DXP Enterprises Inc (DXPE) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to DXP Enterprises' 2011 third quarter results conference call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, Wednesday, October 26th, 2011. I would now like to turn the conference over to Mr. Mac McConnell, DXP's 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 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, but DXP assumes no obligation to update that information.

I will begin with a summary of DXP's third quarter 2011 results. David Little will share his thoughts regarding the quarter. Then we will be happy to answer your questions.

Sales for the third quarter increased 20.17% to $207.9 million from the third quarter of 2010. After excluding D&F sales of $6 million, sales for the third quarter increased 17.2%.

Sales for Supply Chain Services increased 8.6% to $34.7 million compared to $31.9 million for the 2010 third quarter.

Sales of Innovative Pumping Solutions products increased 38.8% to $31.3 million compared to $22.6 million for the 2010 third quarter.

Sales by our Service Centers segment increased 20.4% to $141.8 million compared to $117.7 million of sales for the third quarter of 2010. After excluding D&F Service Centers segment sales of $6 million, Service Centers segment sales for the third quarter of 2011 increased 15.3% from the third quarter of 2010. When compared to the second quarter of 2011, sales for the third quarter of 2011 increased 5.1%.

Sales per business day for the third quarter of 2011 increased 3.5% from the second quarter of 2011. The third quarter contains one more business day than the second quarter.

Third quarter 2011 sales for Supply Chain Services decreased 4.6% compared to the second quarter of 2011. This sequential decline in sales for Supply Chain Services results from declines at Defense-related customers.

Third quarter of 2011 sales of Innovative Pumping Solutions products increased 43.7% compared to the second quarter of 2011. Third quarter 2011 sales by our Service Centers segment increased 1.7% compared to the second quarter of 2011.

Gross profit for the third quarter of 2011 increased 21.6% from the third quarter of 2010 compared to the 20.7% increase in sales. Gross profit as a percentage of sales increased to 28.6% in the third quarter compared to 28.4% for the third quarter of 2010. Compared to the second quarter of 2011, gross profit as a percentage of sales for the third quarter of 2011 decreased to 28.6% from 29%, primarily as a result of a decrease in the gross profit percentage for Innovative Pumping Solutions.

SG&A for the third quarter of 2011 increased $6.3 million or 16.3% from the third quarter of 2010, compared to the 20.7% sales increase. $6.3 million increase in SG&A is partially the results of the $1.1 million of SG&A expenses associated with D&F. As a percent of sales, SG&A decreased to 21.7% from 22.5% for the third quarter of 2010, and from 22.1% for the second quarter of 2011.

Interest expense for the third quarter of 2011 decreased to 46.7% from the third quarter of 2010. The decrease is the result of lower average interest rates combined with the reduction in the average debt outstanding compared to the 2010 period. Interest expense for the third quarter of 2011 declined 25.7% from the second quarter of 2011 as a result of the lower average interest rates in connection with the July 25th, 2011 amendment to our credit facility.

Total long-term debt increased approximately $400,000 to $101.6 million during the third quarter of 2011. During the third quarter of 2011, the amount available to be borrowed under our credit facility decreased approximately $20 million to approximately $51.6 million. The decrease in availability is the result of paying off the remaining $20 million of the term loan in connection with the July 25th, 2011 amendment to the credit facility. Since quarter end, our bank has approved a $50 million increase in our line of credit, which will provide additional availability.

Capital expenditures were approximately $800,000 for the third quarter. Cash on the balance sheet at September 30th was $1.7 million. Accounts receivable and inventory balances were $121.2 million and $79.1 million respectively at September 30th, 2011. I'm happy to report that the tone of our business has continued to improve. Now I would like to turn the call over to David Little.

Thanks, Mac, and thank you to everyone in our conference call today. Our third quarter results, compared to our second quarter, continue to show improvement of top line sales growth and bottom line earnings per share growth.

These substantial results are because we are building a different company, a lot different than our competition, and our customers appreciate this difference. We're building the largest breadth of technical products and services in our industry, and our DXP People deliver on our slogan of being customer-driven experts in MRO solutions. I believe we continue to take market share, and our customers believe that we bring expertise and value to their customers.

Our goal continues to be a 10% EBITDA margin by 2013. I was pleased to see expenses as a percent of sales reduced 40 basis points and our gross margins decreased 36 basis points, which resulted in EBITDA margins staying about the same at 8.2%.

We will get to my goal. But a more important fact, brought to me by Kent Yee, and the reason why DXP doubled sales every five years and has the ability to continue doubling sales every five years without raising money through public offerings, is because we have one of the highest returns on investment capital in our industry. This is true when you compare to Grainger, Fastenal, MSC, who have much higher EBITDA margins. I believe we are stronger and have a better management team, as we move forward to building a multi-billion-dollar company.

I'd like to recognize Wayne Crane, who is our new Senior Vice President of Information Technology/CEO -- CIO. Wayne has a vast amount of experiences with companies much larger than DXP. He has been on board for ten weeks and is already making a difference in our service levels, and we look forward to his long-term strategies and vision for IT as we grow DXP to a multi-billion dollar company.

I'd also like to recognize Kent Yee, our Senior Vice President of Corporate Development, who was hired back in March. He was responsible for the Kenneth Crosby acquisition and has a full pipeline of some very exciting future acquisitions. Both of these gentlemen were excellent finds, and much needed to propel DXP into the future.

Kent wanted me to give you some highlights of the Kenneth Crosby transaction. First, it was a great fit. It was complementary to DXP's existing Supply Chain Services segment and its Service Center business. We will look to add similar businesses via acquisitions in the near term. Strengths -- the strength DXP brings to the Service Centers is that they will help us in the Northeast to have a much stronger presence. Financially compelling. They will be accretive to our earnings immediately, and they have strong free cash flow. Early integration efforts indicate meaningful synergy opportunities in purchasing and operating leverage.

We announced this agreement on October 12th. They're a leading -- Kenneth Crosby's a leading supplier of cutting tools, abrasives, gauges, and industrial tools. They go to market as an integrated supply company, which is about 48% of their business, and a branch-based operator, which is the other 52%.

Sales and adjusted EBITDA for the 12 months ending September 31st were $51.4 million and $3.4 million in EBITDA. The announcement was through July 31st, that we announced EBITDA to be $49 million and EBITDA to be -- I mean, sales to be $49 million and EBITDA to be $3 million.

The purchase of the assets was for $16.5 million, which was five times trailing EBITDA. Accretive earnings to share, we anticipate $0.06 to $0.09, both for -- well, proportional for 2011 and for 2012. And this does not factor in any synergisms.

Kenneth Crosby gives us, as mentioned, a much greater presence in the Northeast United States. They have expertise in cutting tools, which we really like, and expertise in integrated supply. They have enhanced markets exposure in power generation, medical, and pharmaceutical.

DXP will provide them with an operating base to better serve customers nationally; purchasing and operating leverage; key supplier relationships to expand Crosby's product line over time. Combined, further diversified geographic mix, $50 million in sales in the Northeast, which will help scale and reach, increased purchasing scale to cutting tools, abrasives, gauges, and industrial tools, and enhanced reach and ability to serve local (inaudible) markets.

They had five locations. There are -- two main ones were in Rochester, New York, and Hopkinton, Massachusetts. They are right on the edge of the Marcellus Shale and they're starting to participate in some of that, so we're excited about their markets also. [I'm going to have fun with questions]. By the way, Kent gave me 16 slides, so I'll probably shorten it.

Let's now talk about our three segments, DXP Service Centers, DXP SuperCenters, DXP Supply Chain Services, and DXP Innovative Pumping Solutions.

Innovative Pumping Solutions. Sales increased 38.84% and operating profits increased 103.2% compared to the third quarter of 2010. Quote activity remains strong. Current outstanding proposals is above $53 million. Order backlog continues to grow, and lead times for our manufacturers are starting to extend, which means business is good.

Potential projects in the Gulf of Mexico consist of a major oil company that has two active projects and has started inquiries on fire pumps, chemical injection, and diesel transfer pumps as well as some other smaller packages. Another platform in the Gulf of Mexico has started to inquire about fire water pumps, seawater lift, diesel fuel transfer, potable water skids, and other pumping possibilities.

We're working with [Vaclo] on a $2 million package that looks promising for an order in Q4. Other activity -- projects in the Gulf of Mexico include a platform we have quoted replacement fire water packages of $3 million, and seawater lift packages. A second platform is scheduled to start inquiries in Q4. Preliminary estimates are around $17 million. Activity at most of the engineering contractors remains strong, with multiple million-dollar projects for the oil and gas companies.

Our HP-Plus Pump opportunities have increased since the middle of Q3. IPS has booked over $2 million in orders, and we have $2 million in opportunities we expect to close by the end of the year. We remain confident that the trend for projects will continue through 2011 and into 2012. Service and repair activities is very strong at present and is expected to continue through 2012.

On the midstream level, mostly talking about pipelines, current order backlog is growing. We are seeing opportunities in [Eagle Ford], the [Bakken], the Marcellus Shale projects. This activity has been associated with a number of pipeline requirements for crew delivery to various markets, rewrite opportunities for existing pipelines, and equipment for new loading, and tank farm facilities for primary movers and transfer logistics. We are currently working two shifts.

Activity -- quote activity is strong. We are seeing opportunities in the international area as well -- Canada, Mexico, Brazil, Peru, Ecuador, Colombia, and Iraq. On-shore activity associated with quotes and orders is strong. Significant players in the market, Anadarko, Kinder Morgan, [XPO], EOG, are active in the [Eagle Ford] and the new shales in the Permian basin. Feedback is good for Q4 and 2012. Some customers noted above are predicting their 2012 spend programs to be double their 2011 programs.

DXP has a Pipe Division. It has been awarded the Chevron Bigfoot and Jack/St. Malo projects. The total value of these projects is estimated at $7 million. Both are scheduled to kick in in Q1 of 2012. They have several field and overseas jobs working at this time.

In total summary, the outlook for projects both on-shore and offshore, upstream and midstream, is strong and should continue through 2012. Service and repair activity is excellent, and our HP-Plus Pump is gaining ground, and the Pipe Division is off to a great start.

Supply Chain Services. DXP's Supply Chain Services. Sales increased 8.64% and operating profits increased 10.72% compared to Q3, 2010. The Supply Chain Services segment continues to have organic growth, with some headwinds from our customers in the military and defense markets. DXP Supply Chain Services continues implementation of the oilfield supply agreement. Many resources are being dictated -- dedicated to ensuring quality of data as well as maintaining superior levels of customer service.

While we would like to see progress move faster, we remain committed to excellence and will focus available resources to maintain high standards during the implementation process. Phase two was successfully completed and loaded. At the end of Q3 we should start seeing an increase of revenues on this contract in Q4.

Supply Chain customers currently operating on [net price] software is now down to nine sites. Preparation to transition these remaining customers has been completed and will start taking place during Q4 and Q1 of 2012.

It's been an exhausting effort, and hundreds of man-hours have been dedicated to making sure operational excellence is met at every corner. We are confident such efforts have contributed to a seamless process, relatively unnoticed to our customers. This conversion has also allowed SPS to eliminate redundancies in processes and improve back office synergies while moving forward to implement operational excellence at all sites.

We look forward to adding Kenneth Crosby's supply chain business to our list of valued customers, and feel strongly that several of these customers can be expanded by both additional products and by capturing their additional geographical locations. We are seeing positive signs and remain optimistic about improved sales and bottom line performance for Q4 and 2012.

Service Centers. DXP Service Centers emerged from a strong Q3 and remains optimistic about a Q4 MROP environment. Sales increased 20.45% and operating profits increased 17.20% compared to the third quarter of 2010. Our Service Center segment's entrepreneurial approach will allow us to take full advantage of the leverage that we have created in our breadth of technical products and services. We will continue to focus our top customer-driven strategies, which include SuperCenter development, value-added repair service, and regional distribution center opportunities.

Several end customer markets continue to improve, such as oil and gas drilling, oil and gas terminals, chemical manufacturing, mining of gold, platinum, uranium, copper, food and beverage which is stable, tire manufacturing, and grain handling. As DXP continues to expand its service capabilities from a local statewide level 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 one new SuperCenter in Q3, bringing our total number of SuperCenters to 26.

Our Gulf Coast Regional Management Team successfully converted or grew the Gulf Coast Torch and Regulator Service Center in Houston, Texas, to a SuperCenter status in Q3. This upgrade marks the third SuperCenter in the Gulf Coast region.

In summary, we started with 113 Service Centers in Q2 -- we have some activity here -- and in Q3 we added one Service Center in Jacksonville, consolidated Sioux City, Iowa with Sioux City Falls, North Dakota, and consolidated Emporia, Kansas with Kansas City, Missouri, giving us 12 SuperCenters, plus the acquisition of 5 Service Centers from Kenneth Crosby, gives us a new total of 119 Service Centers. SuperCenters, as discussed, equals 26. We have added a new distribution center in Atlanta, which makes 7 total.

We continue to believe in our sales excellence and operational excellence program, creating efficiencies and gaining market share. Our outlook for the markets we cover is flat for the fourth quarter due to the holiday season, and positive for 2012.

I am personally pleased with all three segments, even though we can and will get better. I'm excited about our DXP People and their expertise to drive profitable solutions for our customers.

About two months ago I was talking to an analyst with a major investment bank, and he follows the industrial distribution space. And he says, I get that DXP is trying to build a company that the largest breadth of technical products and services. He also acknowledged that this has not been done before. And he said, good luck.

I thanked him for his comment, and certainly a little luck is always welcome. But the fact is, we are building a company with the largest breadth of technical products and services, with people that are product experts. We sell commodity products like other large competitors, but we excel when the customer has a problem and we can provide the solution with our technical products and our product knowledge.

I said this last quarter, but it is so true. Customer-driven experts and MROP solutions is not just words. Our DXP People are experts, and they provide customer solutions every day. We simply help our customers perform better every day, and being customer-driven means going the extra mile, and DXPeople are proud to do so.

Thanks to our DXPeople, customers, suppliers, and shareholders for their contributions to making DXP all it can be. Our outlook for the rest of 2011, 2012, and beyond, looks very promising. We are now open for calls -- questions.

(Operator Instructions). Matt Duncan, Stephens.

Good afternoon, guys. Congrats on another great quarter.

Thanks, Matt.

Thanks, Matt.

You know, I guess, David, maybe the first question I've got -- and you've talked about this a little bit in your prepared comments, just sort of on what you're seeing out there and the outlook for your business. Obviously the media would lead us to believe there's maybe bad things looming, but it doesn't sound like that's the case, from you or from what your peers have been talking about through this earnings season. Are you seeing any signs of weakening even on the fringes, or does business still look pretty good to you?

Well, first of all, I refuse to use the term, cautiously optimistic. But I guess that term means that, you know, we're not idiots around here. We read the paper. We hear about Europe. We hear about our government bubble. And I guess we're thinking and hoping, I guess, that those people get their act together and do the right things, and the economy doesn't suffer for that.

But, to be honest, we don't feel or see any of that. We -- maybe we saw a little bit of it in the military side. People started getting a little more cautious on that side and had started cutting back some. But frankly, that's the only sign we can possibly see. And of course, you know, we're fighting five different conflicts around the world, or something; more or less than that, I guess.

So, you know, we just don't see it. We really don't. Now, that doesn't mean that if those other events happen, that we don't need to have a game plan B, and we certainly do. And I'd like to point out the fact that, you know, two years ago when things got so bad, that our business, managed properly, generates a lot of free cash flow. We generated $50 million, paid down debt. People got a little concerned with our banking relationship. We told everybody it was not in jeopardy; we just didn't want to -- we didn't need get it redone. Our bank wanted us to get it redone, but to do so would have cost us a lot more money and we weren't willing to spend that, and our banking relationships were excellent. And so, I think in retrospect, everybody can agree that we did the right thing.

So, we have plan B; but plan A really looks good, and we're just frankly no help in understanding what we read in the paper. We don't see it. Everybody's booming at the seams. Everybody -- National Oilwell blew out earnings. BJ Services -- you know, all our oil and gas companies, our mining companies, chemicals -- they're all doing great.

So, at the end of the day you've got a plan B, but at this point you -- it sounds like you doubt you're going to need to go to plan B. Plan A's still what you're operating on.

Exactly.

Okay. That's helpful. On the Supply Chain Services business -- so, it was down a little bit sequentially. It sounds like that's tied to some military business, which I believe is indirect for you. I don't think you guys do much directly with the government. It's probably indirect exposure.

[Right].

Do you think you'll be able to grow that business, on the whole, sequentially in the fourth quarter, excluding the impact of Kenneth Crosby, which is obviously going to help? Can the organic business reverse course and be up sequentially in the fourth quarter?

Yes. We expect that -- it was also that, you know, our implementation of the oilfield service company has gone really extremely well, but it's gone a little slower than we would like. And they're happy with us, and we're happy with the agreement; it's just that we're being careful. And so, like we said, we've got -- phase one was done, but we ended up -- we got phase two done at the end of the third quarter. And it should start producing higher results for the fourth quarter. (Inaudible) --

David, how much of that slower implementation is on your end versus on their end?

Oh, it's always a combination of the two. We're not here to point fingers at our customers. But, you know, it's always about reconciling and cleaning up the data, and making sure we don't order the wrong things. And it falls on both ends.

Okay. And then last thing here, and I'll hop back in the queue. On the Service Center business, your operating profit growth was a little bit slower than the revenue growth year over year. I'm assuming that's a function of SuperCenter conversions the Southeast US greenfield expansion. Is there anything else that would explain that?

We -- I looked at that, and I would just say that expenses, frankly, in the Service Center sector were a little higher than we wanted them to be, in about three or four different regions. Almost in every case, it was where we were adding personnel; adding salesmen; adding inside people; adding people that aren't overhead, that are going to be revenue producers. So, I felt okay with that.

Okay. All right. That's helpful. Thanks. I'll hop back in queue.

Holden Lewis, BB&T.

Thank you. Good afternoon.

Hey, Holden.

Hey, Holden.

I get building on that -- yes, and I kind of noticed the same thing about a pretty good drop from Q2 to Q3. I guess, give us a sense -- I mean, did you go into the quarter feeling that you wanted to add a bunch of these, you know, head counts that just kind of fell in there, and that process is completed, so now we start to farm that? Or is this a multi-quarter build-out in people that's going to continue to pressure that margin? I mean, how should we view the profitability of that business and sort of the investment in that business going forward, compared to how it's been in the last quarter or two?

Yes. I think the level of expense that we created in Q3 will flatten out for Q4. And then, yes, it's planned; but it's not planned. We're always looking for good opportunities to hire people with expertise knowledge. And so, I think we just had a lot of new hires in the third quarter. They might have been more desirable had they been scattered out from the first, second, third quarters. But they were all job postings -- all jobs that we wanted to find people, and we just happened to pick up a lot of good people in the third quarter, and -- but I think you'll see the level of expense -- you know, unless it's the variable part of the expense that we blow out the fourth quarter or something, and commissions are higher, you'll see expenses overlap.

Okay. So, it was just that -- your jobs you were looking for -- and the reason we ask, I think, is because you've been looking for new jobs for a while. You're just saying that for some reason they just all seemed to fell into -- fall into Q3 that way.

Right.

[In time].

Right. Exactly.

Okay. And then -- so, as you go forward, if -- you know, if the rate of add maybe sort of revert back to normal, I mean, are you of the opinion that, you know, the volume's kind of remaining steady to improving next year? That, you know, you would expect to see that margin begin to build again from the Q3 floor? Or are there other sort of investments coming in, and maybe this is a good time to mention sort of the regional profitabilities of the Southeast?

You're asking really good questions, because I'm -- first of all, I'm already -- I believe that if I didn't have any growth strategies I'd already be at 10% EBITDA. Okay? But since I do (laughter) then I have to manage, because you all want the top line and the bottom line -- then it's a matter of managing those things in a way that isn't going to cause financial results to go down. In fact, as you know, I want them to go up.

So, I think you'll see us have a -- we've had a hard time catching up, especially in Safety Services. We haven't been able to hire enough people in Safety Services. We haven't been able to hire enough people in field mechanics. And so, we -- you know, we just had the opportunity to fill some of those things, and we certainly took advantage of it. I don't -- I would not -- I personally think expenses are going to continue, as a percent of sales, to decline. I think it's not a big decline. It's a step-by-step process.

And I still -- even though our margin -- gross margins were down, a lot of that had to do with some earlier fabrication jobs that were taken on price to keep people working, and now that's not the case. It's much more of a seller's market than a buyer's market. And so, I personally think you're going to see margins go up incrementally, and I think you'll see expenses go down incrementally.

Okay. Yes. And that's what I was going to ask next, was kind of that IPS business. I think you mentioned weaker gross margins impacting the overall gross margin, but I mean, the operating margin on that business was really quite good at 15.4%.

Right.

I mean, is this just a case where there's just enormous amount of SG&A leverage, and that's what you saw and, you know, that more than offset the gross margin pressure? And then are you suggesting that the gross margin pressure is over, so again, you should see the margins in that business begin to improve, now that some of those other projects are out?

Yes, yes, and yes. I think you're exactly right. And it certainly does have a fixed cost of being in that business. The business got pretty soft, and never obviously went to zero, which was really a good thing. And I think I'm going to hit my $100 million number you've been questioning so much.

Okay.

(Laughter).

It made it easier this quarter. All right.

I sure did, didn't I? (Laughter).

Yes. Thank you.

Thank you.

Joe Mondillo, Sidoti & Company.

Good afternoon, guys.

Hi, Joe.

Hey, Joe.

Just to sort of add onto that question in terms of the gross margin at IPS, what was the reasoning behind the lower than expected gross margin? Was it just the products mix, or was there pricing involved, or what was going on there?

No, I think it's related to courage. When you don't have a shop that's very full and you've got a lot of fixed overhead, and you're quoting on a million-dollar job, you're pretty much -- and you really want it, you're going to lower the price. And then when your shop gets full -- and as you noticed, I quoted the fact that we're working two shifts in almost all of our shops -- then you get a little more aggressive.

Okay. So, it was sort of a case in point of lower margin backlog back, say, two quarters ago, or whenever. And since then, pricing has --

Yes. A year ago. A year ago.

A year ago, okay. Then the other question that I wanted to ask -- in terms of the Supply Chain Services, you thought that that could get to, you know, a run rate of $40 million, I think you said, by the end of this year. Do you see that in the fourth quarter, or maybe is that extended into the first quarter now? And also, what's the outlook of new business -- new customers within that business?

Right. Well, we're not going to make $40 million. We're not going to get there in the fourth quarter. We should get back to hopefully a little above, the second quarter.

And as far as new business, I'm not -- they didn't -- I haven't heard of any brand-new contracts signed in the third quarter. We still have things we're working on that were signed in the second quarter, and so there is more revenue coming, but it's -- I haven't heard of any new contracts.

What's your sort of long-term outlook of that business? Is that sort of a -- you know, a cash flow business, and you're, you know, putting the investments in the Service Centers? Or do you see -- foresee any sort of long-term growth within that business?

Well, I see long-term growth. First of all, I see it as one of the solutions that DXP needs to provide to compete with AIT, and Motion Industries, and companies like that. Because what they do is, they go to corporate America and say, we have 480 stores. We don't have 480 stores. And if you'll give us all your business around bearings and PT, then we'll give you a better price.

We come in and say, look, if you'll give us one of your facilities and roll up all of your MRO spend, and we do it on an integrated supply basis, we'll give you a better price. We'll actually guarantee you cost savings.

So, it's one of the ways we combat the competition. Because they can't do what we can do, and then we're not always able to do what they can do. And so -- and then you have your larger customers that put a lot of pressure on margins that -- but you have to have a -- you know, we have to have some offering for them, and so we try to move them towards the Supply Chain Service model.

That model makes -- as you see, makes less EBITDA margins. But it has a really -- what you don't see, and we're going to get here someday -- Kent Yee's going to get here -- is -- and Mac -- is, it has a very high return on working capital. Because we're not -- back in the old new days we bought their inventory. The new days -- nowadays we don't buy inventory. And now they want better pricing, so we want to get paid in ten days. There's a lot of things that happen on the integrated supply deal -- this -- that makes the working capital pretty minuscule.

So, what that allows us to do is, if we could make it a billion-dollar business -- but we wouldn't have to come up with hardly any money to make that happen. And so, its return is going to be just as high as these other businesses we're in, that require more capital. So, it's not a bad business. It is a different model.

How is the profitability of that business been over the last two years, and sort of, where do you see that going? Has it been sort of consistent, flattish, or have you been able to increase profitability, and where do you see that going?

We've seen that operating income line as high as 8%. That's our -- that's always sort of our goal. And I think with -- you know, if we can turn the corner where you have increasing sales and therefore you get leverage down on the bottom line, I think we can get back to an 8% operating income level, if that's your question.

All right. Great. Yes, that was. Thank you very much.

All right. Thank you.

(Operator Instructions). Matt Duncan, Stephens.

Hey, David. I just want to be clear on something on the Supply Chain Services business. You said that you weren't going to make your $40 million mark by the end of the year. I'm assuming you're talking about the organic business excluding Kenneth Crosby, because that's -- their business is roughly half and half?

Yes. No, no. Yes, of course. Right.

So, you should be over $40 million if you include that business, correct?

Yes.

Okay. All right. Just want to make sure I understood that correctly.

You're right. No, I didn't. I'm not including them.

Okay. And then as we look at backlog for the Innovative Pumping Solutions business, you quoted a number for sort of bid activity proposals out of, I think it was $53 million. But what's your actual backlog number for that business right now?

Well, we're not going to tell you. But I'll say that it's been increasing all year long, month by month.

Okay. That's what I was getting at. So, it's still on the rise, month after month?

Yes. Yes.

Okay. And in terms of monthly sales trends for the quarter, was there any month that was stronger or weaker than the rest, in terms of maybe daily sales growth year over year?

Well, I guess I don't compare the daily sales to the year before. I kind of look sequentially and, I mean, September was clearly the strongest month.

Okay. And then how's October look so far, Mac --?

That's typical, by the way. That's typical. We always have a little bit of a dip after the first -- after the quarter.

Yes.

And then it -- and we did. And so, July looks like it's kind of weak, but really it wasn't a bad July. And then August was better, and September was better after that.

Okay. And then the last thing I've got is just on the acquisition environment. David, you made it sound like you're still pretty active there. Do you think you'll be able to close anything else by the end of the year? And it sounds like you've still got a pretty full pipeline there. What's the focus -- remind us the focus of the acquisition strategy. Are you pretty agnostic between the three segments in terms of what you're buying, or is there a focus between -- on any of the three?

Well, the focus typically is going to be Service Center -- you know, grow geography; grow more dots on the map, typically. And Kenneth Crosby did that but it also did have the integrated supply piece, which was nice. We -- so, I would say most of our focus is still on the Service Center side, and I said we'd do a couple. We've done one and we'll probably still do a couple.

Okay. All right. I appreciate it. Thanks.

Holden Lewis, BB&T.

Thanks. Since you proved to be so good at predicting the IPS business for 2011, what are you seeing in terms of, sort of, the next year in terms of sort of rate of growth? I mean, I get that your backlogs are still growing and all that sort of thing, but I mean, based on what you're seeing, are you able to sort of handicap what the level of growth is that you're anticipating for next year in that business? Or, you know, any sort of guidance about that?

You know, we're in the budget process right now, and people are going to be submitting their deal. So, this was -- this is just going to be based on what I think is happening in the industry, and based on what levels we've been at before. We -- you know, we've been at the $120 million level, and I think we'll see us get back to that.

Okay. Excellent. And thank you very much.

You're welcome.

Thank you. And that does conclude the question-and-answer session, as well as our conference for today. Thank you for your participation. You may now disconnect.

Thanks.