible - multiple speakers.)

--- was a slowdown in those sequential improvements or has it been kind of slow and steady in each month?

Let me look and make sure I'm answering. I mean --

And I guess what I'm really getting at is, is the tone of your business still fairly similar to what it was early in the quarter? Have you seen the end markets slow at all, or do you feel like things are by and large still pretty good out there?

Well, from a sales perspective we didn't see a slowdown.

And then maybe, David, from your conversations with customers and then just your DXP folks, kind of what's your sense of what's happening out there in the marketplace right now?

Well, I think I have a close eye on the stock market because I think it's a six-month indicator of where we might be headed. And of course, I'm not sure they've got it figured out. But what my people are telling me is that they feel good, or the big -- we know supply chain services should have continuous improvement. IPS and capital projects, that's a little iffy. It's only 10% of our business. Offshore piece that may be down is even a smaller piece than that. So that's really not that concerning to us. That segment's very profitable and we're okay with that.

The big number is the 70% of the business that's in service centers. And of course we're really driving hard to push super centers. That piece of our business has been the most substantial grower that we've had in the first quarter and the second quarter. And those people are telling us that they feel very good about the rest of the year.

Okay. That's very helpful. I appreciate that. When you look at the Quadna revenue breakdown, I guess I was surprised it was a little bit more innovative pumping solutions there than I thought it is. Is that sort of normal breakdown of their revenue, kind of 60/40 service centers to innovative pump?

Yes. They have a very substantial part of their business is in Denver. And Denver is a rather large -- of course, Denver and Phoenix fabricate, but Denver fabricates more for the oil and gas industry and those packages are bigger. And so they do exactly -- we've had meetings between the two teams -- they do exactly what our innovative pumping solution does for offshore and onshore. And they do all their work onshore. And so they're participating in the shale plays north of Denver and all the way to North Dakota. And then I guess they come south sometimes too. So it's a sizeable amount of their business.

Okay. And then staying on Quadna for a second, the $0.03 of EPS accretion that you guys showed there this quarter, backing out the fees, is that about what you expected it to do? Or is maybe doing a bit better than you expected? Maybe just talk about the profitability of Quadna.

Jeff Wright and his team of people there are really outstanding and we're really excited to have them. And I think their first quarter with DXP was -- exceeded our expectations. Yet, when I talked to Jeff, and I specifically did talk to him before this conference call I'll assure you, he feels good about the year. And he feels good about the things -- he feels good about his backlog. It's actually up. And so, he didn't have anything but positive things to say.

Okay. Moving on to supply chain services for a minute, I guess it feels a bit like that piece of your business has kind of been stuck in the mud for a few quarters here. And I guess it sounds like you have signed some new business there. But sort of what actions have you guys taken to get that business moving and starting to show the improvement that really your service center based business is? Because it's pretty much the same type of customer base that makes up the supply chain services, too. So I would think if the economy is recovering we should see that growing too. So kind of what are you guys doing with supply chain services to kind of get it improving?

I think -- well, first of all the Precision legacy people -- we don't call it Precision really any more, but they're a great group of people there. They have a great deal of knowledge about that business. John Jeffery, who was Senior Vice President of service centers is now running that. And I think he's done a really nice job of pulling the teams together and the people together. And so we've really not lost a step, I guess, in terms of personnel and moving forward.

The things that are a little different -- well, actually things that aren't different I guess would be a better question first. The things that aren't different is that they had just lost some accounts and we have been struggling through the fact that that's -- they come off the books as fast as they come on the books. At the same time, they had signed up some new business and some of it's been harder to get implemented, mostly because of the customer. But it can go both ways. And so I think what's really happening is, on the short term here is that what -- we're going to stop losing accounts and stop the business from flowing out the bottom. And that's just a natural thing that's happened. And then we have some new business that's coming on. So I think we've simply hit bottom.

Longer term, we feel really good about the fact that we're going to leverage our whole sales channel across all of DXP to bring in new business. This is kind of how DXP operated before Precision. The legacy people there had a little different attitude about that. Doesn't make them wrong or us right. It's just we feel pretty strong that we can leverage our relationships with these customers and it gives us more credibility up front. And so we're excited about that. And so, I don't know -- I guess again, in summary, is we went through some tough times. We feel like we've hit bottom and we're ready to move forward.

Okay. That's helpful. And the last thing I've got, and I'll jump back in queue, it sounds like in your commentary about the way the business progressed through the quarter, it seems you feel like the back half of the year is going to be pretty good, too. Is there any reason that your revenues would not be up sequentially again here in the September quarter, that both your sales and earnings theoretically should be higher in the 3Q than they were in the 2Q?

Well, we certainly believe that.

Okay. That's helpful. I'll jump back in queue. Thanks, guys.

Holden Lewis; BB&T.

Could you elaborate a little bit more on the gross margin trends you saw? I mean, I kind of heard, I think you said that certain of your suppliers are starting to push some higher prices for their products. Are you unable to increase your own price in that kind of an environment? In the past I think you've gotten price increases pushed through. But I mean, are you not trying to recover those hikes with a better price?

Yes, of course we are, and of course we do try to push those things through. But I think we're getting more pushback than normal. Business is not bad; it's not robust off the chart, either. And so our customers are looking at inflation and it's supposed to be next to nothing. And so I think -- I'm frankly personally surprised that -- it's not all of our suppliers, but some of them are adding these price increases. So if I'm surprised I think certainly our customers are.

So can we pass them through? Yes. There's always some component of business we have with fixed pricing for a year or something like that. But that's typical. We're not -- nothing unusual there. It's not a very big percentage. So I just -- margin enhancement and the tools we're putting in place to increase our margins is such a big buzz word around DXP in terms of that's what we need to be doing. And that's what we've been trying to do. And then so it's just a little discouraging that our manufacturers are having some of these price increases that don't really make sense to us right now.

So do you have a sense when you think about the price/cost relationship, was it negative in Q2 so it was like a some number of basis points drag on the gross margins in the quarter? Or do you offset it somewhere else? I mean, has it gotten to that point where it's actually visibly negative in your model?

It's visibly negative --

In other words, all other things being equal --

Yes. I understand, but it's visibly negative in certain accounts.

Okay. And so what are you doing outside of the pricing element to offset? If you could sort of give us a rundown on maybe some of the top initiatives that you have working right now and kind of how those are progressing.

Yes. It's a combination of just encouragement -- we still -- we try to give our inside and outside people suggested pricing. And then it's a function of encouragement to believe in that suggested pricing. They have the ability as of now to override that pricing. And at a certain level they get paid less commissions. At a certain level it takes approval processes. But it's a combination of very sophisticated tools that are looking at geography, type of customer, volume of business, fast-moving item versus slow-moving items and coming up with suggested pricing. And then it's a constant battle to get people to believe in that.

And then the suggested pricing is based on your -- the IT systems that you have in place?

Yes.

Right, and just sort of driving adoption of that model?

Right.

Okay. But isn't that in effect kind of price increases, if you will? Right? If you're suggesting pricing on certain products, faster trading products, is that effectively price increases or is it product substitution to move people into more attractively margined products? Or what -- how should we look at that?

Well, we're always trying to -- we're incentivized, I guess, to make as much margin as we can on every order. So it's not a -- we don't think of it as a price increase, because we don't have a big book of items that are all priced and we go, "Well, we're going to raise our pricing 1% or 2% and try to see if that'll stick in the marketplace." We don't function like that. So what we have is a lot of items we sell, a lot of different customers, and a lot of different people selling that stuff. So we suggest a price and then it's a matter of them having the flexibility to get as much margin as they can. So we don't really -- we don't see that as the ability to say that we're having a big price increase, because we're really not.

And part of the just -- we know a lot of people listen to these conference calls, so let me rephrase this a little bit. Part of it is to lower the price equally sometimes. If you have a item that we would call a velocity item, the customer's going to know what he can buy that item, because he buys it every day. And so it could be that we need to lower the price on that particular item. Whereas when he sits there and he calls you up and says, "I need this," and we go, "Wow. We'll have to figure out how to source that." Or, "We're going to have to figure out how to help you out here," -- when it becomes a different problem to get -- to make a margin that we deserve, if that makes sense.

Yes. And as you look at your product offering, your portfolio, I mean, you've been sort of -- and your customer portfolio -- you've been sort of utilizing this technology for a while and trying to sort of get everything into the right buckets and price areas and all that sort of thing. I mean, how close do you think you are to kind of having your offering and customers sort of in the price buckets that you want them to be in at this point? I mean, where are we in the process and at what rate does that improve, or has that been improving?

I think we're using the system, the utilization rate of the system -- we'll use that term -- is about 10%.

Wow. And has that been rising or has that been kind of static?

It's been -- it was rising until we kind of hit this recession. And then what happened is we kind of went in -- everybody's -- just their own mentality went, "Yeah, whatever it takes to get an order." So it kind of lost traction. And now that we think that the economy's getting better and we're seeing improvement and some longer lead times from manufacturers, et cetera, and we're back trying to get traction again.

Okay. And you referenced that people aren't necessarily incented, if you will, at this point. At some point in order to get that 10% up meaningfully, do you adjust the compensation to say that you have flexibility within a range and beyond that you don't have flexibility? I mean, do you -- at what point do you incentivize to get people working or accepting the system?

Well, I think you have that wrong. By the way, I think we do incentivize people to do that. They get paid more for higher margins. But the problem is, some percentage of something is better than a higher percentage of nothing. So they still have it in their mind they're going to lose the order and they don't want to lose the order. So they revert back to something lower. I mean, we ultimately will not get control of pricing until we really have the ability to be an MSC where you just have published pricing and you pretty much stick with it and certain accounts get discounts and et cetera. We're just not at that level of sophistication yet. But we're moving in that direction.

Okay. And last thing on this and then I'll jump back in, do you feel like the efforts to raise -- you're seeing cost increases. You're trying to get price increases where possible. Obviously the cost increases are relatively recent. Do you feel like as we get into Q3 and Q4 efforts to reclaim that through real price increases will gain greater traction? Or at this point you don't think the market is all that accepting of your effort to get prices, so we can't count on that for being an offset in the second half?

If I'm guessing, I think the two sort of offset each other and margins will stay about the same.

Okay. Thanks. I'll jump back in.

Joe Mondillo; Sidoti & Company.

First, I just wanted to touch back on the Precision supply chain services. When you talk about growth going forward, what are we talking about? Are we talking about maybe a couple million in the back half here? Or what kind of growth do you see, if you could just give us somewhat of a degree there?

Wow, that's a tough question. You know --

Well, you were talking about you're adding customers. How many customers are you adding, did you say?

We're adding two additional customers and we have some new ones already kind of in the works already, a couple more stores. We're not used to giving a range, but if you want to pin me down to one, I think it's going to be from 2% to something. I don't know what the "something" is, but it probably isn't necessarily going to be over 10%.

10% you're saying?

I'm saying 2% to 10%.

2% to 10%. Okay. So is that -- and that's over the first half of this year?

Yes.

Okay. And then I guess just touching on, Mac, I guess, I just had a couple questions on the debt. What is your total debt at the end of the quarter?

$111.8 million, so $112 million, rounded.

Is that total or long-term?

That's total.

Okay. And how much did you pay down in the quarter, including the debt that you took on?

During the quarter total debt increased by $1.6 million, but we bought Quadna during the quarter and incurred $16 million of debt.

Right. So you paid down roughly $15 million?

Around $14 million.

$14 million; okay. And that interest expense, given no converts on that convertible debt there, do you expect that interest expense to stay there? Should that be around that $1.6 million?

No. I mean, debt went a little bit lower, so assuming that interest rates stay the same, which you'd think they would, the interest expense should go down -- it'd be pretty close to the same, down a little because debt's lower.

Okay. And I think that's all I got for you. Thanks a lot, guys.

(Operator instructions.) Follow-up from Matt Duncan from Stephens.

David, I was just curious if you guys have seen any impact from the oil spill. You obviously have a big footprint along the Gulf Coast. Has it had any impact on your business?

Well, I think when you read my script -- I'm sorry I kind of jumped around on it a little bit -- we think we're seeing safety requirements out there inspected closer and people are trying to get ready for that. So we've seen some of our fire pump units, fiberglass pipe that we use on the column for that -- we're seeing people replace that and upgrade that.

So, again, we're tied to production and a platform. And we're not really tied to drilling. So if a drilling person loses rig to South America, well then that really doesn't affect us much, if any. So -- and then we haven't been part of a cleanup or anything like that, so we've had really just marginal increase of business through the fact that these production platforms are making sure that all their safety equipment and stuff like that is working right.

And we've sold a few pumps to people that are making equipment that cleans ships and -- but it's pretty small.

The question that I have is -- and by the way, we saw BP cancel one project, but then they're going ahead with another project. So we're not too concerned with that. Now, if our government can't decide how we're going to drill, say, for two years, well that ultimately would affect a small piece of our business if we didn't make that up by selling equipment to other offshore places around the world. So we would have to make a shift there. But to date, we don't really -- we having seen it be too big a -- we haven't seen it be a real negative and we really haven't seen it be a big positive either.

And the only thing that we will say is that we have shifted some resources to onshore activity, which seems to not be being affected at all. So that's a positive.

Okay. And then, if I look at the balance sheet for a second, Mac, talk a bit about what happened with inventories and receivables this quarter. You got [dollars]; you were able to generate a pretty good amount of cash flow to pay off most of that Quadna debt. And I'm just curious where it came from.

Well, receivables went up and inventory went down a little bit.

Okay. So nothing too big in terms of movement there. And then the last thing I've got for you is sort of the -- on the acquisition landscape. You guys seeing anything interesting out there right now? And what's your appetite for acquisitions as you continue to pay down debt?

We would -- well, we're looking at acquisition deals. We're kind of -- I mean, like some of our offshore customers, we're kind of maybe dragging our feet a little bit. We're trying to make sure that we feel comfortable that the businesses in other parts of the country and things that aren't related to us -- it doesn't do us any good for us to be doing really, really good and then acquire somebody and then have the bottom fall out from under them. So we're a little reluctant to pull the trigger at this stage, but I would like to do another acquisition before the end of the year, assuming that the economy does -- behaves okay.

Okay, that's helpful. Thanks.

Follow-up from Holden Lewis; BB&T.

SG&A, how much -- what was the SG&A level if you strip out the effects of the acquisition? I mean, how much -- the $0.5 million plus whatever operational SG&A from Quadna -- what would the level be?

I kind of have to some math to -- [we don't] factor in Quadna's SG&A.

Thought you said it was around $2.5 million, something like that?

Oh, yes, I did say that. I disclosed that. Quadna SG&A was $2.6 million. That includes $0.5 million of expenses and includes the amortization of intangibles.

Okay. So if the -- really, even though the revenues have picked up to the highest level in some time, you're still sticking sort of around that $36 million level in terms of the organic business. Yes?

Yes.

What can we expect from that going forward? Do we have any costs that need to come back into the model at this point? Do you have any sort of incremental initiatives which are going to drop those numbers down further? It's good cost containment at this point, but kind of going forward can we kind of expect it to vary more directly with revenues? Or is there a [choke] that steps up? How should we look at SG&A going forward?

We have a -- if sales and gross profits and all those things improve like we expect, there are certain variable costs that will go -- commissions and things like that, that might go up. I think the answer to the question is, is I would like to see us make some gains on the percent of SG&A. 24% or wherever we're at -- I include interest, I think -- that's too high. That's not the level that I would like to see. So a combination of sales going up and a combination of the fact that we do have some cost initiatives around continued reduction of administrative cost and some operational excellence program stuff that's reducing cost a bit.

Now, we're not talking about saving $1 million a quarter or anything like that. We're talking about making some incremental gains there. And the combination of sales going up -- I'd like to see that percentage come down. I mean, you're going to ask me how much and -- but I don't know the answer because I don't really know how much incremental expense I'm going to take out and I really don't know how much sales are going to go up.

We're not aware of some driving need from cost that's been cut that now we're having to bring back.

Oh, yes. No, we're --

If that what's your -- if that's a part of your question.

If that's part of your question, no, we don't -- we're still reducing expenses, slightly.

Okay. And maybe talk about the difference between kind of the sort of legacy DXP and some of these businesses you've acquired. I mean, it seems like you've been more active in terms of trying to integrate the Precision business into the DXP model and the Vertex business. Maybe update us on the progress of those integrations to date and how much more progress you might have. Or are we kind of -- do we have them kind of where we want them to be?

That's a wonderful question, because that's really a hot subject with me. Precision and their administrative functions are all being moved to Houston and that is not complete. We've got David Vinson and others that are been spending a lot of time in Omaha making this happen. So yes, some things are still to come there.

I think we'll be complete somewhere -- sometime in September. Then the next question is a good one too and an appropriate one. We're not going to have administrative people out in the field anymore. There's just -- we're not in control. Precision was treated that way because it had an earn-out and the earn-out got in the way of integration of those functions. But as an example, Quadna, who we closed on April 1st, they're going to be up on our system and running pretty well by the second week in August.

So we're just not going to do them like that anymore. We're just -- even if I have to eliminate earn-outs in terms of acquisition costs. Because they just -- it's a pain.

Is Precision now on your system or are they still sort of treated separately?

No. They're -- well, there's three parts. There's a part of Precision that has customers that have spent a lot of money on Neterprise. And they're going to stay on Neterprise. We don't have any intentions to take -- make that customer mad. We don't want to make them mad. They're happy with what they're getting there and so that piece is going to stay. What we were talking about, where I got a little -- and I was kind of -- because it kind of led you down to believe that all of Neterprise was going away and that's just not the case.

There's a part of the supply chain service business, a number of sites, that we are going to move to P21 DXP's RP system because we get operational efficiencies and we get access, better visibility of inventories, and so we're going to get that completed by the end of the year.

Then there's -- more than half of their business is their service centers. And starting in November of '09 we converted all of them onto our system. So they -- the service centers, the Precision legacy service centers are on our system. There's another big piece of [swatching] service sites that are going put on our system and then there's part of it that will just stay on Neterprise.

And to give some sense of how effective that could be from a profitability standpoint, when you moved the branches of Precision onto your system at the end of last year, have you seen a meaningful improvement in efficiency, margin, anything like that that we can sort of look at the next transfer and say you could see something similar? How should we look at that?

Yes. I think that if we have got those service centers focused on customer service and sales, I think they have access to more inventories. I think we've consolidated purchasing power and rebates. And the last step is to move their administrative people, except for the IT people, by the way, to Houston.

There's one exception to that -- again, for the employees listening to all this I need to be exactly right. The industrial supply division, which has a great team of people that we didn't have here at DXP, they're in Omaha and they're going to stay in Omaha. And because of that, even though there's an inventory management and purchasing group that reports to Houston, there's a group of people there that are going to stay and manage the industrial supply piece and some other small piece. I can't remember what it is. But so the rest of the accounts payable people, the accounts receivable people, the controller, the HR person, all those types of functions are being moved to Houston along with inventory management that relates to rotating equipment, safety, and bearings and power transmission.

Okay. So it sounds like on the SG&A side you -- there's still opportunity for cost savings, just on the consolidation of the admin down to Houston as well as --

Yes.

--continue to put both Quadna and some of Precision on your systems.

Yes.

Got it.

But I'm sure I'm giving you more detail than you want, but I'm trying to make sure I'm not going to upset any employees that might be listening to this, because these are very specific plans. And we've told these people -- we've told the ones that are leaving and we've the ones that are getting to stay. And so we're trying to be sensitive to that.

And there's even a little company, Falcon, that was converted on to our system in June.

Okay. But then, I guess returning to an earlier question about your SCS, I think a lot of times these contracts when you sign into them there's like an expected sort of volume that comes out, right? So you're implementing these sites which have -- responsible for this volume. I think another way maybe to look at it is do you kind of track what your sort of your backlog is, if you will? These two new contracts that you signed, that pushes our total potential volume of full implementation to X level versus where we were before. I mean, is there some way to give us a sense of the order of magnitude of the opportunity as we implement going forward in that respect?

Yes and no. Yes, the customer tells us -- the cosmetic company tells us that it's $4 million of spend. Our expectations that have been proven up over the years is it's probably more like $2 million. And we just expect that. I mean, they're trying to -- they're enticing you to give them the very best price you can based on a certain volume level. And that volume level never pans out to be quite like that.

Right. But can you talk about like what's -- on the contracts that you have, what's like the potential spend that -- understanding that there's always some leakage and stuff, what is the potential spend on those contracts that if we ultimately implement them all we'll get from the current level? I mean, what's the unimplemented spend so far on your book of contracts?

And Holden, I'm going to be really happy to get you that information. I'll talk to John Jeffery and he can let me know. I don't know the answer to that.

But you haven't lost any more contracts.

No.

Do you think that the culling is done?

And we can an- -- I'm just saying we can answer your question. We truly can answer your question. I just personally don't know.

Okay. But the culling of contracts is done. We're -- that's -- the number we have is kind of what we're -- we don't think we're going to lose any so anything now is additive?

Right.

Okay. Thanks.

Thank you. Ladies and gentlemen, if you'd like to listen to a replay of today's conference please dial 1-800-406-7325 or 303-590-3030 using the access code of 4333065 followed by the pound key.

This does conclude the DXP Enterprises, Inc. 2010 second-quarter results conference call. Thank you very much for your participation. You may now disconnect.