DXP Enterprises Inc (DXPE) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thanks for standing by. Welcome to the DXP Enterprises, Inc. 2012 third-quarter conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, November 1, 2012. I would now like to turn the conference over to our host, Mr. Mac McConnell. 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 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 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 2012 results. David Little will share his thoughts regarding the quarter. Then we will be happy to answer questions. Sales for the third quarter increased 39.5% to $289.9 million from the third quarter of 2011. After excluding the third-quarter 2012 sales of $66.7 million for businesses acquired in 2011 and 2012, sales for the third quarter increased 7.4% on a same-store sales basis.

Sales for Supply Chain Services increased 11.2% to $38.6 million compared to $34.7 million for the 2011 third quarter. Excluding third-quarter 2012 SCS segment sales of $4.5 million from acquired businesses, SCS segment sales for the third quarter 2012 decreased 1.7% from 2011 on a same-store sales basis. The decline is a result of reduced sales to military and truck-related customers. Sales of Innovative Pumping Solutions products increased 24% to $38.9 million compared to $31.3 million from the 2011 third quarter.

Sales of our Service Center segment increased $70.7 million to $212.5 million compared to $141.8 million of sales for the third quarter of 2011. After excluding 2012 Service Center segment sales of $62.3 million for businesses acquired in 2011 and 2012, Service Center segment sales for the third quarter of 2012 increased 5.9% from the third quarter of 2011 on a same-store sales basis.

When compared to the second quarter of 2012, sales for the third quarter of 2012 increased 10.7%. After excluding $27.6 million of sales for businesses acquired in 2012 on a same-store sales basis, sales for the third quarter increased 2/10 of 1% from the second quarter. The third quarter contained one more business day compared to the second quarter.

Third-quarter 2012 sales for Supply Chain Services decreased 9.5% compared to the second quarter of 2012 as a result of reduced sales to military and truck-related customers. Third-quarter 2012 sales of Innovative Pumping Solutions products increased 10.4% compared to the second quarter of 2012. A sequential increase in IPS sales is the result of energy and mining-related projects.

Third-quarter 2012 sales of our Service Center segment increased [15.1]% compared to the second quarter of 2012. After excluding $27.6 million of Service Center sales for businesses acquired in 2012 on a same-store sales basis, Service Center segment sales for the third quarter increased 4/10 of 1% from the second quarter of 2012.

Gross profit for the third quarter of 2012 increased 40.4% from the third quarter of 2011 compared to the 39.5% sales increase. Gross profit as a percentage of sales increased to 28.8% in the third quarter of 2012 compared to 28.6% for the third quarter of 2011. This increase is primarily the result of an increased gross profit margins for the IPS segment. Gross profit as a percentage of sales for the third quarter of 2012 decreased to 28.8% from 29.3% for the second quarter of 2012 primarily as a result of reduced gross margins for the IPS and SCS segments.

SG&A for the third quarter of 2012 increased $14.0 million, or 31% of third quarter of 2011, compared to the 39.5% sales increase. This increase is a result of approximately $14.3 million of SG&A expenses, including amortization of intangibles and acquisition costs associated with the acquisitions completed in 2011 and 2012 on a same-store sales basis. Excluding the SG&A expenses related to acquired businesses, increased compensation-related expenses were offset by lower healthcare costs, professional fees, travel expenses and collection of a $500,000 legal settlement.

We expensed approximately $1.1 million of professional fees during the quarter, which were incurred in connection with the acquisition of HSE during the third quarter of 2012. As a percentage of sales, SG&A decreased to 20.3% from 21.7% for the third quarter of 2011. This decrease is primarily the result of economies of scale.

SG&A for the third quarter of 2012 increased $3.2 million, or 5.8%, from the second quarter of 2012. This increase is the result of approximately $5.6 million of SG&A expenses, including the amortization of intangible acquisition costs associated with the acquisition of HSE completed in the third quarter of 2012. Excluding the SG&A expenses related to the acquisition of HSE, increased compensation-related expenses were offset by lower healthcare costs, professional fees, travel expenses and the collection of a $500,000 legal settlement. As a percentage of sales, SG&A decreased to 20.3% from 21.3% for the second quarter of 2012 primarily as a result of spreading corporate expenses of over a larger sales base.

Interest expense for the third quarter of 2012 increased approximately 200% from the third quarter of 2011 and the second quarter of 2012. On July 1, 2012, DXP entered into a new credit facility in connection with the acquisition of HSE. This increase is the increase in interest as a result of increased borrowings used to fund acquisitions, increased amortization of debt issuance costs for the new facility and a $654,000 charge to fully amortize debt issuance costs related to the prior credit facility.

The tax rate for the third quarter of 2012 increased from the tax rate for 2011 and the tax rate for the first six months of 2012 primarily as a result of the non-deductability of acquisition expenses associated with HSE.

As of September 30, our total long-term debt was $259 million and our bank leverage ratio was 2.12 to 1 at September 30, 2012. At September 30, our borrowings under the credit facility were at a weighted average rate of approximately 2.2%. Our availability under the credit facility at September 30, 2012 was approximately $67.4 million.

Cash on the balance sheet at September 30, 2012 was $12.2 million. Accounts receivable and inventory balances were $188.7 million and $99 million respectively at September 30, 2012. Now I would like to turn the call over to David Little.

Thanks, Mac and thanks to all our participants on our conference call today. Our first thoughts go to our DXP people, our customers and their families that were affected by Hurricane Sandy. Our prayers are with them to have a safe and speedy recovery.

Our third-quarter results were excellent in both top-line and bottom-line growth. Our external growth strategy of new acquisitions is working very well. Our focus is to support and help our new family members to succeed by being a part of a bigger ship with more tools and resources to help their customers to be more successful resulting in growth for both us, the customer and our new acquisition.

Our goal is to acquire a successful company and help them grow, creating a win-win situation by better serving their customers with a larger breadth of technical products and services. This strategy is working and will continue to be a big part of our future success together.

I would like to personally congratulate all of our DXP people for their accomplishment of reaching our $1 billion sales goal. If you look at our last 12 months, we did $1,022,465,000 in sales at a 9.5% EBITDA margin. In the third quarter, our EBITDA margins were actually 10.6%. We achieved this goal much earlier than expected since it was actually our 2013 goal.

Okay, take a minute, congratulate yourselves on a job well done, but now we are going to get into planning to do our next milestone of $2 billion by the end of 2016 and of course, EBITDA margins of 10% plus. I believe in monetary goals, but I also believe in the pursuit of happiness. In business, money is just a measurement. Happiness is defined as being successful. DXP wants to provide each of its employees and our customers with the opportunity to be successful and grow. We've continued to be successful in managing our balance sheet as Q3 2012 pro forma return on invested capital was 28.8% after-tax. This is one of the highest returns in working capital plus fixed assets in our industry.

We are excited to grow our individual Service Centers to be supercenters and expand our market presence in North America through acquisitions, which, when we take their locations and we grow them in to be supercenters. Our vision is set and reachable and we are getting really, really good at execution.

I will now focus in summarizing activities within our three business segments -- Service Centers, Supply Chain and IPS. The Service Centers segment sales increased 15.4% from Q2 to Q3 of 2012 and 49.8% compared to Q3 of 2012 versus Q3 of 2011. Operating income increased 14.4% from Q2 to Q3 and 56.4% compared to Q3 of 2011. Our Service Center leverage comes in the form of top-down commitment to sales and operational excellence and acquisition strategies around technical products and services in our five product divisions.

Overall, the tone of our business remains stable to growing. We are experiencing softness in some end markets, but our goal is to continue to grow by taking marketshare from medium and small distributors that cannot provide the breath if products, services and technical expertise needed in this highly competitive market channel.

We continue to transfer marketshare gains into strong earnings growth by providing our Service Center network with excellent programs that provide freedom within the structure to capitalize on the market opportunities. This approach allows us to take advantage of the entrepreneurial culture in the front office and add agility in the back office. Our excellent programs focus on quality processes and educational programs that reinforce our culture of adding value through collaboration with our customers, suppliers and product (inaudible).

I would like to formally recognize our operational and sales excellence committees for their dedication and commitment to continuous improvement and success in this marketplace.

Our continued success in key end markets is fueling the expansion of our Service Center network. Our Q3 investment in Jerzy Supply will broaden our technical product and service portfolio in the greater Houston area thereby strengthening our strong position in this key geographic market. Jerzy's reputation of providing quality products along with a high level of personal service will unlock additional opportunities for our greater Houston sales channel.

We continue to create value for our industrial customers seeking to consolidate their vendor base without sacrificing local inventory and expertise. We delivered a record three supercenters during the third quarter. This accomplishment reinforces our commitment to being a one-stop source for the industrial customers looking for an experienced results-oriented [MROB] partner.

We would like to recognize our employees, customers and suppliers in Mason City, Iowa; Atlanta, Georgia and Goldsboro, North Carolina markets for their dedication in helping us create these three new supercenters. We presently have a network of 33 supercenters and nine in progress.

A few more facts, we have 155 total Service Centers. We have nine sales offices. We have 33 supercenters, as mentioned. We have nine supercenters in process and seven distribution centers, eight fabrication centers. We are in 35 states in the United States and seven provinces in Canada.

Supply Chain Services, SCS, business segment was very busy in Q3, implementing multiple locations. Many of these on-site locations will be completed in Q4. Completion is a good term. That means we start making revenues off of them. These sites consist of several SCS value solutions with multiple plans, on-site storerooms, vending solutions. SCS has changed its computerized maintenance management software. These solutions are very exciting to our customers and our teams because SCS is enhancing value beyond what our competition's abilities are.

In Q3, the Supply Chain excellent team is in operation and sales are continuing to strive to deliver solutions by creating value and competitive advantage. This sales excellence program is helping the team evaluate and deliver differentiating solutions to customers and in return, SCS has seen more qualified customers that allowed SCS to generate better top and bottom-line growth.

The operational excellence team is still focused on providing customer service levels above the customer's expectations while leaning out SCS's cost. The supply chain can lower SG&A and improve the bottom line. Q3 and Q4 are traditionally slower months for SCS with holidays, weather and capital discipline affecting daily sales. We are still seeing decreased spending in defense, military and government market segments. Recent trends have seen some slowdown in our transportation and our gas customers in the fourth quarter.

Just to kind of go back through some facts on Supply Chain Services. In 2011, we had 52 on-site and 101 off-site locations. In 2012, to date, we have 62 sites and 101 off-site locations. There are 12 new sites and two -- we also had two closed sites. In Q1, when we say implement, we mean to implement, means to start generating revenue. In Q1, we had one site in this category. In Q2, we had one site. In Q3, we had one site and in Q4, we are having -- which we hope to be about eight sites. We have some really nice things coming.

IPS, Q2 sales were $35.177 million versus Q3 of $38.854 million. [U.P.] percentages in Q2 were 34.2% versus Q3 of 30%. This margin erosion is due to lower margin jobs associated with highly competitive production type modular packages. These are [lack] units and so they are a little more competitive than our offshore modular packages. We also had some slippage of orders from Q2 to Q3, which, when that happens in the product space in our shops a longer period of time, they can't help but accumulate more hours and more cost.

IPS segment is continuing to be faced with manufacturer expanded delivery times. The major equipment -- component on major equipment components as in Q2, we continue to face the issue of end users taking steps to delay delivery of our modular packages. What appears to be the driving force here is, one, the year-end users total project is suffering from delivery issues on other aspects of the project and in some cases, there is evident attempt to slow down our completion of a modular package by the end user. The above issues continue to contribute to inefficiencies in our production schedule and fabrication process, which is a longer explanation as to why gross profit margins are down.

When we look at our downstream oil and gas mining sector in the Rocky Mountains and North Dakota regions, we continue to see a shift in projects to production equipment. These are [lack] unit opportunities. The current lack package being marketed by DXP Golden has gained acceptance in the market and will provide additional modular packaging opportunities for this business unit. This type of modular package typically does result in slightly lower margins because of the nature of the product.

Gulf of Mexico, the signs of activity are encouraging as it relates to new projects. Anadarko is duplicating their Lucas platform equipment. BP and Chevron are moving forward on some projects. We feel confident based on the products DXP has to offer and our relationships with BP and Chevron and other players that this will result in opportunities for us. BP has decided to move forward on Mad Dog 2. This is a new platform project. The project is moving slower -- it is moving slower than expected, so IPS has over 35 million pumps quoted on this project. Our expectation is that this equipment on this project will be purchased in 2013 and 2014. BP Atlantis upgrade project, this is an existing production platform of equipment expected to be purchased in Q2 of 2013.

Offshore, we are looking at projects in Africa. IPS is currently involved in three offshore Africa project opportunities. Most of the equipment for these projects is slated to be purchased in 2013 and 2014. Based on our relationships with end users, the E&C's existing presence in the production area and product offering DXP has to offer, we are confident in our ability to get the opportunities to provide modular packages on these platforms.

Offshore Alaska, we are currently engaged in an opportunity to provide modular packages for an offshore Alaska platform project. This equipment is slated to be purchased in Q1 or Q2 of 2013. When we go to midstream, we see the quoting in this sector increasing. In this sector, delivery is important and many opportunities can be realized when DXP and our manufacturers can provide acceptable deliveries.

Working with our major manufacturers to commit and hold critical deliveries will be a key component for new (inaudible) requirements. We feel our remanufactured products and HP-Plus products, which we have stronger control over our own deliveries, will continue to provide opportunities based on our ability to provide quality products and favorable deliveries as we control the entire process of providing the pump, product and packaging.

Our HP-Plus product has gained traction. We have been successful in placing a significant amount of HP-Plus units in the Permian Basin, Eagle Ford, the Marcellus Shale pipeline applications. Based on our current backlog and sales activity, IPS segment scheduled deliveries for Q4 should be our largest revenue quarter for 2012. Due to the manufacturing extended leadtimes and end-user extended leadtimes requirements, this may affect some Q4 deliveries and performance.

Our present top 29 EMI and Golden are working two 10-hour shifts six days a week in the production of our modular packages. We see this continuing in Q4. [529] is increasing its production staff in order to meet production schedules for Q4 for IPS segment business. Our current open live project quotes is in excess of $80 million; $30 million alone on the BP Mad Dog 2. This is double what our open quotes were at the end of Q2.

[Pointing] activity is steady. Here at year-end, we are seeing several small packages quoted opportunities for modular package. This is typical for this time of year. We feel comfortable barring no economic political or world outside event that Q1 of 2013 should be strong.

I'd now like to talk a little bit about our Q3 2012 acquisitions. In the third quarter of 2012, we completed one acquisition for a total transaction consideration of $85 million, or 4.6 times acquisition EBITDA of $18.6 million. Note, total transaction consideration includes working capital adjustments, plus any additional expenses, CapEx reimbursements, etc., but excludes legal costs.

Consequently, the Q3, we completed the acquisition of Jerzy Industries on October 1, 2012, which will begin financial reporting in Q4. We are excited to have these two acquisitions as part of our DXP family, HSE Integrated adds to our safety products and services division and provides a significant presence covering both the western and eastern parts and firmly establishes DXP across North America.

Western Canada or Alberta is a major oil and gas market and will allow DXP to leverage its expertise within this market and better serve DXP customers who desire product and services providing with an entire North American footprint as discussed last quarter.

For Q3, HSE contributed $24.9 million in sales and $3.6 million in operating income. That's with a 14.5% margin. All acquisitions in Q3 contributed $66.6 million in sales, all acquisitions, including Kenneth Crosby, C.W. Rod, Mid-Continent, Alesco and [Forest Pulp & Power], Industrial Paramedic Services, Austin & Denholm and HSE. Year-to-date, acquisitions have contributed $137.6 million in sales.

Highlights from our two recent acquisitions include the following. HSE highlight -- Canada's largest industrial safety services company. The last 12 month's sales and adjusted EBITDA at acquisition of $105.2 million and $18.6 million respectively. 23 locations in Canada and the United States, 20 are in Canada, three are in the United States. Positioned to service the oil sands market. Firmly establish DXP as a leading safety service provider in North America, presently in the number two market position.

Jerzy, a leading provider of industrial and hydraulic hose and fittings in the greater Houston market. Last 12 month's sales and adjusted EBITDA at acquisition of $9 million and $1.3 million respectively, two locations in Houston and Deer Park in [Harbury] Wilson Drive, provided DXP with significant scale in the industrial hose and fitting sub product category. We include hose in our bearing and PT group. I think you will see is breaking that out soon. Focused on serving the oil and gas, chemical and petrochemical markets.

Since Q4 2011, we have now completed nine acquisitions. DXP's acquisitions have focused on additional scale, geographic reach to our product divisions, as well as establishing DXP's business presence across North America. Overall, we are pleased with these acquisitions we have completed and we remain excited about our pipeline. We continue to see opportunities in the US and Canada as of late. While we continue to evaluate and review opportunities, we are more cautious given the overall shift in tone of the market and an increase in volatility in monthly results. In other words, we are slowing down on that.

In conclusion, I would like to congratulate our DXP people for achieving our milestone of $1 billion in sales and 10% EBITDA by 2013. Thanks to our execution and relentless pursuit of sales and operational excellence, thanks to our suppliers who make world-class products and provide DXP with sales support. Thanks to our customers that believe that our large breadth of technical products and services and our expertise makes them more successful.

I would also like to thank this country for the free enterprise system that gives everyone the opportunity to be successful. I can only hope that everyone at DXP and our customers feel the same. I am personally looking forward to our next four years to achieve our next milestone of $2 billion in sales and EBITDA margins of 10% plus. We are now open for questions.

(Operator Instructions). Matt Duncan, Stephens Inc.

Good afternoon, guys. Congrats on another great quarter.

Thank you, Matthew.

First question I have got, David, if you could talk a little bit about the sales trends that you are seeing in the business. How did it do month-to-month throughout the quarter and how did October look? You said you are seeing a little bit of a slowdown. If you could maybe talk a little bit more about what you are seeing out there.

Well, we -- really month-to-month on a (inaudible) sales basis was probably relatively flat.

It was up in September, but --.

The gas market continues to contract. Oil is still relatively strong. We see our oil and gas customers talking and putting together their next year budgets, which are at least the same as this last year, if not larger in some cases. So we feel that 2013 should be a really good year. We likewise see some slowdown in the fourth quarter with some of the oil and gas customers. As you know, they get their budgets, they spend them as fast as they can, so that they produce more oil and get more volume of product on the books. When they get towards the end of the year, their budgets tend to be gone or depleted significantly. And so we are not seeing a lot of extra money coming into the oil and gas play to continue to keep drilling going.

That said, remember also though that DXP is the size of the (inaudible) and service business is on the production side and there, as you heard on IPS, you heard everybody talk about how their quoting activity is strong, their backlog is strong, they are working an unbelievable amount of hours. And so on the production side in the midstream side of moving the product from all the drilling that we have had is pretty strong.

So we feel good about where we are, the rig count is going down and that I think is just people either reducing their gas drilling, which has been happening and is continuing to go down, but on the oil field side, we have seen them speed that up until recently and now it is sort of declining too and now -- but we just really attribute that to the fact that they are spending more time on the production end and trying to produce what all the drilling that they have done, along with sort of the climate, this election-year climate we are in.

But that all trickles down, as you know, so now we have regular manufacturing that services the oil and gas industry. We have service companies that are building frac trucks and all that. So all of that infrastructure has, in fact, slowed down. We did -- our organic growth rate -- it is there; you can see it. It is 13% plus for the year and it was 7.4% for this last quarter. So that speaks to the organic piece slowing down.

The question I have is how do we compare against our peer group and when I look at our peer group, well, 7.4% organic growth is pretty good. So I am feeling that our strategies of growing supercenters and the things we are doing are working, hiring new people, hiring new salesmen, training new people, etc.

So we like the spot we are in. We like what is happening to our business. We could always have more, so to speak, I guess, but things are pretty good at DXP and we see ourselves continuing to take marketshare and grow.

Okay, David. That is helpful. So it sounds like from what you are saying then, after adding in Jerzy Shore, I guess it is kind of $2 million to $3 million in revenue -- or Jerzy Industries rather, $2 million to $3 million in revenues, it sounds like you're probably going to be down a little bit sequentially in the 4Q just on sort of normal seasonality and maybe some slowing that you are seeing in oil and gas. Would that be fair? Maybe revenues are down a little bit sequentially?

We certainly have a headwind there. We have got the holiday season. We have got -- we don't see people increasing their budgets for the rest of the year. So we have some headwinds that we are looking at. I might comment about Supply Chain Services because a lot of its business -- it is adding some new business, but a lot of its business is just day-to-day business running these manufacturer concerns. So we see them having declining sales where they don't -- they don't have any way of -- they already have 100% of that person's business, so they can't get more; they have already got 100% of it. So if it goes down, their sales go down.

So we are seeing that -- so there is slowness out there. There is not -- I don't think anybody on this call would think I was crazy if I said business hadn't slowed down. And so -- because it has. So that and the holidays and the election and all the things that are going on, we have some headwinds.

That said, IPS has a tremendous amount of stuff that it is supposed to produce. The Service Centers are still trying to grow supercenters and so we're adding product and we are capturing marketshare. So I think you should see us outperform our peer group, but whether or not that means sequential sales -- I hate for sequential sales go down because we have had 12, 11, 10, 11 quarters of sequential going up and so I hate to break this trend. So I am not going to say it, but if you want to say it you can.

Okay. That is helpful. David, if I look at the goals that you have now laid out for 2016, $2 billion in revenues and a 10% EBITDA margin, I am curious about the 10% EBITDA margin. I think that was your goal at $1 billion in revenues a little bit, so maybe if you could talk a little bit about why maybe you wouldn't do better. I guess you said 10% plus, so maybe you are thinking you can do better, but just give us a little color around that goal for 10% EBITDA margin and $2 billion in revenue.

Well, the things that make the plus really real is we are still getting -- we are implementing P2, which is our pricing software. We still have regions that do not have gross margins where they need to be and we have a lot of things going for us that we think, because we have more engineered products, they demand a little higher price than commodity products. And there is a lot of things going that would say, yes, you are right, we should hit 11, we should hit 12, etc.

The things working against that is that it if Supply Chain Services starts growing very rapidly, well, then it is not a 10% business. So in a way, it is a drag. It is not a drag on return on invested capital because it has a very high one and so we like it -- we like it as a way of dealing with really, really large customers, but it is not going to be a 10% EBITDA business.

Things happening to IPS, lack units are less complicated in themselves, so therefore they don't demand as quite a high of margins as we make on stuff that has got more controls and piping, etc. So we have a product mix issue, one. We also have a customer mix issue and so tell me we are really trying to serve both -- if we had four quadrants of accounts, A accounts, B, C, D, the more we are in the C and D area, we are going to get more margins because we do more things for those kind of people and in the A and B area, the margins, those are bigger accounts, we do less for them. They want to turn everything into a commodity and so our margins get tighter. So those are things -- so customer mix, product mix, segment mix, it all works sort of against us.

That said, I certainly don't want to leave anybody with the impression that I am just happy with 10 and 10 is all we ever want to do because that is not the case. A, we have this pricing software; we are not spending money on that and time and energy just for the fun of it. We think that that will raise our margins. B, we have legacy, very blunt and specific branches that have lower margins that need to get them up. So (technical difficulty) does that answer your question?

Yes, it did. Thank you, David. I appreciate it. I will hop back in queue.

(Operator Instructions). Joe Mondillo, Sidoti.

Hey, guys. I missed the part where you were talking about the segment margins. I was wondering if you could just give me the margins on all three segments again.

Sure. Are you talking about organic growth?

No, no, no. The gross operating -- I assume operating income margin.

Yes, operating.

So those three statements.

For Service Centers in the third quarter, it was 12.4%. In IPS, it was 18.6% and Supply Chain Services at 7.2%.

Okay.

And then you have got to look at that mix, that just real rough, very rough -- Mac can fuss at me later -- is SCS -- I mean is 10% -- is (technical difficulty) 10%, 20%, 30% --?

Oh, the mix?

Yes, the mix, like 70% of the business is Service Centers, really (multiple speakers) Service Centers are about the same.

13%.

Yes, something like that.

In terms of the IPS, how is the backlog in the orders, how is the backlog looking compared to the second quarter? How do the orders trend throughout the quarter? And in addition to that, sort of how is sort of the pricing that you are seeing within that backlog trending?

Okay, so our quote activity is more than double where we were in the second quarter looking at the third quarter. Our backlogs are up. Our manpower are working two shifts, 10 hours a day, that is 20 hours out of a 24-hour day and so -- and then as far as the margin on that business, what we commented about was the [lack] units are at lower GP margins than the modular stuff that goes offshore and even the modular stuff that is onshore, it has got more controls and housing and all these kinds of things on it. So there has been a shift towards more of the production oriented equipment and that is causing our margins and IPS to go down a little bit.

Okay. But the actual orders and maybe the top line looks pretty good going into the fourth quarter and going to the beginning of next year?

Yes.

Okay, okay. And then I also just had a question regarding the debt. I didn't get what your total debt was at the end of the quarter. I was wondering if you could give me that and also did you say there was a one-time fee regarding changing your credit agreement? Just trying to get an idea of sort of what a normalized interest expense should be on a quarterly basis going forward.

Total debt at September 30 was $259.491 million.

Okay. And in terms of --.

There was a $654,000 charge for writing off or fully amortizing the debt issuance cost on the prior loan agreement.

Okay. So on a normalized basis, we are sort of looking at $1.5 million, $1.6 million on a quarterly basis until you potentially start reducing that debt level? Is that fair?

Let me think about it just a minute. Interest expense was $2.3 million, so if you backed out $100,000, it would be $1.8 million. What number did you --?

Okay. I was just trying to get a ballpark --.

It is a small effect, but $85 million of that debt was incurred on the 12th of July, so there is a few more days of having higher debt (technical difficulty).

Okay. And then just lastly, I was wondering, David, if you could talk about any new developments or sort of any opportunities or new developments or just give an update on the HSE acquisition and how that is trending thus far?

Yes, we are very pleased with their -- multiple things. One, we are very pleased with their corporate group -- their corporate accounting group. We are leveraging that for IPS and Austin & Denholm and so that is taking a little bit of burden off of us here in Houston. We are very happy with the sales we are getting and the group of people that they have put together. Their revenues, their profitability was all very good, where we would like for it to be.

We are excited about really positioning ourselves to be a North American safety services company that is probably close to $250 million. The number one player is [Total Safety] and they are about $450 million, but then it drops off pretty fast after us to players that are -- some of the very biggest ones in the $40 million, $50 million type range.

And now that we have had a full quarter here with it onboard, any sort of synergies or cost improvements, anything related in terms of that that could potentially be an opportunity?

Well, we are taking advantage of -- they were a public company, so they are no longer a stand-alone public company. There is some -- we have put our -- Greg Oliver, who is the Vice President of the Safety Services division. We have moved him up there, so really their President and their operations guy are gone. So there is some savings. We are looking at -- they are a tenant in an expensive neighborhood of being in the Calgary downtown and so we are looking at maybe moving out of that particular area, except for leaving the salesmen there because there is a real need for that is where the major oil companies are, so you kind of want to have a little bit of presence there to follow on.

But there is some big [synergies] around utilization of equipment and that is for all of North America. What makes -- the safety business is really not that complicated and yet it is sort of complicated. One, it is sort of complicated because you really need to have a lot of flexible manpower that knows the safety business. And so there is a real art to that and knowing how to do things correctly. And there is a real art to that.

The part that is simple is kind of the math. The math is that you rent people literally and so the higher utilization rate you have for all your people, the more hours they are billing to the customer, the more money you make and we also rent equipment. So the more utilization we have of our equipment all across North America, the more profitable.

So if they were 100% utilized in people and equipment, the margins that we would make would be obscene. Since we don't ever get to that point, they make 14.5% operating margins, which is a pretty nice business. So it is all about -- being bigger allows you to move equipment around, allows you to move people around, etc. So it gives you more flexibility.

Okay. And just to clarify, did you say 14.5%?

Yes.

Okay, thanks a lot, guys.

That is before any amortization of intangibles.

Right, all right. Thanks.

Holden Lewis, BB&T.

Thanks, good afternoon, guys. I also (inaudible) a prior caller talked about the $654 million charge for amortization of past debt. I thought I also caught you saying that there was a $0.5 million collection in SG&A that was an offset to SG&A. Can you give a little color on that? What was the number for that?

It was $500,000.

Okay, what was that for?

I can't tell you. Confidential. (multiple speakers)

It was a lawsuit. We were suing somebody and we won.

Got you.

We have a nondisclosure agreement, so we can't --.

Okay. So just the way we should be looking at this I guess from an EPS standpoint is that collection largely offsets that amortization charge and so the impact on the bottom line is de minimis or is there some different treatment from a tax standpoint that makes the net impact of those two things relevant from an earnings standpoint?

No, they are both treated the same for tax purposes, so you are right. We run off $654,000 is an interest expense for amortizing the debt issuance costs and we also, in SG&A, picked up $500,000 on the settlement.

Got you. Okay.

And you're right; they have kind of offset.

Okay. I wanted to ask a little bit more about sort of the SCS business. You kind of alluded to a new account here, a new account there and then in this fourth quarter, it sounds like you have eight accounts that are going to begin recognizing revenue. That business obviously has seen some macro headwinds, but what kind of revenue impact would we expect for these new things coming on? Is this something we are just going to push the revenues and supply chain back up into the 40%s? Does that look sustainable going into next year? Just trying to get a sense of what the impact is and what the profitability on those new implementations are.

I'm going to have to get you that answer, Holden. I don't really know what amount of revenues they have. I think that when I talk to John Jeffery about SCS, I think he would tell you that, based on the holidays and uncertainties in the market, that he would do about the same for the third quarter and the fourth quarter. That said, we -- I think John has done a really nice job on the profitability side and (technical difficulty). I guess we have done okay and that it has not been a growth business for us, as you can tell. And so from that point of view, that is not -- we are not really happy with that. But let me punt this one. I don't punt many, but I will punt this one and get you a number.

Okay. Yes, because I mean you are opening one account and one account and one account and then eight. That sounds reasonably dramatic, so I recognize that some of your core businesses or customers are having some issues, but it looks like -- so this year could result in a few million down, but it sounds like eight new accounts could result in a meaningful stepup in revenues and that is what I am trying to get a little bit of color on. If you go through that, does that suggest that 2013 is a growth year for you, I guess? But, okay --.

Holden, I am glad you asked the question because I agree with you. I should know the answer to that. And I would like to know the answer to that myself.

All right, fair enough. And then thinking through the IPS as well, and I guess this is all coming -- it is clear that you are more cautious, that your tone is more conservative on the end markets, so I get that. But, again, it kind of sounds like SCS has some opportunities to maybe grow the revenue; we will see. But it sounds like IPS also. I mean for all the concerns about some of the rig counts and drilling and things like that, given your quoting activity and all that, I mean it sounds like you are thinking that 2013 -- again, there is no reason to think that IPS is not going to build on this Q4 and continue to grow or is this Q4 pop in revenues that you are expecting, is this kind of backlog clearing that is going to create a tough comp in '13 that might be difficult to grow off of?

I personally feel really good about 2013. I base that off of the fact that I have been very concerned about the rig count going down. And so -- because that affects us later on down the road. But I am told that the oil and gas companies are going to increase their budgets for this coming year and business should be good. This has not been a good year for the oil and gas companies. It has not necessarily been a good year for the service companies.

And then I would preface -- I would also say that IPS is saying that there is a lot of attention on the fact that they have poked a lot of holes in the ground and now they are saying, okay, we have got to figure out how to move this product around. We have got to build these production facilities, we have got to build these pipeline infrastructures to bring all this stuff to market more efficiently than having trucks and tanks and all that kind of stuff moving it around. So I think from that point of view, IPS feels that they will build off of 2012.

Because I was kind of under the impression with your IPS business that oil rigs have been relatively stable. Gas rigs have been a disaster, but you guys are not -- gas I think is more -- you are more on the production side. Gas uses more compression than pumping and therefore the mix seems to work for you because more oil is good, less gas doesn't matter because you don't do as much there. Is that incorrect or --?

It is correct when you think about our pumping business or the business that we were founded as a pump company, okay, so it is correct in that point. It is slightly incorrect as it relates to our safety services business because they actually sour gas, they make a lot more money off of sour gas than they do supervising an oil well.

So I didn't answer your question very well because I can't really say okay it's the 80/20 rule. Yes, 80% of the time we are going to be so much better off with oil and 20% of the time, we get hurt with gas going down. So that is a win, 80 dominates the 20, so it is a win, but I didn't give you that kind of answer. I probably could and so I can get back with you on that one too.

Okay, that's fine. And then how do you feel about the accretion from the acquisitions at this point? You put out I think -- or I think that there was some discussion about the initial numbers. Do you feel that those are coming in as expected based on what you see right now, lower because of your concern about the macro? How do you feel about how those are coming in accretion-wise?

We feel like we buy things at 4 to 6 times EBITDA and they are highly accretive and our goal in life, as you know, is not to screw them up. So we don't do anything that hurts revenues. We don't change compensation plans, we don't change salesmen plans. We don't do anything that hurts revenues. Alls we do is things that will enhance revenues, so they are all performing really nicely, very nicely. They exceed our expectations.

Okay, great. Thank you.

Matt Duncan.

David, you talked a little bit about the pricing software earlier in the call. Can you give us an update on how many of your regions have that now and sort of what impact it is having on gross margin?

I don't have an update on the individual regions in terms of what kind of improvement they are seeing. I do know that they are all on the system and capable of using the system. And so they are in that process of how believability is and so I don't know the utilization of the rate. We track how many times they use the price or higher versus how many times they lower the price and I haven't seen a report on that either.

So I assume that we probably are going through a month or two here where our results are not helping at all quite frankly and so that is why I am not seeing it. And so if somebody has good news, they normally bring it to me. But they are all up and running and we should get -- we know we will get positive results as soon as we get volume and so we are working on the buy-in part.

Okay, that's helpful. And then can you give us a little bit of an update on the M&A pipeline? You did this one small deal, it sounds like, at the beginning of this quarter. How does that M&A funnel look and how is it going with trying to find some branches to buy up in Canada so you have got the ability to sell more product up there?

I really would like to get back to the acquisitions being 10%. So let's say we are at $1 billion the next 12 months. You should see us do $100 million in acquisitions. We've definitely had that much teed up. We are actually pushing back to try to slow down some of this so that we can, A, catch our breath and 2, get past this sort of uncertain times and so what are the numbers really telling us.

Of course, the flip side of that is the seller is looking at it and going well, man, things may get worse, so I won't want to sell tomorrow, but we are really pushing back sort of deliberately to -- and then certainly our pace, I don't know what the number is, I think it was $260 million or something that we purchased over the last 12 months. That pace is going to slow down too. So we should get back to, A, a little more discipline around the 10% external growth rate and they are pretty teed up.

David, do you think we will see something else before the end of the year? It sounds like probably -- the funnel sounds like it is pretty full there.

We -- I guess -- I am not saying we won't or will. They are never done until they are done.

Sure. All right. Thanks, guys.

At this time, there are no further questions. Ladies and gentlemen, this concludes the DXP Enterprises, Inc. 2012 third-quarter conference call. Thank you for your participation. You may now disconnect.