DXP Enterprises Inc (DXPE) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the DXP Enterprises, Inc. 2011 fourth-quarter and year-end conference call.

(Operator instructions).

This conference is being recorded today, Wednesday, February 29, 2012, and I would now like to turn the conference over to Mac McConnell, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you. Good evening and thank you for joining us.

Welcome to DXP's fourth-quarter conference call. David Little, our CEO, will also speak to you and answer your questions.

Before I begin I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results may 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 extends no obligation to update that information.

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

On October 10, 2011, DXP acquired substantially all of the assets of Kenneth Crosby, or KC. DXP paid approximately $16 million for KC. KC operates out of five locations in New York and Massachusetts. DXP recognized approximately $11.9 million of sales of KC during the fourth quarter of 2011.

On December 30, 2011, DXP acquired substantially all of the assets of CW Rod Tool Company, or CW Rod. CW Rod has seven locations in Texas and Louisiana. DXP paid approximately $1(technical difficulty) million of DXP's common stock, or 35,714 shares, and approximately $42 million in cash for CW Rod. DXP did not recognize any revenues for CW Rod in the fourth quarter of 2011.

Sales for the fourth quarter increased 28.7% to $218.4 million from the fourth quarter of 2010. After excluding fourth quarter 2011 KC sales of $11.9 million, in October and November D&F 2011 sales of $4.2 million, sales for the fourth quarter increased 19.2% on a same-store sales basis.

Sales for supply chain services increased 21.8% to $38.6 million, compared to $31.6 million for the 2010 fourth quarter. Excluding 2011, KC service center segment sales of $5.9 million, service center segment for 2011 increased 3.1% from 2010 on a same store sales basis.

Sales of innovative pumping solution products increased 38.6% to $32.5 million compared to $23.4 million for the 2010 fourth quarter. Sales by our service center segment increased 28.6% to $147.4 million compared to $114.6 million of sales for the fourth quarter of 2010.

After excluding 2011 service center segment sales of KC at $5.5 million -- $5.9 million and October and November 2011 D&F service center segment sales of $4.2 million, service center segment sales for the fourth quarter of 2011 increased 19.7% from the fourth quarter of 2010 on a same store sales basis.

When compared to the third quarter of 2011, sales for the fourth quarter of 2011 increased 5.1%. After excluding KC fourth-quarter sales of $11.9 million, sales for the fourth quarter declined 0.6%. This decline is less than the 4.7% fewer business days of the fourth quarter compared to the third quarter.

Fourth quarter 2011 sales for supply chain services increased 11.1% compared to the third quarter of 2011. After excluding $5.9 million of fourth-quarter 2011, KC supply chain services sales, service center segment sales for the fourth quarter declined 6%.

Fourth-quarter 2011 sales of Innovative Pumping Solutions products increased 6.3% compared to third quarter of 2011. Fourth quarter 2011 sales by our service center segment increased 3.9% compared to the third quarter of 2011. After excluding KC's service center sales, up $5.9 million, service center segment sales for the fourth quarter declined 0.3% from the third quarter.

Sales for all of 2011 increased 23% to $807 million from $656.2 million in 2010. Sales for KC, acquired on October 10, 2011, accounted for $11.9 million (technical difficulty) sales. Sales by Quadna and D&F, acquired in 2010, accounted for $35.5 million of 2011 sales on a same store sales basis.

Excluding 2011 sales by businesses acquired in 2010 and 2011, sales for 2011 increased 15.8% from 2010 on a same-store sales basis. Sales for the supply chain services segment increased 14.2% to $144.5 million compared to 2010 sales of $126.5 million. Including KC's service center sales of $5.9 million, service center segment sales for 2011 increased 9.5% on a same-store sales basis.

Sales of Innovative Pumping Solutions products increased 32.8% to $102.3 million compared to 2010 sales of $77 million, after excluding first quarter 2011 Quadna IPS sales of $3.3 million, IPS sales for 2011 increased 28.5% from 2010.

Sales for service centers increased 23.7% to $560.2 million compared to $452.7 million of sales for 2010. After excluding Quadna, KC, D&F service center segment sales of $38.2 million, service center segment sales for 2011 increased 15.3% from 2010 on a same-store sales basis.

Gross profit for the fourth quarter of 2011 increased 26.2% compared to the 28.7% increase in sales. Gross profit as a percentage of sales decreased to 28.7% in the fourth quarter of 2011 compared to 29.3% for the fourth quarter of 2010. This decrease is a result of the acquisition of KC, which has lower margins.

Compared to the third quarter of 2011, gross profit as a percentage of sales for the fourth quarter of 2011 increased 28.7% from 28.6% for the third quarter of 2011, primarily as a result of improved margins in the IPS segment.

Gross profit for all of 2011 increased 23.1%from 2010, consistent with the 23% increase in sales. Gross profit as a percentage of sales was 28.7% for 2011, the same as 2010.

SG&A for the fourth quarter of 2011 increased $8.2 million or 21.3% from the fourth quarter of 2010 compared to the 28.7% sales increase. This increase is partially the result of $3 million of SG&A expenses associated with KC and D&F on a same-store sales basis.

As a percentage of sales, SG&A decreased to 21.4% from 22.7% for the fourth quarter of 2010. SG&A for the fourth quarter of 2011 increased $1.8 million or 3.9% from the third quarter of 2011. This increase is primarily the result of $1.6 million of SG&A expenses associated with KC. As a percentage of sales, SG&A decreased to 21.4% from 21.7% for the third quarter of 2011.

For all of 2011, SG&A increased $25 million, or 16.6% compared to the 23% sales increase. This increase is partially the result of $9.6 million of SG&A for businesses acquired 2010 and 2011 on a same store sales basis. As a percentage of sales, SG&A decreased to 21.9% from 23.1% for 2010. SG&A for 2011 as a percentage of sales declined primarily as a result of economies of scale getting bigger.

Head count increased approximately 18% during the year. Excluding KC and CW Rod employees, head count increased approximately 8% during 2011, primarily as a result of hiring additional salespeople during the year.

Interest expense for the fourth quarter of 2011 decreased 39.8% over the fourth quarter of 2010. Interest expense for all of 2011 decreased by 32.5%. These declines are the result of decreased rates on our credit facility combined with reduced average outstanding debt levels.

On July 23, 2011, we amended our credit facility. This amendment significantly decreased the interest rates and commitment fees applicable at various leverage ratios from the levels in effect before July 23, 2011.

Despite the $18.4 million of debt incurred with the acquisitions of KC and CW Rod, total long-term debt only increased $13.3 million during the fourth quarter of 2011. During all of 2011, total long-term debt increased approximately $300,000 despite the $18.4 million of cash paid for the acquisitions of KC and CW Rod.

During the fourth quarter of 2011 the amount available to be borrowed under our credit facility increased $26.6 million to approximately $78.2 million. This increase is primarily the result of increasing the maximum amount of our credit facility to $200 million from $150 million.

1 at December 31, 2011. At December 31, 2011, approximately $36.7 million of the purchase price of CW Rod was recorded on our balance sheet as outstanding checks. If these checks had cleared the bank at December 31, 2011, the leverage ratio would have been approximately 1.97:1.

Capital expenditures were approximately $600,000 for the quarter and approximately $4.1 million for all of 2011. Cash on the balance sheet at December 31, 2011, was $1.5 million. Accounts receivable and inventory balances were $137 million and $93.9 million, respectively, at December 31, 2011.

I'm happy to report that the tone of our business continues to improve throughout 2011.

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

Thanks, Mac, and thanks to our participants today.

DXP's fourth quarter and year-end results for 2011 were exceptional. We have produced eight straight quarters of sequential quarter-over-quarter growth and top line and bottom line results.

Our sales for the year grew 23%, reaching $807 million, producing a net income increase of 62%. We promised two acquisitions and delivered two metalworking companies -- Kenneth Crosby and CW Rod. They now make up a separate division called the metalworking division. We are pleased to have Chuck Rod from CW Rod heading up this division as Vice President of Metalworking Products Division.

We continue to demonstrate our ability to acquire companies and fit our strategy to grow our breadth of technical products and services. All five divisions, including rotating equipment, bearing and power transmission, safety products and services, metalworking and industrial supplies increased sales in 2011.

Our goal is to capture more of the customers' maintenance, repair and operating MRO, spend, and to improve their efficiencies and operating costs. As we accomplish this, the entire breadth of DXP's technical products and services become stronger than any one individual division.

Our multiple segments and support divisions make us unique and gives us a competitive advantage that is winning market share against the competition. The right growth strategies, passion for outstanding customer service and technical expertise and our great DXP people executing on all our strategies above is what makes DXP successful.

Customer-driven experts at MRO (technical difficulty) solutions accomplished by fantastic DXP people who want to help our customers improve their operations. We have policies, procedures, operating excellence to control the amount of growth, along with the right balance of entrepreneurial spirit to grow sales and be customer-driven.

Thanks to our outside sales professionals and our inside customer service representatives that are experts that sell on providing value, not on price. Thanks to them, [Sam Penny] and the inventory management and purchasing group, they do a fantastic job of managing our inventory investment as DXP turns inventory six to seven times a year.

This is a big part of how DXP creates after-tax return on invested capital of 30-plus percent -- one of the highest returns in our industry.

Thanks to our customer first center, they provide excellent customer service. Our customer service reps are experts across a large breadth of technical products. This group continues to grow as they provide solutions for both our external and internal customers.

Thanks to all the DXP people from our ballistic distribution centers, fabrication centers, supercenters, service centers, IT, collections, payables, accounting -- DXP people are positive, creative planners and believers in continuous improvement.

DXP is a fast-growing company and people willing to change and be passionate about our ethical standards and our financial goals describes our culture.

DXP supercenter segment -- in early 2011 our supercenter segment began reporting a surge in business within some of our core end customer markets, increasing sales and profits driven from our oil and gas and other energy-related end markets, enabling us to make strategic investments in our network of service centers.

Notably in 2011 investments include two cutting tool acquisitions, a distribution center in Atlanta, the creation of six new supercenters and the establishment of a new region in northeast United States. The management team for our service center segment also made significant investments in people.

Our human resource investments came in the form of recruiting, technical training and our suite of excellent programs designed to reinforce our commitment to quality business processes.

Collectively, our investments will allow us to take full advantage of the leverage we have created in our breadth of technical products and services. We are extremely grateful to our employees, customers and suppliers for making 2011 a record year.

Moving into 2012, we remain optimistic about a stable MROP business environment. We continue to be excited about oil and gas drilling, oil and gas terminals, chemical manufacturing, mining of gold, platinum, uranium and copper, food and beverage, tire manufacturing and grain handling.

Improving energy-related end customer markets has contributed to an increase in supercenter conversions and profitability. Our supercenter strategy continues to create value for industrial customers seeking to consolidate their vendor base without sacrificing local inventory and expertise.

We will continue to create new supercenters by investing in product line and service expansions throughout our network of service centers. Over the course of 2011 our service center management team successfully converted six in-process service centers to supercenters, of which two reached supercenter status in the fourth quarter.

We move into 2012 with a network of 28 supercenters and a momentum to convert the additional eight service centers in process by the close of our fiscal year.

Improving our ability to convert service center prospects to supercenters has led to a decrease in the number of in-process supercenters currently in the pipeline. We will actively seek out new supercenter candidates during the first two quarters of the year.

We would like to recognize our employees, customers and suppliers in the Lake Charles and Denver market areas for their efforts in helping us create the two latest supercenters.

Supply chain services. Supply chain services, SCS segment, saw an increase in revenues over Q4 of 2010 and a year-over-year increase in both top and bottom line. Q4 experienced a slight decrease in organic sales over Q3, mostly due to fewer work days during the holiday season.

Overall, the supply chain services segment had top line and bottom line growth in 2011 and we expect this trend to continue into 2012. DXP's supply chain services continues to be a viable solution to many customers that are looking to outsource all or part of their supply chain. If the customer values our breadth of technical products versus commodity products, then DXP is the supplier of choice.

Our acquisition of CW Rod and Kenneth Crosby has added several new value propositions that are unique in the supply chain marketplace around the metalworking area. Kenneth Crosby and CW Rod offer first-tier access to metalworking vendor products along with expertise to help lower the total cost of ownership.

Kenneth Crosby and CW Rod also bring vendor solutions on a major scale to DXP, with a highly-vended cutting tool business. The vending solution comes with people that have knowledge and expertise to set up a wide spectrum of vending solutions for our customers.

Innovative Pumping Solutions, IPS. Our IPS segment had a very successful year in 2011, beating its $100 million forecast. The operating income growing 64% over last year was outstanding, and everybody should be congratulated.

As we look at 2012 and beyond, upstream oil and gas and midstream continues to look strong. Both on-shore and offshore activity is robust. Our expertise around pumps and modular pumping systems makes us a supplier of choice. If a customer can tell us what he wants, we can design it and build it and often provide better results than he had hoped for.

If the customer needs lightweight corrosion pipe, our DXP pipe division can get it done. If you need a remanufactured pump for quick delivery on a pipeline, DXP can get it done. If you need a disposal pump in the oil field, DXP's HP-plus pump can get it done. If you need service and repair and after-market support, DXP's Innovative Pumping Solutions can get it done.

2012 should be a fantastic year for Innovative Pumping Solutions. Again, we would like to welcome a talented group of people from our last three acquisitions to our DXP family -- Kenneth Crosby, CW Rod, giving us talented experts in metalworking and we look forward to growing this division. Mid-Continent Safety gives us talent and geographic reach to expand our DXP safety services division. We are presently looking for more great companies and people in the safety industry.

Our pipeline of acquisitions is full. I appreciate everyone involved on both the deal side, the integration side and all the accounting efforts. I really appreciate the successful people that make up the companies we acquire. DXP's first job is to not screw up the acquired company.

Our second job is to make the people feel good that they joined DXP. And our third job is to support them so that the employees and their customers feel like winners.

In conclusion, 2011 was a fantastic year. We grew sales 23%, we grew earnings per share 58%, we grew EBITDA margins from 7.1% to 8.1% and we still expect 10% margins by 2013.

After-tax return on invested capital is an industry high of 30-plus percent. DXP people grew from 1,821 to 2,098. We added six supercenters, making a total of 28. We increased service centers from 112 to 123. We expanded our senior management team by two, a Senior VP of Information Technology and a Senior VP of Corporate Development. We created a new division for metalworking, increasing our capacity for modular pumping systems for our IPS segment, grew our outside sales professionals from 199 to 287.

We filled our pipeline with possible acquisitions, opened new locations in the Marcellus and Eagle Ford shale areas. We continue to improve on operational excellence, sales excellence, margin enhancements and supercenters.

2011 was not only a great year, it was a busy one, and I feel strongly that we have set the stage for a very success 2012. Our goal of increasing sales 10% organically and 10% through acquisitions will make us a $1billion revenue Company in 2012.

My goal was $1 billion in revenues and 10% EBITDA margins by 2013. Sales should happen this year and those EBITDA margins will probably have to wait until 2013.

Our markets look good, our strategies are working and DXP has a great, passionate, motivated team of DXP people that are executing our vision. I want to thank our DXP people. This is a people business and their expertise, their passion for customer service, makes me proud to be a part of their DXP family.

I want to thank our customers who believe and trust in DXP to bring value and performance to their customers. I want to thank our suppliers, who give us great products that helps us bring value to our joint customers. I appreciate the suppliers that understand how we both win, but our relationship grows with the customer because of our breadth of technical products and services that helps the customer be more efficient. I want to thank our shareholders for their continued support.

That concludes my portion. We're open for questions.

Thank you, sir. We will now begin the question-and-answer session.

(Operator instructions).

Our first question comes from the line of Matt Duncan with Stephens, Inc. Please go ahead.

Good afternoon, guys. Congrats on another great quarter.

Thank you.

The first question I've got, David, you actually addressed this towards the end of your comments, is sort of about your growth outlook here in 2012. If I understood you correctly, you feel like there's no reason you guys can't do at least the 10% organic growth goal that you've laid out in 2012, correct?

That's correct.

Okay. And then looking at the various pieces, I think on the last conference call you said you felt like IPS could do about $120 million this year. I know there's been some pretty nice strengthening in that market over the last three to six months. Is that still what you think the right goal is for 2012, or with the goals now starting to come back as well, you maybe do better than that now. Just can you update your thoughts on that segment?

25% to 30%.

All right, that's helpful. On the supercenter conversions, I guess you converted two; you've now got 28. You said there's eight in the conversion process today. What is the annual goal for the number of locations you would like to convert?

Well, we'd like to convert one per region. Realistically, that doesn't always happen and as you know, some of this is opportunistic in our ability to find the right people to help us create these supercenters.

So I think as Todd Hamlin, who's Senior Vice President of the service centers was saying in his write-up there was that he feels pretty good about the eight that he has on the board. And he plans on identifying some more to put in process which would -- in process by definition means that we hire the outside and inside person for a new value proposition. So we've got to hire them first before they become in-process.

Okay, so I guess at the end of the day it's just going to depend on how quickly you can hire the people.

Right.

So whether or not it's going to be eight or some number greater than eight that you convert this year.

That's correct.

Okay. Mac, do you have the sales data by month handy, and then if you can maybe talk a little bit about what you've seen so far in January and February?

I actually don't have it in front of me, but I can kind of tell you from memory -- I guess if you take the number of business days and calculate sales per business day, in Q3 it was $3,248,000; for Q4 it was $3,580,000. My memory tells me that really, we were kind of just running along at that Q3 level or a little below during October and November. And December was a very big month that really brought most of that improvement.

What do you attribute that to? Was there some closeouts on IPS or was it really the whole business accelerated in December?

We definitely had IPS things that shipped and closed out in the fourth quarter, and some of it, I mean, I look to David, I think December was strong.

And is that strength, that acceleration you saw in December, has that continued here into January and February?

Well, I think we have to take the oil and gas industry and realize that they really push hard to get all the equipment going at the end of the year, especially if they have any budgets left. Then when they head into the new year there seems to be typically a little bit of a lag as they get their new budgets approved, and so our January, which normally is going to be our lightest month of the whole year, was really good.

Okay. So it sounds like you guys are off to a really good start and given that January's usually soft and was strong, there's no reason to think you can't put up another very good growth number here in the March quarter.

We're going to keep those sequential quarters going, baby.

All right. Two more things, David. First, just if you look at your various end markets it sounds like oil and gas is probably the strongest. There's been some, obviously, a lot of talk about natural gas wells getting laid down. Can you talk a little bit about how that might impact you guys? I know you've got a lot of oil exposure, and in theory low nat gas prices are probably helping you with the petrochem. So can you talk a bit about what you're seeing in the various energy markets?

Well, first of all, the horizontal drilling is increasing every month. Normal, traditional drilling is declining, and that's normally related to gas. It doesn't have to be, but it can be. I will tell you that we have customers saying they're cutting back on the number of gas wells that they're going to be drilling this coming year.

It doesn't really go to zero, but they're cutting back in those areas. Now, that makes sense, of course, because natural gas prices are very low and that same lowness -- if that's a good way of saying that; sorry about that -- is that the chemical and petrochemical people that use natural gas as their raw materials are really doing quite well.

So to us, we see very nice drilling activity, mostly after oil. We see a lot of pipeline business designed around moving the oil, whether that's from Cushings to down here in Houston, where we have the plants, or we need to ship it overseas or wherever we're shipping it.

So the pipeline industry is good, all that midstream. Then we see the downstream chemical plants being good. So we're not really worried about natural gas drilling. We're more than making up for it in oil.

All right, that's what I was getting at. Then the last thing I've got is looking at your balance sheet, if I adjust your debt balance for the checks that were outstanding at the end of the year for CW Rod, it's around $151 million to $152 million. Your borrowing capacity is about a $200 million facility.

What are your thoughts on the balance sheet at this point and as you look at the M&A pipeline, I gather it's probably pretty full. So how do you think about funding those deals and balancing that out with the right level of leverage?

For the deals that we're in active discussions on right now, we have plenty of money available. If we're successful in some other deals that are still just preliminary, we actually have a proposal to increase our line from $200 million to $300 million.

Then what's the max leverage you guys are comfortable with in terms of a leverage ratio?

Three times, three and a half.

Okay. Thanks a lot, congrats again on a great quarter.

Thank you.

(Operator instructions).

Our next question comes from the line of Greg Garner with Singular Research. Please go ahead.

Hi. Thank you for taking my question. A couple of them were already answered by the prior questioner.

First of all, congratulations on a good quarter. I did want to find out, with the recent acquisitions, this opens up the new metalworking division. Is this also an avenue for potential growth? Could it be organic, or is it something that has to be by acquisition, based on the geography of where they're located?

Well, it's both. We like to acquire any type of company that fits one of our five divisions now, and then we bring additional products and additional resources to them to help them grow organically.

We're always about -- we tell them the good part about being public is you've now got to grow your top line and your bottom line at the same time and you've got to do it at at least 10%. But they also --

I guess I shouldn't put it -- does that make it difficult, I mean, that business, is it difficult to grow organically into another geography, or do you need to purchase another facility elsewhere?

That's a really good question, and we do do greenfield startups. But they're normally going to be related to oil and gas, where we're really, really good and we have customers that want us to come there and help them.

So I would say typically we prefer to do an acquisition where we buy market share and then we add to what they do.

And we also sort of -- you can call it acquisitions, where we hire people, which is that we create supercenters, or we're adding people, so the -- I understand your question; you may be asking can we expand in the cutting tools and our other -- in our 120 locations that don't sell cutting tools.

Oh, yes, oh, yes, good point, I forgot that. Yes, that's excellent.

Yes, that's what I was leading to, about --

Right.

-- having the supercenters grow through acquisition that way, if that helps --

But actually, all the metalworkings, we have a new startup in Fort Worth.

Oh.

And then by the way, we already -- we're doing about $20 million in that area through our integrated supply and through our service centers already, and so we've just added enough volume. Now we're talking about $130 million volume in the metalworkings area, and that's why we decided to make it a separate division.

Okay. And I just wanted to clarify, I didn't quite hear at the very end of the commentary, EBITDA margins that would have to wait until 2013, what was the goal on that margin? What was the level?

10%.

Oh, 10%. It was mentioned that -- did I hear this correctly -- $1 billion in revenue is likely for 2012?

Yes.

Okay. Very good, thank you much.

Thank you.

Thank you. Our next question comes from the line of Joe Mondillo with Sidoti & Company. Please go ahead.

Hey, guys.

Joe.

First off I was wondering if you could give me, or just at least talk about the profitability of each of the three segments in the fourth quarter.

As in total operating income for each --

Yes, operating margin.

Okay. The fourth quarter supply chain services would be --

Or just the income amount --

Operating income would be about $2,381,000.

Okay.

That's 6.2% operating margin. IPS was $6,165,000, which would mean a 19% operating margin. Service centers were $16,505,000.

Those are the (technical difficulty).

No, this is the total.

What was the -- can you say the last one again, sorry?

I'm sorry, I'm arguing with Mac in the sense that -- oh, you were talking about the operating costs.

Yes, that's the gross.

Oh, I'm sorry, I was thinking (multiple speakers)

Right.

(multiple speakers)

Right. Service center is $16,505,000 and operating margin percentage 11.2%.

Okay. I guess just to concentrate on IPS, David, I guess in terms of your 25% to 30% goal, you did 27% growth in 2010, 33% in 2011, so you're essentially thinking that you can sustain that growth. What gives you the confidence that you can sustain that growth, and how are you going about continuing to grow at those levels?

Okay, I think we have to go to the history and realize that when BP had the oil spills on offshore that most of our business back in those days came from offshore platforms, and of course that business really went to zero, or almost zero, and we had a big shift to add some capability.

We added to the acquisition of Quanda to on-shore activity, and now what's happening is the drilling utilization rate's gone from 40% to 64% in the Gulf and the activity is picking up. We quoted a lot of stuff last year that either became orders last year that will be produced this year, so we're going to be hitting on more cylinders with more capacity in the fact that the offshore and the on-shore business is robust.

Okay. So primarily drilling activity is generally driving that business?

Production activity.

Production activity? Okay. What kind of capacity, what's sort of your max sales level, or what kind of capacity does that business have right now?

Well, we're adding capacity to Snyder, Texas, we're adding capacity to our Denver Golden facility, we were down to one shift and now -- a lot of last year we were at two shifts. We actually can work three shifts.

We have flexibility and I'm not sure I know if we were just maxed out, what percent, what that number would be.

Earlier, one of the -- what we call 529 location, I think that second shift is not a full shift.

Okay.

So there's a lot --

So you have a lot of room.

They were doing a lot more than what they're doing now before, and we have another location that's just barely touching what they did before.

Okay. And then --

(multiple speakers) hours in a year and they did seven or eight in 2011.

Right.

There's product capacity available, and we can create more if it's needed. So we have to hire people. We don't have a bunch of people sitting around.

Right. Then I guess in terms of the profitability, you said 19% in the fourth quarter. You did 14% in the second, 15% in the third. So you're seeing a good amount of improvement there. Is that 19% sustainable, or was there something in there in the fourth quarter that really boosted that margin there? How are you thinking about profitability through 2012?

It's the utilization of assets that'll drive higher margins to a point, and then you kind of reach that point and it'll level out. So I think -- I'm not --

I mean, I guess the sales base compared to the third quarter, you had a similar sales base, so was there a particular product or product mix in there that really shifted or drove the profitability in the fourth quarter compared to the third, and is that sustainable, or I'm just trying to get an idea of --

No, everything we build is unique, and part of that is it may have a unique profit margin. We've been commenting in prior quarters about how the gross profit was lower -- had been lower than what we were normally accustomed to on our Innovative Pumping Solutions jobs, and a lot of that was driven by that when these jobs were bid, we and our competitors had empty shops.

The competitors were bidding low to get them, so I think what we're doing is progressing towards a more reasonable, more normal gross profit margin.

Okay. So is a high teen operating margin more of a reasonable profitability standpoint?

Yes.

Okay. Then just lastly, in terms of being able to hit the top line, your 2013 $1 billion top line goal this year but not being able to hit the EBITDA margin, why is that, or is that just related to the less profitable acquisitions that you're taking on?

No, we just --

Because I know some of those acquisitions carry lower than Company average margin. I imagine that's dragging on it a little bit, but.

Part of our -- I do think we're going to get to 1% scale in expenses by being a larger company, and I don't think it's -- I mean, we bought Kenneth Crosby, they had lower EBITDA margins, a great return on invested capital, but CW Rod had 14% EBITDA margin. So it kind of offsets it.

I think the question's a cultural one and a scale one. And the cultural part is being able to feel good about charging more and bringing more value to the customer. And the scale one is about driving SG&A expense down.

I think you'll see the scale happen, so I wouldn't be surprised to see 9.1% EBITDA margins this year, but I just don't think we're going to make the cultural change where we're able to charge more, that's going to get us that other 1%.

Okay. All right, thank you very much.

Thank you.

Ladies and gentlemen, that concludes the DXP Enterprises, Inc., 2011 fourth-quarter and year-end conference call. We thank you for your participation. You may now disconnect.