DXP Enterprises Inc (DXPE) 2010 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the DXP Enterprises Inc, third quarter 2010 results conference call. During today's presentation, all participants will be in a listen only mode. Following the presentation the conference will be open for questions.

(Operator Instructions)

At this time, I'd like to turn the call over to Mac McConnell, Senior Vice President of Finance and 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 third quarter conference call. David Little, our CEO will also speak to you and answer your questions.

Before we begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements or predictions and actual events or results, can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis, is contained in our SEC filings. I will begin with a summary of DXP's third quarter 2010 results. David Little will share his thoughts regarding the quarter's results and then we will be happy to answer questions.

Sales for the third quarter increased 20.1% to $172.2 million from the third quarter of 2009. After excluding Quadna sales of $14.5 million, sales for the third quarter increased 10%. Sales for supply chain services decreased 5.2% to $31.9 million compared to $33.7 million for the 2009 third quarter. Sales of Innovative Pumping Solution products increased 59.8% to $22.6 million compared to $14.1 million for the 2009 third quarter.

After excluding Quadna, IPS sales of $6.8 million, IPS sales for the third quarter of 2010 increased 11.5% from the third quarter of 2009. Sales of MRO products by our service centers increased 23.1% to $117.7 million, compared to $95.6 million of sales for the third quarter of 2009. After excluding the Quadna MRO sales of $7.7 million, MRO sales for the third quarter of 2010 increased 15.1% from the third quarter of 2009.

When compared to the second quarter of 2010, sales for the third quarter of 2010 increased 3%. Third quarter 2010 sales for supply chain services increased 1.5% compared to the second quarter of 2010. Third quarter 2010 sales of Innovative Pumping Solutions products increased 20.4% compared to the second quarter of 2010.

Third quarter 2010 sales of MRO products by our service centers increased 0.6 of 1% compared to the second quarter of 2010. Sales for the first nine months of 2010 increased 9.2% to $486.5 million from the first nine months of 2009. After excluding Quadna sales of $27.9 million, sales for the first nine months of 2010 increased $13.2 million or 3% from the first nine months of 2009.

Sales for supply chain services decreased 7.9% to $94.8 million compared to the 2009 first nine months sales of $103 million. Sales of Innovative Pumping Solutions products increased 21.9% to $53.6 million compared to 2009 first nine months sales of $44 million. After excluding Quadna IPS sales of $13.1 million, IPS sales for the first nine months of 2010 decreased 8% from the first nine months of 2009. Sales of MRO products by our service centers increased 13.3% to $338.1 million compared to $298.5 million of sales for the first nine months of 2009. Sales of MRO products -- after excluding Quadna MRO sales of $14.8 million, MRO sales for the first nine months of 2010 increased 8.3% from the first nine months of 2009.

Gross profit for the third quarter of 2010 increased 19.9% from the third quarter of 2009 compared to the 20.1% increase in sales. Gross profit as a percentage of sales was 28.4% for the third quarter of 2010 and the third quarter of 2009. Gross profit as a percentage of sales for the third quarter of 2010 decreased to 28.4% from 28.6% for the second quarter of 2010. Gross profit for the first nine months of 2010 increased 8.2% from the first nine months of 2009 compared to the 9.2% increase in sales. Gross profit as a percentage of sales decreased to 28.5% from 28.8% in 2009's first nine months. This decrease in the gross profit percent is primarily the result of the effect of the economy and product mix. SG&A for the third quarter of 2010 increased $3.6 million or 10.2% from the third quarter of 2009 compared to the 20.1% sales increase.

This increase is primarily the result of $2.7 million of SG&A expenses associated with Quadna. As a percentage of sales, SG&A decreased to 22.5% from 24.5% for the third quarter of 2009. For the first nine months of 2010,SG&A increased $1.9 million or 1.7% compared to the 9.2% sales increase. This increase is primarily the result of the $5.3 million of Quadna SG&A in 2010. As a percentage of sales SG&A decreased to 23.2% from 24.9% for the first nine months of 2009. SG&A for the first nine months of 2010 as a percentage of sales declined primarily as a result of head count reduction implemented during the second half of 2009. Interest expense for the third quarter of 2010 increased 15.7% from the third quarter of 2009 primarily as a result of increased interest rates. On March 15, 2010, we amended our credit facility.

This amendment significantly increased the interest rates and commitment fees applicable at various leverage ratios from levels in affect before March 15, 2010. The amendment increased the cost of funds borrowed under our credit facility by approximately 200 basis points beginning on March 16, 2010. The purchase price for the acquisition of the assets of Quadna on April 1, 2010 included approximately $11 million of cash, $700,000 of cash acquisition expenses and $10 million in the form of convertible promissory notes bearing interest at the rate of 10%. On April 9, 2010, $4.5 million principal amount of the convertible promissory notes were converted to common stock. On August 18, $3.7 million of the convertible promissory notes were paid using funds obtained from DXP's credit facility, and $1.8 million of the convertible promissory notes were converted to DXP common stock. Meaning all of the $10 million of convertible notes are now gone..

Despite the remaining $15 million of debt incurred with the acquisition of Quadna, total long-term debt decreased approximately $6.1 million during 2010 to $109.4 million from $115.5 million at December 31, 2009. During the third quarter of 2010, total long-term debt declined $2.4 million from $111.8 million at June 30, 2010. $1.8 million of the third quarter decline in total long-term debt resulted from the conversion of notes to common stock on August 18, 2010. During the third quarter of 2010, the amount to be available under our credit facility increased approximately $1 million to approximately $51.5 million.

Capital expenditures were approximately $500,000 for the quarter and $900,000 for the nine months. Cash on the balance sheet at September 30th was $1.2 million. Accounts receivable and inventory were $98.8 million and $70.9 million respectively at September 30, 2010. I'm happy to report that the tone of our business has continued to improve from 2009. Now, I would like to turn the call over to David Little.

Thanks, Mac and thanks to all of the participants the call today. I would also like to thank all of our DXP people for their continued efforts and execution of our sales and operational strategy to be customer driven. I'd also like to thank our customers who value our expertise at providing customer-driven solutions that helps make them more profitable. Our focus continues to be on operational excellent programs and consolidation of administrative functions for cost savings, process improvements, reducing working capital requirements as well as decentralizing customer service by capitalizing on growth opportunities by being experts at customer (inaudible). Our management team for DXP service centers, (inaudible) services and Innovative Pumping Solutions continues to be focused on growing sales, improving EBITDA margins, creating super centers, operational excellence, and being experts at expert driven solutions.

DXP service center segment. Despite shortages in capital expansion projects our DXP service center segment emerged from a positive Q3 and continues with an optimistic outlook for Q4. Our service center segment will continue to focus on creating super centers, value added repair services and a regional distribution center opportunity. Several markets have improved, such as oil and gas, oil and gas terminals, chemical manufacturing, mining of gold, platinum, uranium and copper, food and beverage, power manufacturing, grain handling, . (inaudible) oil and gas production and completion, fabrication and our aggregate markets remain slow. DXP continues to invest in people, operations and sales. All DXP acquisitions and business units combine to provide optimum expertise of market coverage. That means customer-driven solutions for our customers. DXP's whole is greater than the sum of its parts which results in greater expertise across various markets.

This enables us to take market share away from the competition and allows for maximized business opportunities and expanded service areas nationally. Our Q4 MROP growth plans include expanding the Southeastern area of the United States through new service center operations. Our new region will improve our access in Georgia and will create new markets in Alabama, South Carolina and Florida. This will allow for DXP's customer-driven solutions to reach previously under served industries in the Southeastern United States such as poultry, mining, lumber, pulp and paper, OEM and general manufacturing. The expansion is the result of a successful recruitment of an experienced regional management team, local professionals with industry expertise and close customer relationships.

Our south Atlantic region is being engineered around extensive site selection, service center openings vendor partnerships designed to ensure that the total DXP value proposition including supply chain solutions reaches these new markets. This increased coverage in addition to moderate growth within these industries sets the stage for significant opportunity for our organic sales growth in Q4 and beyond. As DXP continues to expand its service capabilities from a local statewide level to a national one, the president of DXP super centers will grow. During 2010 and beyond DXP will continue to invest in super centers. We're pleased to report that our south central, regional management team has successfully upgraded our Dallas service center to super center status in Q3.

This conversion marks the fourth super center in that region. The end of the Q4 2010 will allow for opening of one additional DXP super center with more completion scheduled for Q1 and Q2 of 2011. We presently now have 24 super centers, 12 under construction and we had 113 service centers which we consolidated three of these stores into existing service centers so we presently have 110 service centers. We will be adding two service centers in Tampa, Florida and Macon, Georgia in the fourth quarter.

Supply chain services. We had a modest increase in revenues in Q3 when compared to Q2. We implemented two on site stores, [Pertellus and PurPower] Technologies. Q4 we currently underways the implementation of two new on site store solutions Revlon and Standard Register. Q4, one new on site procurement model is also scheduled for completion with [Monaco] Coach. We are currently renegotiating a few agreements where our expectations were too high. And, I might add, we have been successful in doing that. We also feel that we are going to have some potential (inaudible) will have potential labor strikes and Q4 has a number of reduced days because of the holidays but we feel like overall we expect the added revenue brought in from new sites to offset the potential negative financial impact of unforeseen strikes and reduced number of days in Q4. We are protecting a flat fourth quarter and are optimistic that new revenues will begin to positively impact Q1 of 2011.

Our increased revenue strategy includes four points. Leverage existing account relationships, utilizing the number of service center professionals and their relationships. We use our service centers to bring us leads, customer referrals, utilize our supplier relationship and their potential candidates. We have hired a very experienced VP of business development and he was the founder of Precision Supply Chain program, was added to our team to help accomplish these core strategies. Operationally, we're focused on operational excellence plan.

This brings us the mentality of making sure we do a day's work in a day, continuing to be a driving force, expect to see Company-wide improvement on programs under developed, ensuring we meet customer expectations, meeting contractual commitments allows for the execution of our four increased revenue strategies by demonstrating our commitment with measurable results in the performance of KPI. We've also successfully implemented supply chain solutions power program in three locations. This is where we serviced and track, repair warranties and increase revenues by capturing all of the service and repair business from rotating equipment being tracked. We increase margined from a service proposition and we pass along cost savings to our customers.

Innovative Pumping Solutions. Innovative Pumping Solutions is doing much better and from a market prospective we contribute this mostly to the fact that we have higher oil prices. Onshore is doing really well. Offshore is doing okay based on smaller stuff and services. The moratorium, as we all know, has been lifted. We also know that we can't get any drilling permits because of the regulations around safety has not been written yet. We do see that activity offshore is in the planning stages and people are wanting to produce more.

So there is activity. Our [H-Plus Plum] is continuing to make positive results and IPS is positive about the rest of this year and we see improvements in 2011. DXP is in a growth mode. We are hiring new talent. We are opening new stores. We are expanding our SCS sales expertise. We're planning a new distribution center in Atlanta to support the east coast. Capital projects and the oil & gas are increasing. We're taking market share away from the mom and pops who have had to cut back while we were investing.

We are back on the acquisition trail. We feel that market is improving slightly but a slight increase in the top line normally giving us the 5% increase in the bottom line. The very important point. So just give me a little growth. Again, thanks for listening today. Thanks for everybody on the call. We are now open for questions.

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

Good afternoon, guys. First question I've got for you, David, I want to talk more about the southeast expansion. So what product type will this be based around? More bearings, PT, is it more pumps? What's the product you're going to enter that market with?

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

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

Well, we're going to -- actually there is a business plan and I do not know that. I do know they've already sold $1 million worth of products so far, so I'm pretty positive about the fact that our costs versus profit equation won't last very long. We're really excited about these people. And, there is a plan, I can't remember what those numbers are, but to give you a whole scope of the plan we're adding -- we're actually taking an old precision location in Atlanta and we're combining that with some new talent and a new location along with the location in Macon, Georgia, and Tampa, Florida, and we're also going to be adding somewhere close to 50,000 square feet of regional distribution space.

Our east coast folks have suffered from not having a really good supply channel to them, to their customers and so we're pretty excited about the expansion and we're already seeing some positive results but at this point all we have really done is hired about eight people.

But David the state that you have set aside to be the regional DC. You say that's about 50,000 square feet to start. Is it going to be easily expandable as you continue to build out the footprint in the southeast.

Yes, there's more -- there's a good time to be leasing space. Let's just put it that way. Atlanta has pretty much got a glutton of space. They overbuilt pretty bad and so the rates are a lot cheaper and there's plenty of space. It's in a building that's 200,000 or 300,000 square feet. But I will say -- just to discuss this because I think it's an interesting point about our strategy -- is when we look at the map and we get with UPS and we look at ground as a way of moving product around because a lot of stuff we have is heavy.

We really think we're going to be better suited to having eight to nine 50,000 square feet facilities located across the United States then having four 200,000 or 300,000 square foot facilities. So that's our thinking right now and our thinking is that Houston's okay, that Omaha is a good location. Atlanta has popped up. You would want to be in Atlanta. We're not going to build any of these things based on where they might service the most of our existing customers. We're going to build them in a place where they help us serve the whole United States.

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

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

Okay. Shifting gears for a second looking over at Innovative Pumping Solutions this is the first quarter since 3Q '08 if I'm looking at this correctly that you guys have had organic growth there. It sounds like it's probably more land driven as opposed to off shore is that fair?

That's fair.

Do you think you can continue putting up sequential growth off of this number was there anything of size in the quarter to help or is this a new base line for that segment to grow off of.

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

Even 2011 what we see coming I think I looked at a whole list of iffy jobs or more and there weren't any of them that were much bigger than $2.5 million. We're just not seeing the big, big stuff that's out there, but there's a lot of small stuff so to answer your first question, is yes, we think this is a baseline. I think we could build off of this. We're real excited about the onshore activity. The acquisition of Quadna and what it brings to the onshore activity, plus what we're already doing and then if -- offshore comes back in a bigger way quicker than we think, that would be another plus.

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

Well, am I going to have a slight improvement or a big improvement in the economy would be my question because I think your first question is unfair because I think it's probably been at least 18 months since Dallas started down a path of trying to be a super center and it became a super center. I think it's unfair to ask that question on the fact we just came off of a recession, and so again we will build these things quicker if the economy is giving us something. If we're having to just fight it out and take market share away from all of the mom and pops it's going-- we can do that and we've proven we can do that but that's a slower process.

Obviously, I understand the economy has made it difficult to convert those locations over. It sounds like the people you've needed have been there for a while. They just needed a healthier economy to get the progress they were looking for.

True.

Okay, the last thing I've got, and I'll jump back in queue, is on the acquisition front. Sounds like you guy maybe have some things in your sights. You mentioned you're seeing some things out there right now. If I'm doing my math right, your leverage ratios are down to 2.6 times on trailing EBITDA at this point. Do you feel like you've got to the ability to go do what you want to do from an acquisition prospective at this point and are there things out there that are registering that you may be getting close to.

Yes on all of those questions, but I will expand on more. We're being pretty tough about trying to structure these deals where we actually do get them to take a little bit of stock and a little bit -- I'm kind of normally talking maybe 20% to 50% of the price in terms of taking our stock. It accomplishes -- and I'm gotten away from earn outs. Earn outs have been a pain and they've held me back and they're tough on integration and stuff like that but having, especially when you're hiring somebody that's going to stay on, I want them to have some skin in the game and so that's kind of the structure that we're kind of looking at now where it's cash.

It's a bank debt, along with stock and we're only paying four to five times EBITDA. And consequently the bank is pretty happy to loan us more money. Especially if they're only worth something under the 2.5% threshold. So, it's kind of a combination that's working for us right now and people are thinking that DXP is sort of at a stock price wise at a low point and it's going to go bigger and better and all of that kind of good stuff. We have a lot of interest.

Okay, and I assume it's probably a smaller acquisition target. Maybe revenues below $50 million that's going to be willing to take stock. Is that probably fair.

Yes, no. That's a really good point, Matt. Exactly. That if we had to go out and we were going to buy a much, much larger company owned by an investment banking firm, they're not going to want the (inaudible) stock and so we would have to go out and raise equity but we're not looking at those right now. What we're looking at is like you said something under $50 million.

Okay, thanks, David. Appreciate it. Nice quarter.

Thank you.

(Operator Instructions) Next question is from the line of [Joe Mondillo] with Sidoti & Company, please go ahead.

Good afternoon, guys.

Hi, Joe.

First question in David's, I believe, prepared remarks he mentioned sort an outlook to the fourth quarter saying that you're expecting a flat fourth quarter. Is that an EPS basis?

I was actually making that comment as it related to supply chain services which was roughly 20% of our business. And so actually we feel like the service center segment and the IPS -- the IPS will probably be flat also. It's 10% of our business. There's some things that could make that better but we're not counting on them. And - but the service center side of our business our guys are projecting that it should be up slightly. So, if everybody is flat and they're up, well then both the top line and the bottom line should be up.

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

Well, Mac you want to --

Part of it is rebates - the biggest share of rebates really come from bearings and bearings are 30 or so percent of our business. And so it might not be as big of a factor compared to another competitor who's primarily bearing the BT distributor. We accrue an estimate of rebates so there shouldn't necessarily be a fourth quarter, or something, jump because we got rebates.

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

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

It's -- it's not anything wild but it's trending up and we don't normally give backlog numbers, but our backlog is up.

Your orders are improving on that side of the business?

Yes.

Just in terms of the expansion on the service center side of the business when was the last time you opened new service centers.

We opened a -- all before, maybe some during 2008 before we knew that the world was coming to an end, was we opened up a Mineot, a little before that when the shell play and what was the name -- south of that. (inaudible) We opened up a very successful --

The last time was like 2008. It's actually unusual that we open new locations. In ten years we probably haven't opened five new locations.

Okay. And you spoke to the fact that you are expecting to continue to open some in 2011? Do you have a certain number out there that you're looking at?

To fully develop what we would like to do in what we'll call the southeast -- it would be a total of six to eight stores.

Okay.

So we're in essence opening up 2.5. We're enhancing one.

And per service center just estimate how much does is cost to open up one service center?

Well, it's not that expensive from a capital point of view. We're going to put $150,000 of forklifts and trucks and -- and so a couple of hundred thousands dollars from a capital point of view. The real expense is people and so to me it's the function of do we put in several hundred thousands of dollars worth of people and how fast do they start producing income that offsets that expense and when we did -- want to say Grand Prairie but that's just wrong. It made money --

Clayburn.

Clayburn made money in four months but it was an oil patch play. It was a lot of activity. Our customers wanted us to be there. It was very exciting. Mineot took 12 months. So, it's just -- it depends.

So a few hundred thousand up front cost and then the labor.

Right.

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

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

I'm sorry, yes, EBITDA is fine -- actually I think that was in the press release. You don't have the full operating cash flow with working capital?

We didn't put it. (inaudible)

Okay, that's fine.

It's still somewhat being reviewed and if I gave out number today it is possible it could change.

All right, I think that's about it. Thanks a lot.

Thank you.

The next is from Holden Lewis from BB&T Capital Markets.

Thank you. Good afternoon, this is John Cooper on for Holden. Just kind of looking a little bit at the SCS segment. I know you guys kind of had mentioned that you're renegotiating to the new agreements and something like that. It really doesn't look like there's too much progress going on there.

Are we kind of losing some business there or how's kind of visibility looking there and when are you expecting that to tick up and improve? I think -- of course we had a management change in supply chain services, so the first thing that John [Jeffrey] did who's been with DXP for a long time, was to go out and visit all of the customers, review all of the contracts and look at and have frank discussion about where we were performing, where we weren't performing.

If we weren't performing was it because the expectations were too high, et cetera? And so we haven't lost any business and our first goal is to make -- to try to do everything possible not to lose any business. So that's been transpiring. Then, at the same time we have hired a new guy but we have three other existing outside sales guys that are out beating the streets trying to come up with deals, not to mention that the old philosophy of supply chain services was that we didn't want the service center people involved.

The new philosophy is we do want them involved and we especially want their eyes and ears on the street telling us look, XYZ customer's looking at a different supply chain solution and we want to hear about it because in the past if you weren't going to include that guy, well then he didn't tell you about it because he was going to lose some business.

So, we're trying to get the funnel full. We have-- with new implementations. We have some implementations coming. We have been winning new contracts here lately and so I think the business needed to have a turn around first and I think that sort of happens and I think everybody is on the same team. Everybody is on the same page and they're pretty fired up about what they can do.

Okay. So basically you kind of going through transition now and there's like Q1 2011 kind of like the basis point where everything seems to be shifting right and you've got things in the right direction?

I think we're already in the right direction. I think we've already hit our baseline. I think we're expecting things to go forward and I think we would have felt that in the fourth quarter had it not been for the possibility of three strikes and the fact that it's just the holiday season and a lot of the manufacturers will shut down and clean things up and will do things that just typically aren't good for that business.

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

No, just that they're supposed to happen in the fourth quarter.

Okay. All right, and then do you know of a duration or anything like that? As far as settling on anything.

You've got a better crystal ball than I do. (inaudible)

All right. And just on IPS a little bit. It looks like typically IPS is seeing Q4 up sequentially from Q3. That's what we've seen over the last couple of years any way, (inaudible) last year obviously. And it looks like a majority of the increase in Q3 was more of the acquired revenues. Is there any reason to suspect that we're not going to see that typical seasonal bump up again in Q4?

Well, IPS second quarter -- third quarter to second quarter sales grew 20%. That acquired revenues are in there for both periods.

But moving from Q3 into Q4, typically Q4 has generally been stronger than Q3 and I guess you said you were looking at it to be flattish. Is there any reason to not think it could improve off of Q3? There's really no reason I know of for Q4 to be better than Q3. It used to be that it was better because we weren't on percentage completion and so we had this completed contract thing and everybody would want to get it shipped and done before the end of the year and so our fourth quarter would be bigger for that reason. But, we've been on percentage completion now for a couple of years. At least a couple of years. The there really isn't any real reason that the Q4 should be lower or higher.

Okay. Not from a market prospective.

Right. Okay. I think that's all I've got for now. I'll jump back in queue. Thanks, guys.

Thank you.

Our next question is a follow-up from Matt Duncan, Stephens Capital Management.

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

Yes.

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

I'm really looking for selling expense to go up a little bit on dollars but I would suspect that it might go down a little bit as a percent.

Okay. Just wanted to make sure I had that right. And then I guess the last thing and I think you've talked about this a little bit but in terms sort of the hand you're being dealt currently by the economy it sounds like you're continuing to see underlying improvement in your business and I would guess that at this point that inventory restocking is largely over and so you're probably seeing true demand from your end customers. What customer groups do you think will lead the growth going forward based on what you are seeing today and you gave us some insight into what you saw in the quarter but what end markets are the strongest for you on a go-forward basis, do you think?

I feel pretty strong about all the commodity people. That being oil and gas, gold, platinum, nickel, copper. All of the commodity folks are blowing and going and trying to produce more. All of the -- some other markets, food and beverage, et cetera, they're good markets but they're not just going to lead the way.

The chemical markets, again, refineries are not doing well but the chemical markets because of the fact that gas prices are so low are doing really well and so all of your grain handling stuff. Again, making oil out of the corn and stuff like that. They're doing well. Things-- housing industries are bad. Things that relate to that. I think that might be why the aggregate market's down. We talk about oil & gas transport has been good.

Okay, that's helpful. I just wanted some insight into where the growth would come from going forward. Thanks, David, I appreciate it.

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