DXP Enterprises Inc (DXPE) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to today's DXP Enterprises Inc, 2011 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) This conference is being recorded today, Wednesday, July 27th of 2011.

At this time I'd like to turn the conference over to Mac McConnell, Senior Vice President of Finance and CFO. Please go ahead, sir.

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

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.

I will begin with a summary of DXP's second quarter of 2011 results. David Little will share his thoughts regarding the quarter's results, then we will be happy to answer your question.

Sales for the second quarter increased 18.2% to $197.9 million from the second quarter of 2010. After excluding D&F sales of $6 million -- sales of $6.6 million -- sales for the second quarter increased 14.2%.

Sales for Supply Chain Services increased 15.6% to $36.4 million compared to $31.5 million for the 2010 second quarter.

Sales of Innovative Pumping Solution products increased 16.4% to $21.8 million compared to $18.7 million for the 2010 second quarter.

Sales by our Service Centers segment increased 19.1% to $139.5 million, compared to $117.1 million of sales for the second quarter of 2010. After excluding D&F, Service Center segment sales of $6.6 million, Service Center segment sales for the second quarter of 2011 increased 13.5% from the second quarter of 2010. When compared to the first quarter of 2011, sales for the second quarter of 2011 increased 8%. Sales per business day for the second quarter of 2011 increased 9.7% from the first quarter of 2011. The second quarter contained one less business day compared to the first quarter.

Second quarter 2011 sales for Supply Chain Services increased 4.3% compared to the first quarter of 2011.

Second quarter 2011 sales for Innovative Pumping Solutions products increased 30.7% compared to the first quarter of 2011. The sequential increase in IPS sales was -- is really the result of the lumpy nature of IPS sales. The level of IPS orders is strong, and we expect a significant increase in IPS sales in the second half of 2011 from the first half of 2011. Second quarter 2011 sales by our Service Centers segment increased 6% compared to the first quarter of 2011.

Gross profit for the second quarter of 2011 increased 19.5% from the second quarter of 2010, compared to the 18.2% increase in sales. Gross profit as a percentage of sales increased 29% in the second quarter of 2011 compared to 28.6% for the second quarter of 2010. Compared to the first quarter of 2011, gross profit as a percentage of sales for the second quarter of 2011 increased to 29% from 28.6%, primarily as a result of increased safety service sales, which have higher gross profit margins.

SG&A for the second quarter of 2011 increased to $4.9 million, or 12.5%, from the second quarter of 2010. This is compared to the 18.2% increase in sales. The $4.9 million increase in SG&A is partially the result of $1.1 million of SG&A expenses associated with D&F. As a percentage of sales, SG&A decreased to 22.1% from 23.1% for the second quarter of 2010, and 22.3% for the first quarter of 2011.

Interest expense for the second quarter of 2011 decreased 36.2% from the second quarter of 2010. The decrease is a result of the -- of a reduction in the average debt outstanding compared to the 2010 period. Interest expense for the second quarter of 2011 was flat [with] the first quarter of 2011.

Total long-term debt decreased approximately $8.6 million to $100.2 million during the second quarter of 2011. During the second quarter of 2011, the amount available to be borrowed under our credit facility increased approximately $8.8 million to approximately $71.6 million. The increase in availability is the result of the decline in debt combined with the effect of increased receivables on the asset test.

Capital expenditures were approximately $2.6 million for the quarter. Cash on the balance sheet at June 30th, 2011 was $1.1 million. Accounts receivable and inventory balances were $114.7 million and $77.7 million respectively at June 30th, 2011. I am happy to report the [turn] of our business has continued to improve. Now I'd like to turn the call over to David Little.

Thanks, Mac, and thanks to everyone on the conference call today. Okay, I'll be short. We had a great quarter and we'll continue to do so. Oh, just kidding. Okay. I'll give you a little more color.

Our second quarter results compared to our first quarter showed an 8% increase and a 20% increase in earnings per share. These substantial results are because our markets are improving; but more important is our DXPeople continue to execute our profitable growth strategy. In addition, our growth investments that we talked about at the first of the year, are resulting in additional sales, and will continue to do so throughout the year.

I believe we continue to take market share because our customers value the expertise and we bring -- that we bring to them and their companies. I am pleased also that we increased EBITDA margins from 7.6% the first quarter to 8.2% in the second quarter. Our goals continue to be 10% by 2013. As you guys know, EBITDA dollars is an important metric that fuels our ability to have substantial growth both organically and through acquisitions.

On the acquisition front, our pipeline is full of opportunities, and I believe you will see a couple of acquisitions completed before the end of the year.

The past two and a half years have been good, bad, ugly, and certainly not boring. I believe we are stronger and have a better management team, as we move forward to build a multi-billion-dollar Company. And it's so much more fun to be winning.

First I'll talk about our three segments, DXP Service Centers, DXP Supply Chain Services, DXP Innovative Pumping Solutions.

Innovative Pumping Solutions. Our results, with 16.3% increase in sales and a 36.5% increase in operating income compared to Q2 of 2010, is very positive.

Activity in the IPS group remains strong. Backlog is increasing, and shipments for Q3 and Q4 are expected to rise. Activity in most of our engineering contractor customers remains strong, with them having multi-billion-dollar projects for various oil and gas companies. We are seeing increased opportunities in pipeline sector with rerates and remanufactured equipments. Service and repair continues to be steady. We're seeing some margin pressures to secure orders, which frankly makes no sense to me, given that the increase of [capital/actual] equipment is on the rise.

In conclusion, we continue to see increased improvement of both the top line and the bottom line for the rest of the year and into 2012.

Supply Chain Services segment. Our results of 15.6% increase in sales and 40.5% increase in operating income compared to Q2 of 2010, is a nice improvement. Supply Chain Service segment saw an increase in top line and bottom line over the previous quarters -- [quarter] -- due to the continued effort to execute our sales strategy. Additionally, adding more first-tier product groups to existing accounts, incessant drive to implement in a timely manner, and expand existing contractual relationships, DXP's Supply Chain Services has successfully extended our agreement with a trucking and military manufacturing for four more years, eight years after the original agreement was signed.

We're also proud to announce that DXP's Supply Chain Services was named Navistar's Diamond Supplier of the Year. Not only were we granted such an honor, but (inaudible) the only indirect MROP supplier to receive this prestigious award. During Q2, Supply Chain Services rolled out two new SmartServ solutions to existing customer sites, in a forging operations and a chemical processing plant.

SmartServ is a new solution offered to Supply Chain Services customers. This new solution tracks rotating equipment for warranty and repair as well as any required preventive and predictive maintenance.

Our service parts management agreement with our largest beverage customer hit new milestones in activity, revenue, and service levels throughout the first part of the year. This new activity, especially during the second quarter, is due in part to the implemented organizational changes which have [boasted] productivity by more than 10%. As a result, we are able to manage the activity growth within our current workforce and expanding (inaudible) operations.

[Five]. Our oilfield supply agreement went live in the month of June. We have implemented 25% of this [rewarded] business. Remaining will be brought live during the third quarter. We're optimistic, and anticipate a long and successful relationship with this account.

In Q2, one of our longstanding energy customers verbally awarded DXP with a new three-year contract extension. DXP has also been granted several other opportunities to expand SCS's footprint within that same organization.

Operationally, SCS continues to quest -- its quest for operational excellence at every location, and is on schedule to convert its existing sites from (inaudible) to P21. Three previous scheduled beta sites were successfully converted in Q2. In conclusion, we see -- continue to see top line and bottom line growth for the rest of this year and into 2012.

DXP Service Centers segment. DXP Service Centers segment emerged from a strong Q2 with 19.5% increase in sales, 23.3% increase in operating income compared to Q2 of 2010, and continues with an optimistic outlook for the second half of the year.

Our Service Centers segment entrepreneurial approach (inaudible) improving industry (inaudible). We will continue to focus on our top customer-driven strategies, which include SuperCenter development, Service Center expansion in the Southeast, value-added repair service, and regional distribution center opportunities.

Several markets continue to improve, such as oil and gas, oil and gas terminals, chemical manufacturing, mining of gold, platinum, uranium, and copper, food and beverage, tire manufacturing, grain handling, and second-tier automotive manufacturing.

The net result of our organic growth initiative, operational discipline, and strengthening economy, is strong growth across all regions, with strength coming from those markets heavily weighted towards oil and gas, mining, and chemicals.

To give you a look at this by region, the largest percentage growth coming -- comes from the following regions. The Southwest, 43% year-over-year growth; East Coast, 37% year-over-year growth; South-Central, 27%; North Texas, 23%; Sabine/Beaumont area, 23%; Greater Houston area 22%; Western region, 14%; South Texas, 10%; Ohio River Valley, 10%.

Our gross margin enhancement strategies and operational excellence programs contributed to an improvement in margins despite (inaudible) of business (inaudible) towards OEMs. Regions that saw a meaningful increase in gross margins year over year included South Texas, 13.6%; the West, 5.2%; East Coast, 3.9%; Houston, 3.9%; South Central, 3.4%; Southwest, 2.2%; Ohio River Valley, 1.7%.

DXP continues to invest in our people, operations, and sales. All DXP acquisitions and business units combine to provide optimum expertise and market coverage. We saw numerous examples of our high service, customer-driven culture, delivering business results in all aspects of our customer business.

A recent example of this is when a North Texan -- Texas region introduced a innovative pumping control technology to an oilfield service company focusing on the shale gas at each site. The resulting technology solution provided our customer greater flexibility in their pumping systems while improving reliability, performance, and overall profitability in their (inaudible) processes. Our high-performance technical sales force and support team continue to provide solutions to our industry of difficult application challenges. It is this type of consultative selling environment that binds our Company's culture of being customer-driven experts to (inaudible) solutions.

Our Q3 MROP growth plans continue with other expansion in the Southeastern region of the United States through new Service Center operation. In Q2 the new Orlando, Florida Service Center was completed, and preparations continue for the planned Jacksonville, Florida location. In the current quarter, Orlando Service Center will continue producing revenues as it begins to develop new business in the South and Central Florida market. Our Jacksonville, Florida Service Center will be completed in early Q3, and it is forecast to begin generating revenues by late Q3.

As DXP continues to expand its service capabilities from a local statewide to a national one, the presence of DXP SuperCenters will grow. We will continue to invest in SuperCenters, and we are pleased to report the conversion of two new SuperCenters in Q2, bringing our total number of SuperCenters to 25.

Our South Central Regional Management Team has successfully grown our (inaudible) city Oklahoma Service Center to SuperCenter status in Q2. This upgrade marks the fifth SuperCenter in our South-Central region. We are equally excited to report the second SuperCenter within the Ohio River Valley region. The upgraded status of our Cincinnati, Ohio Service Center to SuperCenter, [reinforced] the synergistic relationship between our bearing, PT, and our rotating equipment divisions.

We will continue to fulfill our commitment to convert ten Service Centers to SuperCenters during the 2011 fiscal year. At present we have seven Service Centers in progress from our initial commitment. During Q2 we have added three additional in progress -- in process, SuperCenter candidates, which brings our total SuperCenter in progress number to ten.

I am pleased with the progress we are making. I'm excited about our DXP people and their expertise to drive profitable solutions for our customers. Customer-driven experts and MRO solutions is not just words. Our DXPeople are experts, and they provide customer solutions every day. We simply help our customers perform better every day. And being customer-driven, going the extra mile, and DXP people are proud to do so. Thanks to our DXPeople, customers, suppliers, shareholders, for their contributions to making DXP all it was meant to be. We look forward to a great 2011 and our journey beyond. Thanks, and we're now open for questions.

Thank you, sir. Ladies and gentlemen, at this time we will now be conducting a question-and-answer session. (Operator Instructions) And our first question comes from the line of Matt Duncan with Stephens, Inc. Please go ahead.

Afternoon, guys. Congrats on a great quarter.

Thank you.

Thanks.

The first question I've got is just kind of looking at the sales trend that you're seeing. Did you see momentum throughout the quarter, and how does July look so far, sort of looking at the month-to-month trend?

I guess you're talking about day sales?

Yes. Yes, exactly. Sales (inaudible). How's that trending?

The -- I think the worst month on a day sales basis of the quarter, was better than the best day sale month in the first quarter. So, the trend was up. I mean, the -- May actually dropped from April, and then June was the best day sale month of the quarter. Okay? (Inaudible). I mean, it's up, but Innovative Pumping Solutions and things can change that.

Oh, sure. Absolutely. And how do things look so far in July? Are you continuing that trend of progression higher?

July looks fine. We don't see any evidence of any softness. You know, the market kind of thought we were seeing some in May. We kind of thought we were. But it really didn't materialize. Then -- and then June was really a nice month; and July seems to be following the trend of June.

Okay. So, then, you would expect your sales in the third quarter should be up sequentially, given the -- what you said about the three different pieces of the business?

Yes.

Okay. That's helpful. David, on the Supply Chain Services side of things, on the oilfield services customer that you're implementing, remind us roughly how big of a piece of revenue that should be on an annual basis, and how long is it going to take you to get there? I guess you said you're about 25% implemented in the 2Q. Did I hear you correctly? You're going to implement the rest of it in the 3Q?

Yes.

How big is that agreement? What's the revenue potential there?

I knew you were going to ask that. I made a note of me to go ask John Jeffery what the answer to that was, and I ran out of time. I forgot. I can go get it for you.

Yes, and I guess just maybe some -- is it $10 million? Is it $50 million? Just some idea of sort of the magnitude that it could be, to your revenue. It doesn't have to be exact. Just a generalization.

Yes. I still wish I knew. I know we have a much better idea of what that number is, and I really do know what -- I mean, I think we do know kind of what we're expecting now. You know, the customer always promises twice as much that it really is, so --

I also suspect that the 25% implementation doesn't mean we got 25% of the revenues in the second quarter.

Oh, sure. Yes. You're just getting locations brought on. Absolutely.

We're going to get you that answer. It'll take about two minutes.

Okay. that's fine. And on the Southeast US expansion, can you talk about -- give us an update on what contribution it made to both revenues, and what the profitability drag was?

Well, the sales were essentially flat, second quarter versus first quarter. But we've been hiring people. We've opened the new location -- in fact, we've signed leases on two more locations to get -- we've hired some people for all the locations. And those are -- the loss increased from about $300,000 for the first quarter to a little over $400,000 for the second, and that's in line. We -- our budget had shown that the loss was going to get bigger during the second quarter, not smaller.

And then, Mac, if I remember correctly, the revenue contribution in the first quarter was a little over $1 million. Was that -- (inaudible) $1,100,000 on the 2Q?

Yes. It's $1,100,000, and it's about the same in the second.

Okay. That's helpful. And then last thing. On acquisitions, I gather that the new credit agreement, or the amendment to the credit agreement, is largely to give you guys room to continue the strategy of growing the Company in that way. David, it sounds like your pipeline's pretty full. Are there any bigger deals in there or is the focus really more on the smaller acquisitions at this point?

I'm going to -- well, first of all, I'll answer your first question. And the oilfield service company is a $15-million-plus deal.

Okay, that's helpful.

The second part of your question is, there's a real appetite, I guess, for private equity guys now to capitalize, I guess, on low interest rates, or whatever. So, we looked at two very much larger deals. And, you know, we told them we would go seven-plus kind of (inaudible), and we didn't even -- we didn't make it to the dance. So, no, I think pricing from the private equity sector seems to be kind of ten times EBITDA, and I'm just too cheap to do that. So, we've refocused on some things that are more in the $50 million size and smaller.

Okay.

And -- where we can buy these things at -- you know, plus or minus a little bit around five times EBITDA. So, our focus is that, and doing multiple ones instead of one big one.

Is there a preference on your behalf, whether it's pumps, bearings and power transmission, safety? Is there any part of the business that you're looking to grow at, say, a greater proportion than the others?

We -- well, the philosophy now has been a little more around geographical expansion, and maybe an acquisition in the East Coast, where we're not as strong as we are kind of in the Omaha area, and as strong as we are in the Houston area. So, there's more around that. We'd like to go to Canada on the Western side, [buying] the oilfield up in that particular arena. So, most of our thought processes today are not so much that we care about what four divisions, that's rotating equipment, bearing and PT, safety, or industrial supplies; it's more geography, is where we're trying to fill in some holes.

So, the focus geographically, then, it sounds like it's the East Coast; the Western part of Canada, are the two main focuses there.

Yes.

Again, acquisitions are sort of a romancing situation and we don't get to pick when somebody's ready to sell.

Sure. I know. But still, what we'd like to do is just make sure we're geographically adding (inaudible). It helps -- what it does, Matt, is it helps us with our SuperCenter concept. If we can move a new division into a region that doesn't have those capabilities, then it helps it -- first of all, it helps make the region a super-region, and then that gives us the wherewithal and the talent and the expertise to build SuperCenters better. So, that's sort of our strategy.

Okay. That's helpful. I'll jump back in queue. Thanks, guys. Congrats again on a good quarter.

Thanks.

Thank you. And our next question comes from the line of Holden Lewis with BB&T Capital. Please go ahead.

All right. Thank you. Good afternoon.

Hi, Holden.

On SCS, I guess, first, understanding that that's a business that you typically have a little bit of visibility in because of the contract nature of the business, do you have a sense -- you obviously have the one oilfield service contractor. Are there other contracts that you're currently sort of rolling out, implementing, and do you have a sense of -- I mean, is this going to be a business that shows good sequential strides, pretty smoothly now, through a number of quarters? And what kind of margins are these new contracts typically coming onstream at?

I can answer those. We have a backlog of implementations. We don't presently -- the expansion we're kind of doing now is more sites with existing customers, and trying to capture more of their MRO spend in some areas that maybe we haven't done a good job for in the past. There's not any significant new customers that I'm aware of. The -- but there are sites, additional sites, that are -- that'll be coming on board with existing accounts.

That doesn't mean that tomorrow we might not find a new deal, because we're working multiple deals all the time. So, we're encouraged by that. But the answer to your question is, yes, we feel very confident that we're going to have sequential improvement each quarter, (inaudible) going out for multiple quarters.

And then on the profitability question, they're -- that particular part of the business is more like an 8% EBITDA business instead of my goal of 10%. But still, it requires a lot less working capital, and so we're happy with the returns we get on that.

Okay. And then, not knowing what your D&A element is on SCS specifically, how does that translate into an EBIT? Is that -- is it just kind of a 5% and 6% margin EBIT, that's just kind of the norm for these kind of contracts?

It doesn't have much depreciation and amortization, so it's almost the same.

Okay. So, your new deals, as they come on -- because obviously it's a 5% to 6% margin business, and has been -- you expect that as your revenues grow sequentially, even though most of that sequential is just one oilfield service guy plus anything that you add with existing guys, you expect that those are coming in more at like an 8%-ish level? So, you would expect that with a sequential increase in revenue, you're also going to get a sequential increase in operating margin on that business? Is that accurate?

Not -- yes and no. You know, we -- the deal itself may be an operating margin of 8%, but we have fixed overhead, so any volume increase will result in leverage on the bottom line.

Yes. Just as I was saying, new business is basically an 8% EBIT margin

Yes.

Okay. And that's fully loaded? That's what you would report on the segment details?

Yes.

Yes.

And then -- so, excellent. And then switching over to IPS, you commented before, I was saying to you, you're kind of looking at $100 million. That still would require pretty good back end loaded push, but obviously you have some visibility on the backlog. Do you still feel good about the $100 million? Is it too high, too low for this year? And again, looking at the backlog, what does the profitability look like there? It can be choppy, but does that give you any sort of color as to whether -- you know, 14% from Q2 is the right number, or higher with more volume? How should we look at that?

I'm good on the $100 million. What are we running? (Inaudible).

The first quarter was down a little bit. It was at 14.1%. The first quarter was 17.1%.

Right. And when you look at the backlog, I mean, what does the backlog of margin look like, or is it difficult to say?

It is difficult to say, but it's also -- I mean, there were some lower-margin jobs in the second quarter that were bid back in a time period where we had a lot of competition and we were interested in keeping -- getting business just to keep the shop full. Now the world's changed. It changed a while ago, and so that we think those low-margin jobs are behind us.

So, you think you've flushed out the low-margin stuff and you're kind of on today's type of profits now?

Yes.

There's still some margin pressure, by the way. I'm not quite sure that everybody's come out the recession as -- maybe as well as we have. So, we are losing some business, and of course we always lose some business. But it's not as good, margin-wise, as it was back in '08.

Okay.

But it's still really, really good. I mean, it's one of the more profitable things we do. But it's not as good as '08.

Sure. And are both businesses still leverageable? I know in your Q you said that even year over year with high revenues, both IPS and SCS had pretty flat SG&A. Is there a point where that runs out and you need to invest in SG&A, and add some more in there, or are those two businesses -- you know, basically the cost structure you have for SG&A is kind of fixed, and there shouldn't be much wiggle on that for the time being?

Well, costs aren't fixed, but there is a fixed portion of it. And so it's the blend of some variable commissions and things like that. So, yes, there's some more leverage in that business; but then, you know, don't plot out fixed expenses, because that's not going to work.

SCS, clearly, every time we have more business, more customers, we have to add people.

Yes.

IPS is a little different because more of those people that get added for IPS are going to [cost] sales.

Right. Okay.

(Inaudible) stuff like that. So, it's pretty leverageable, but it's -- there's some variable cost.

Okay. Great. I'll jump back in. Thanks.

Thank you. And our next question comes from the line of Joe Mondillo with Sidoti and Company, LLC. Please go ahead.

Good afternoon, guys.

Hi, Joe.

First question, just in terms of the Southeast expansion budget, what is that sort of -- what are you expecting sort of second half of the year? You said you saw a loss of $300,000 in the first quarter, $400,000 in the second quarter. Sort of, what are you expecting in terms of a profitability standpoint in the second half of this year?

I know our forecast was to sort of achieve breakeven in the fourth quarter.

Is that still likely?

No. We -- no. I don't think so. I think we're good with that.

Is that still the plan, or--?

Yes.

Okay. The next question. Just in terms of the Supply Chain Services additional customers that you're expecting, I believe you were sort of talking about a $40 million-plus run rate by the fourth quarter of this year. Has that picture sort of improved since the last call, and maybe by how much, or how is that looking, in terms of that expectation?

I mean, the first quarter was, you know, $34.9 million. Second quarter was $36 million. We're planning to grow.

Yes. I think $40 million by the fourth quarter's about right.

Okay. And then the IPS, in terms of the orders that you saw on the second quarter -- did those improve sequentially from the first quarter in IPS?

Yes.

Significantly, or --?

I think the backlog went up somewhere in the neighborhood of about $7 million or so. I think that's about right. It went -- it -- which is almost right at 30% increase.

Sequentially, that is?

Yes. Yes.

Okay. And then, in the Service Center business, could you talk about pricing -- what you're seeing with pricing in a quarter-to-quarter basis over the last couple of quarters? Are you beginning to be -- are you pushing -- are you raising any prices, or how is that trending?

IPS again.

Service Center.

Service Center. No. What we had was, we had a lot of price increases at the beginning of the year, and they were hurting margins, only because -- maybe we're not as good as we could be on passing them along. Not that we couldn't pass them along, but everybody's reluctant to pass them along as fast as we would like. And so we've gotten past most of those now, so our gross margins have been increasing, and of course that's contributing to the increase in EBITDA that I like to [attract].

What about the negotiation of pricing with your vendors?

The -- you know, again, they all pretty much had price increases at the beginning of the year, and now we're not seeing any price increase.

Okay. The last question just has to do with your capital expenditures. They increased, I believe, quite a -- significantly since -- from the first quarter. What is your budget there for the year, and is that all Southeast expansion on the Service Centers, or just talk about what your CapEx budget is?

Our CapEx budget is largely -- is really driven by two things right now. Some is IT, and most of it is our safety business. And yes, the expansion in the Eagle Ford results in buying trailers for our employees to live in, and ATVs -- all-terrain vehicles -- with trailers for them to get to their job site and do work, and various kinds of shower trailers, and paramedic -- various equipment that we're buying. And so, that -- I mean, I guess I'd say the budget for that is, when we have an order from a customer, then we go get the equipment so we can put the people in the field. And we did a lot of that in the second quarter.

What do we expect, CapEx? $4 million?

Yes. Something like that.

Around $4 million? Okay. All right. Thanks a lot.

For the year.

Yes.

Thank you. And our next question is a follow-up question from the line of Matt Duncan with Stephens, Inc. Please go ahead.

Mac, you gave us the revenue number from D&F. Do you know if it was accretive to EPS in the quarter, and if so, by how much?

Sure. It's approximately $0.02 for the quarter. It was $0.05 (inaudible) in the first quarter.

So, it's on track to be, you know, probably $0.08 to $0.10 accretive for the year, then, is the right way to think about it?

And then by the time the year is up, we probably won't be able to tell you, because we would have so integrated and changed it.

Sure. Oh, absolutely. David, looking at the sort of longer-term picture, you've got a goal of a 10% EBITDA margin in 2013. Have you looked at how that would break out between the three pieces of your business? What EBITDA margins do the three pieces need to get to, so you can achieve a 10% corporate EBITDA margin?

Yes. The Innovative Pumping Solutions is going to be in the -- what, 15%? That's pre-D&A (inaudible).

Last year it was 24%.

I guess what I'm getting at, on how you [build that] 10% EBITDA margin, is it really just continuing to grow and get leverage in the three pieces? Is there -- ?

If we fail everything else, we'll just do that. You know.

But it is -- you know, it -- if you get enough business, IPS is going to have really good operating margins.

Yes. It's going to be 14% to 15%, and then we believe that the Service Centers can get to 11%, and then Supply Chain Services is going to be on about 8%.

Okay. All right. That's all I had. Thanks.

Thank you.

Thank you. (Operator instructions) And our next question is a follow-up question from the line of Holden Lewis with BB&T Capital. Please go ahead.

Thank you. On gross margin, I think you commented that mix -- you commented, I think, that there was more safety services, which was positive for the mix, but then on the other hand you said that there were more OEMs, which should be negative to the mix. And so, I mean, for your model I think a 29% margin usually is pretty good. You know, it's a nice step up from Q1 or the last four quarters. You know, I'm just trying to get a sense -- if mix was kind of neutral with some pluses and minuses, what was the other pieces that's been pushing it up? Is that -- it also looks like your mix of SCS, IPS, and MRO was kind of steady as well. So I'm trying to get a sense of what else was in there.

Right. The gross profit mix is that Innovative Pumping Solution has the highest gross profit margins, Service Centers next, and then Supply Chain Services last. From an -- the other part that's causing operating income to go up -- and so -- well, okay, so that mix worked out to where we got margins -- gross margins up to -- what were they, Mac?

29%.

29%. By the way, 30%'s my goal. 30%'s kind of like where I'd like to get. And again, the mix cause that to vary a little bit. The other piece, though, is to have -- even though there's variable costs in SG&A, there's fixed costs, and so we're trying to leverage that. And we should see some continuing leverage through the next couple of quarters at least.

So, our goal is to get SG&A down to -- without depreciation in interest in there, to be in the 20% of sales. So, if you have 30% goal and 20% goal, without interest and depreciation in there, you get 10% EBITDA. So, that's what we're trying to drive. And then, you're right; I can't -- you know, if SCS starts growing faster than the rest of the businesses, well then maybe I don't get to 10%, but I think we'll all be happy anyway.

Yes. I guess I'm just -- it looks like, if you look at Q2 mix last year, revenue mix in MRO, IPS, SCS -- if you look at it this year, there's not a lot of difference. Those mixes look a lot alike. Last year MRO was 70%, this year 70.6%, IPS 11.2%, this year 11%, and so I guess I'm having a hard time seeing where the mix is. I guess --

It's not just mix. It's not just mix, Holden. I mean, it -- (inaudible) I mean, we're trying to drive -- we're trying to get that incremental 1% more [G PER DAY] on every job.

Okay. So, you feel that you're getting (inaudible) just on pricing, or what are the other pieces?

Right. Oh, I think there's 1% on pricing. I think it's all about pricing. We're working very diligently with fancy computer models and all that to help with our suggested pricing and we -- but we leave flexibility in the field. I mean, we're not trying to lose orders. So we let them cut the price, but we try to give them a little more intelligence on where we think they could be selling things. And so, we're -- I feel like we're -- from an operational excellence point of view, we talk pricing all the time and we're trying to drive incremental price.

I know that that's been a -- you know, that technology -- using the technology to try to shore up pricing, that's kind of been a long-term initiative, and kind of feels like maybe it hasn't evolved as quickly as you might have liked, or as successfully as you might have liked. Is there some reason to think that maybe we're getting traction with that, or how should we look at that?

Well, I think you're right. Because I really wanted to go up faster, but -- so, I think you're right. But, no, I think we're getting traction. What blows a hole in all that is, like I said, I mean, since the fourth quarter of '08 was our high water mark on sales, and it's taken us all the way to this quarter to exceed that, so that's been two and a half years of not a -- certainly not a seller's market; it's been a buyer's market. So, we get pressures. We have to succumb to pressures. So, when times get better and it's a little more an equal market, then -- and we can sell value, and our customers appreciate that value well, well then maybe we'll get a little more.

And then just expanding on the SuperCenters a little bit, in MRO, you just -- you added two this quarter, I think, and you still have another ten in process that you think you're going to get converted to SuperCenters this year still?

Yes.

So, you should have ultimately added twelve fresh SuperCenters in 2011, when everything's done? Is that right?

Wait a minute. I'm confused. I think -- I thought I was answering a Supply Chain Service question.

I'm onto MROs, sorry.

David Little. Okay. So, we're adding --

So, you said that you added two in the second quarter, right?

I did.

(Inaudible) Service Centers getting upsized to SuperCenters.

Right.

And then you have another ten now that are in process of converting from Service to Super, and you--

We're always trying to keep ten in process (inaudible).

How many more do you expect to get converted from Service to Super this year?

Seven.

Okay. So, you're expecting another seven converted --

Our goal was ten for the year. Our goal is ten for the year, and our goal is also to always have ten in process.

Got it. Okay. And so, if you get those other seven, right, because getting a SuperCenter's mostly adding somebody with expertise and bringing the relationships, and sort of goosing the revenue that way, correct?

Yes, sir. Yes.

So, what does it mean from a revenue standpoint if you're going to get another seven converted? I mean, it seems like that involves bringing someone on who kind of turns on new revenue pretty quickly, right? So, I mean, with everyone that comes on, should be a step up in revenue in MRO?

Yes, and that -- but that's why we're driving organic growth from quarter to quarter, where the Service Centers was what, Mac? I don't remember. I know it was 8% overall, but it was -- in the Service Centers itself, it was --

Organic --

Organic growth.

13.5%.

13.5%. And so, yes, the market's getting some of that growth but we feel like SuperCenters, in gaining market share, is helping that number, so we're trying to outperform our peer group.

Right. And what it boils down to is, you're growing because you're adding talented heads, right?

Talent, and we're -- and I think you have to look at it this way. We're -- there's a universe of customers, and we only -- we don't get them all, but we get a lot of them. So, we got these universe of customers. Well, how do we capture more of their MRO spend? And that's what a SuperCenter's all about. It's -- maybe we're doing rotating equipment business with them, but we're not getting their industrial supplies.

So, how do we go about getting also their industrial supplies? How do we get all four categories? Right? We get all their safety, all their industrial supplies, all their rotating equipment, all their bearing and PT. Well, we feel like we do it by not just adding the product. Everybody can add the product. It's that we add the expertise along with that product, so that that type of customer that values our expertise will give us more of his spend.

But so, if you have seven in process getting opened at some point this year, and that kind of turns on fresh revenue when that guy comes on --

Right.

I mean, that alone should just continue -- in a flat market, that suggests that your MRO business should continue to progress incrementally, or sequentially, right?

That's absolutely true. And the only thing that we didn't find that was true, if you remember, is that when we had this great recession, we didn't convert any SuperCenters. So, we weren't -- we got too many headwinds, the strategy's not working -- doesn't work that way. When we have a little more tailwinds -- well then, we're able to do that more efficiently, and it starts working again, and so that's why you're seeing us have success getting SuperCenters going again, and et cetera.

Got it. All right. Thank you.

Thank you.

Thank you. Ladies and gentlemen, this concludes today's DXP Enterprises Inc, 2011 second quarter results conference call. Thank you for your participation. You may now disconnect.

Thank you.