DXP Enterprises Inc (DXPE) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the DXP Enterprises, Inc., 2012 fourth quarter and year-end results 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 is being recorded today, Wednesday, February 27, 2013. I would now like to turn the conference over to Mr. Mac McConnell, Senior VP of Finance and CFO. Please go ahead.

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 we begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results could differ materially. A detailed discussion of the many factors that we believe may have a material effect 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 fourth quarter 2012 results. David Little will share his thoughts regarding the quarter's results, then we will be happy to answer questions.

On October 1, 2012, DXP acquired substantially all of the assets of Jerzy Supply in Houston, Texas, for approximately $5 million in cash. DXP recognized approximately $2.3 million of sales for Jerzy during the fourth quarter of 2012. Sales for the fourth quarter increased 34.2% to $293 million from $218.4 million for the fourth quarter of 2011. After excluding fourth quarter 2012 sales of $56.5 million for businesses acquired in 2011 and 2012, sales for the fourth quarter increased 8.3% on a same-store sales basis.

Sales for Supply Chain Services decreased 1.1% to $38.1 million compared to $38.6 million for the 2011 fourth quarter. Excluding 2012 Supply Chain Services segment sales for businesses acquired in 2011 and 2012 of $600,000, the SCS segment sales for 2012 decreased 2.7% from 2011 on a same-store sales basis. Sales of Innovative Pumping Solution products increased 49% to $48.4 million compared to $32.5 million for the 2011 fourth quarter.

Sales by our Service Center segment increased 40.1% to $206.5 million compared to $147.4 million of sales for the fourth quarter of 2011. After excluding 2012 Service Center segment sales for businesses acquired in 2011 and 2012, a $55.8 million Service Center segment sales for the fourth quarter of 2012 increased 2.2% from the fourth quarter of 2011 on a same-store sales basis. When compared to the third quarter of 2012, sales for the fourth quarter of 2012 increased 1.1%. After excluding fourth quarter sales of $5 million for businesses acquired in 2012, sales for the fourth quarter declined 0.7% on a same-store sales basis. This decline is less than the 1.6%, or one fewer business days in the fourth quarter, compared to the third quarter.

Fourth quarter 2012 sales for Supply Chain Services decreased 1.1% compared to the third quarter of 2012. Fourth quarter 2012 sales of Innovative Pumping Solutions increased 25.8% compared to the third quarter of 2012. Fourth quarter 2012 sales by our Service Center segment decreased 3% compared to the third quarter of 2012. After excluding Service Center segment sales of $5 million for businesses acquired in 2012, Service Center segment sales for the fourth quarter declined 5.2% from the third quarter on a same-store sales basis. The Q4 sales decline from Q3 for Service Centers occurred across most of our Service Center operations.

Sales for all of 2012 increased 35.9% to approximately $1.1 billion from $807 million in 2011. Sales for businesses acquired in 2011 and 2012 accounted for $194 million of 2012 sales on a same-store sales basis. Excluding 2012 sales by businesses acquired in 2011 and 2012, sales for 2012 increased 11.9% from 2011. Sales for Supply Chain Services increased 8.2% to $156.2 million compared to 2011 sales of $144.5 million. Excluding SCS sales of $12.1 million for businesses acquired in 2011, SCS segment sales for 2012 decreased 0.3% from 2011 on a same-store sales basis. Sales by Innovative Pumping Solutions products increased 58.2% to $161.8 million compared to 2011 sales of $102.3 million. Sales for Service Centers increased 39.1% to $779 million compared to $560.2 million of sales for 2011. After excluding Service Center segment sales of $181.9 million for businesses acquired in 2011 and 2012, Service Center segment sales for 2012 increased 6.6% from 2011 on a same-store sales basis.

Gross profit for the fourth quarter of 2012 increased 39.6% compared to the 34.2% increase in sales from the fourth quarter of 2011. Gross profit as a percentage of sales increased to 29.9% in the fourth quarter of 2012 compared to 28.7% for the fourth quarter of 2011. This increase is the result of increased gross profit percentages for all three of our segments. Compared to the third quarter of 2012, gross profit as a percentage of sales for the fourth quarter of 2012 increased to 29.9% from 28.8% for the third quarter of 2012, primarily as a result of improved margins in the Supply Chain Services and Service Center segments.

Gross profit for all of 2012 increased 37.6% from 2011 compared to the 35.9% increase in sales. Gross profit as a percentage of sales increased to 29.1% for all of 2012 from 28.7% for 2011, primarily as a result of increased gross profit percentages experienced by the IPS and SCS segments. Supply Chain Services gross profit percentage increased primarily as a result of a change in customer mix. The increase in gross profit percentage in the IPS segment was primarily related to stronger demand for IPS products.

SG&A for the fourth quarter of 2012 increased $15.4 million or 33% from the fourth quarter of 2011 compared to the 34.2% sales increase. This increase is the result of the $15.5 million of SG&A expenses for businesses acquired in 2011 and 2012 on a same-store sales basis. As a percentage of sales, SG&A decreased to 21.2% from 21.4% for the fourth quarter of 2011. SG&A for the fourth quarter of 2012 increased $3.2 million, or 5.5%, from the third quarter of 2012. This increase is partially the result of the $1.5 million of SG&A expenses associated with the acquisitions of HSE and Jerzy in the second half of 2012 on a same-store sales basis. As a percent of sales, SG&A increased to 21.2% from 20.4% for the third quarter of 2012. This increase is primarily the result of some -- approximately $1 million of restructuring charges incurred during the fourth quarter by HSE.

For all of 2012, SG&A increased $52.2 million, or 29.6%, compared to the 35.9% sales increase. This increase is partially the result of $43.6 million of SG&A for businesses acquired in 2011 and 2012 on a same-store sales basis. As a percent of sales, SG&A decreased to 20.8% from 29.9% for 2011, primarily as a result of economies of scale of being bigger.

Interest expense for the fourth quarter of 2012 increased 136% from the fourth quarter of 2011. Interest expense for all of 2012 increased by 58%. These increases are primarily the result of increased borrowings used to acquire businesses. Despite the $5 million of debt incurred with the acquisition of Jerzy, total long-term debt decreased approximately $20.6 million during the fourth quarter of 2012. During all of 2012, total long-term debt only increased approximately $123.5 million despite the $144.9 million of cash paid for acquisitions during 2012. During the fourth quarter of 2012, the amount available to be borrowed under our credit facility increased approximately $42.2 million to approximately $109.5 million. This increase was primarily the result of the $20.6 million reduction in debt outstanding combined with the effect of amending our credit facility.

On December 31, 2012, we amended our credit facility, which increased the facility by $75 million. The new amended credit facility consists of a $130 million term loan and a revolving credit facility that provides a $262.5 million line of credit as of December 31, 2012. Our bank leverage ratio, which is a pro forma calculation, was 1.87 to1 at December 31, 2012. At December 31, 2012, total debt was $238.4 million.

Capital expenditures were approximately $1 million for the quarter. Cash on the balance sheet at December 31, 2012, was $10.5 million. Accounts receivable and inventory balances were $174.8 million and $101.4 million, respectively, at December 31, 2012.

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 2012 were simply outstanding. We continued to produce sequential quarter-over-quarter growth in top line and bottom line results. Our sales for the year grew 36%, reaching $1.1 billion, producing a net income increase of 62%. Our last two quarters exceeded 10% EBITDA margins and our after-tax return on invested capital on a pro forma basis was over 30%.

DXP's fourth quarter results were achieved despite a general softness in daily activity in both the United States and Canada, yet sales were at a record high of $293 million, up 34.2% from the same period in 2011. Fourth quarter diluted earnings per share were $0.92 versus $0.86 in the third quarter and $0.61 last year for an improvement of 50.8%. Fourth quarter year-over-year organic growth was 8.3%.

I cannot thank you our operations people enough for the strong back-office support that drives customer loyalty and efficiencies by doing a day's work in a day and exceeding our customers expectations. Being customer driven with a positive, can-do attitude describes DXP people. Our operational excellence and back-office support is so critical to our success. When our stated goal is to double the size of the Company every four to five years, the planning and effort to keep pace and ahead of this is challenging. I would like to thank our IT department for improvements they made this past year. The accounting department did a great job in growing their department to handle our new entities and increased volume of business. Thanks to our customer-first center. They provide excellent customer service. Our customer service representatives are experts across a large breadth of technical products. And this group continues to grow as they provide solutions for both our external and internal customers.

Thanks to all of the DXP people from the ballistic distribution center, fabrication centers, supercenters, service centers, IMP Group, collections and payables for their efforts and continuous improvement. Thanks to our human resource department for their tireless effort in finding great new DXP employees. Thanks to the operations department for their system support and their integration and training for our newly acquired companies. A special thanks to our sales and marketing people. Our entrepreneurial spirit is alive and well throughout our outside and inside customer service representatives. Their relationships and understanding of each customer's business allows them to be creative, entrepreneurial problem solvers.

We have the right balance of entrepreneurial spirit, growth sales and back-office controls to support the increase in sales growth. We will continue to be customer driven by being experts that bring value-added solutions to each of our customers. Our goal is to capture more of the customer's maintenance, repair and operating MRO spend and to improve customer efficiencies and their operating cost. As we accomplish this, the entire breadth of DXP's technical products and services becomes stronger than any one individual division. Our multiple segments, support divisions, make us unique and gives us a competitive advantage that is winning market share against the competition.

We continue to demonstrate our ability to acquire companies that fit our strategy to grow our breadth of technical products and services. And all five divisions, including rotating equipment, bearing and power transmissions, safety products and services, metal working and industrial supplies, increased sales in 2012. Great growth strategies, passion for outstanding customer service and technical expertise and our great DXP people executing on all these strategies above is what makes DXP successful. Customer-driven experts at MROP Solutions accomplished by fantastic DXP people who want to help our customers improve their operations.

I would like to welcome our latest fourth quarter acquisition, Jerzy Supply, to our DXP family. This is a great addition of people with hose expertise. This was a great year for our acquisition program as DXP added more than our 10% targeted growth via acquisition sales. We strengthened our rotating equipment division with three great companies, our products and services division with three substantial companies and, as mentioned above, our bearing and power transmission division added one hose company. All these companies added experts, products and services to grow these divisions.

Overall, we were pleased with the acquisitions we have completed since Q4 of 2011 and we remain excited about our pipeline of future candidates. We continue to see opportunities in the US and Canada. And during the first half of 2013, we anticipate closing one to two acquisitions and approximately two or three acquisitions during the second half of the year.

I will now focus our -- on summarizing activities within our three business segments -- Service Centers, Supply Chain Services, and IPS. The Service Center segment sales increased 39.1% from 2011 to 2012. Operating income increased 37.9%. Our Service Center leverage comes in the form of top-down commitment to our sales and operational excellence, five technical product divisions, an acquisition -- and an acquisition strategy around technical products and services. 2012 was a noteworthy year for our Service Center segment, improving economic conditions and the successful execution of our core strategies accumulated into a record year.

Increasing sales and profits, driven by our manufacturing and related portions of the US economy, enabled us to make strategic investments in our network of Service Centers. Notably, 2012 investments included three rotating equipment acquisitions, three safety acquisitions and one hose and rubber acquisition, the creation of five new supercenters and further refinement of our excellent programs. Our Service Center segment's management team has also made significant investments in people. Our human resource investments came in the form of recruiting, career development and our suite of excellent programs which are designed to reinforce our commitment to quality business processes. Collectively, our investments allow us to take full advantage of the leverage that we have been able to create in our industry-leading breadth of technical products and services. We are extremely grateful to our employees, customers and suppliers for their contribution in making 2012 a monumental year.

Over the course of 2012, our Service Center management team successfully converted five in-process Service Centers to supercenters. We move into 2013 with a network of 33 supercenters and the momentum to convert an additional 8 by the close of the physical year. Improving on our ability to convert Service Center prospects to supercenters has led us to an increased number of in-process supercenters currently in the pipeline. We will actively seek out new supercenter candidates over the course of the year and continue to record our progress on these initiatives.

Moving into Q1 of 2013, we remain optimistic about the economic recovery and strength of our business model. Our Service Center network is powered by five product division platforms that are designed to provide substantial business results for our industrial customers. Our progressive approach to conventional industry has created distance between us and our competitors who prefer to do more transactional environment. The cornerstone of our branch-based model is our supercenter strategy. This customer-driven strategy continues to create value for industrial customers seeking to consolidate their vendor base without sacrificing local inventory and expertise. Broadening our portfolio of technical products and services, recruiting top talent and acquiring great companies will continue to be our recipe for supercenter expansion. In summary, we look forward to competing and winning in 2013. Our focus will remain on building a North American Service Center platform that will provide substantial benefits to our industrial customers looking to improve their overall production and financial performance.

Supply Chain Services. Supply Chain Services business segment was busy in Q4, finishing the implementation of an on-site location started in Q3. Q4 is traditionally a slower month for SCS with holidays, weather and capital [discipline] at year's end. We are still seeing decreased spending in defense, military, natural gas exploration and transportation industry. Q4 saw two customers announce closing and consolidation of manufacturing, which is expected to reduce their production by 40%. SCS started a new implementation in Q1 and the completion of the site at the end of Q4, which will keep us at our current rate of 62 locations.

2012 ended overall contributing to a good -- I'll say that again. 2012 ended overall contributing to an operating income of 8%. This achievement was due to our continued strive of operational excellence resulting in a leaner, more efficient supply chain delivering bottom line results to DXP and exceptional customer service. The SCS 2013 strategy is to continue to develop operational excellence along with sales excellence. Sales excellence has a strong focus on delivering profitable top-line growth in 2013. Another SCS strategy is to establish DXP's Supply Chain Services as the expert in automating the supply chain channel, thus delivering additional savings to our customers and increase bottom line to DXP. This strategy has been developed -- developing over time through our -- uncovering our customers' needs for this strategy. This strategy will accomplish -- was accomplished through expansion of our case software, B2B website solutions and enhancing our vendor deliverable within our onsite presence and, lastly, expanding the speed and accuracy of data mining.

IPS -- Innovative Pumping Solutions -- Q4 results and Q1 outlook. The IPS segment financial result for Q4 saw -- versus Q3 sequentially, saw sales increase 25.82%. Operating income increased 34.2%. On a yearly basis, we saw IPS increase sales 58.19% and operating income 89.71%. Due to the increased activity with the HP Plus line, we are adding personnel to support project management, project management and fabrication, assembly, testing and documentation staff. In order to remain compliant for safety and QA and QC with the major oil companies, we have had to increase staffing in these two areas.

Manufacturing lead times on non-API pumps and motors appears to be back to normal levels. [Fluger] pump lead times are currently 24 weeks. API and high-energy pump lead times continue to be in the 42 to 52 week. Motors have stabilized in the 8 to 10 week range on larger sizes. Engines for API applications are in the 36 to 52 week range. Lead times for products related to our day-to-day business have attained normal levels.

In Q4, we took a proactive approach in managing our delivery expectation with our customers based on our commitment to quote, "Deliveries" -- working with the customers well ahead of near term -- near the year end projected deliveries. We were successful in minimizing shipments that slipped into Q1 for 2013.

Downstream Oil and Gas and Mining Sector. Land based current order placement profile is in the $100,000 or less range -- smaller orders. We anticipate the large project dollar orders to be placed starting late Q1 and forward. The Eagle Ford, the Permian, the Marcellus, the Bakken, the Niobrara shale plays will continue to provide substantial opportunities for our modular equipment packages in 2013. To date, these specific shale plays account for the bulk of equipment shipped into the shale play markets. In the Rocky Mountains and North Dakota regions, we continue to have success with opportunities associated with [lack] units. The current lack unit package being marketed by DXP/our Golden operation, has gained acceptance in the market and continues to provide additional modular packaging opportunities for this business unit.

In the Middle East, we are actively involved in an opportunity for modular packaging in this geographic region. We are optimistic in order placement in Q2. Gulf of Mexico, the signs of activity are slowly evolving as it relates to projects. Projects that were put in play in 2012 are still on the board at present time. They are planned to happen. The uncertainty is when will they actually be released for equipment purchases. We feel confident based on products DXP has to offer and our relationships with the major players in this sector. This will result in substantial opportunities and we anticipate them placing orders in Q1 and Q3 of this year.

Offshore Africa, most of the equipment for these projects is slated to be purchased in 2013 and 2014 based on our relationship with end-users, E&Cs and our existing presence in productions arena within geographic -- within DXP's product offering, we remain confident in our ability to get -- getting the opportunity to provide modular package on these projects. Offshore Alaska, we are currently engaged in an opportunity to provide modular packages for an offshore Alaska platform project. This equipment is slated for purchase in Q1 or Q3 of 2013.

Midstream pipeline industry, we see [courting] activity in this sector related to oil and gas pipeline opportunity increasing. In this sector, equipment delivery is important and many opportunities can be realized when DXP and our manufacturers have the ability to provide acceptable deliveries.

Working with our major manufacturers to commit and hold critical deliveries will be a key component of new equipment, sales and requirements. We feel our remanufactured products offered and HP Plus product line will continue to provide opportunity based on DXP's 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 line continues to gain traction in this sector. We have been successful in placing a significant amount of HP Plus units in the Permian basin, the Eagle Ford, the Marcellus shale pipeline -- and the Marcellus shale pipeline applications. We have expanded this product offering to provide product applications designed for the use of modular lack units.

Q1 outlook, our 529 PMI Golden fab facilities continue working two 10 hour shifts, six days a week, in production for modular packages. We see this continuing. 529 has increased its production, project management and project engineering staffs in order to meet the production schedule for 2013 for IPS segment business. Production pump Snyder has settled into their expanded fab facility and Q1 capacity has been booked. This business unit has expanded their electronic -- electrical controls programming, troubleshooting and insulation staff. This has provided the opportunity for increased revenue growth in this area.

We are seeing new opportunities for fab service in our fab centers. It is evident that the commitments DXP has made in documentation compliance and controls, safety, QC and QA processes in compliance with major players in the oil and gas sector are providing additional revenue opportunities with our fabricators requesting our services.

Current IPS segment backlog is $60 million-plus. Current open live project quotes is $80 million-plus. We feel comfortable bearing no economic, political or world upset events. Q1 '13 will provide a solid foundation for growth in 2013.

In conclusion, 2012 was a fantastic year. We became a billion dollar Company. Our platform and the markets we serve will let us be a multi-billion dollar Company in the future. It's all about the execution. We achieved 10%-plus EBITDA margins. After tax return on invested capital was an industry high of 30%-plus. According to Bill Gunderson, over the last decade, DXP's stock was the fifth best annual average return for all public companies in the US. We beat Apple, who was eighth.

DXP employee count grew from 2,100, to 2,817 active employee. We increased Service Centers from 123 to 128 in the US and from zero to 25 in Canada. We have 8 sales offices, 33 supercenters, 9 supercenters in progress, 7 distribution centers, 8 fabrication centers. We're in 35 states and 7 provinces in Canada. SCS also has 62 on-site locations, 101 off-site locations. We are growing, but if you looked at a map, you will see all the places we still have to grow to. In other words, we have a lot of runway and a very fragmented market.

Our course is set and our goals are achievable. I believe in our family of DXP people. I believe in our forefathers who wrote in the Declaration of Independence, "We hold these truths to be self-evident that all men are created equal, that they are endowed by their creator with certain unalienable rights. That among these are life, liberty and the pursuit of happiness." And I believe that happiness is achieved by the pursuit of success, not a gift from the government. I believe that people at DXP are successful because they are free to match their skills with their passion. DXP people are passionate the about what they know, about customer service and about being part of a winning team.

I want to thank our customers who give us innovative products that help us bring value to our joint customers. A special thanks to our suppliers that understand how we both win when our relationship grows with the customer because of our breadth of technical products and services that helps the customer be more profitable. I want to thank you, again, our DXP people. This is a people business and your expertise and passion for customer service makes me proud to be part of your DXP family.

I believe the economy will have slow growth in 2013 because of our government. I also believe we will grow faster than the economy because of the opportunities, DXP people and our sales strategy. Our slogan for the year is, battle for market share.

Thanks and we will now open for questions.

(Operator Instructions)

Matt Duncan with Stephens.

Good afternoon, guys. Congratulations on a great quarter.

Thank you, Matt.

The first question I've got, David, just to make sure I understand some of the guidance, sort of comments you were giving us about the first quarter correctly. You had a really big quarter in innovative pumping solutions this quarter. And if I annualize that number, you're up to almost to $200 million in terms of annual revenues. Is that an annual revenue number you think you can do in 2013 in that segment? Or was there something special about this quarter?

Well special because the biggest one we ever had. But I think we'll duplicate that at least in the first quarter of next year. And we see a lot of activity. I think to explain it best for our audience today is that we've had a lot of drilling and then drilling started declining. And part of that is, frankly, that we're building the infrastructure production facilities and pipelines and things necessary to carry that oil to wherever it needs to be, whether that's export, a chemical plant, a refinery, et cetera. And that infrastructure building is driving our capital equipment sales. And it is very strong, and we see that continuing in 2013.

Okay. So it's going to continue with that 4Q level into the 1Q and then we'll just see where it goes from there. But you feel good about it, is what I'll think about it then.

Yes.

Okay. Looking at the sales trends in the quarter, obviously your growth slowed a little bit in the Service Center business. Clearly, there's got to be some kind of economic and fiscal cliff impact on that. Can you maybe go through the month-to-month sales trends you saw in the quarter? What you're seeing so far here in the first quarter and is there any way, in your mind, David, to quantify the impact fiscal cliff might have had on your business.

Well I don't know how to quantify it. In effect, all of 2012 we had kind of a seesaw environment. And so I don't -- there has to be affecting business. The -- I would say that our -- we had a very good January. I would say that February is tracking like January, but January had a lot more days. So February's never going to be a blowout month. And then I would say our normal year, March is always one of our bigger months of the year.

And to give you an answer to that, it's because oil field companies get their budgets and the faster they spend their budgets on equipment that's going produce more, then the people get rewarded for producing more oil during the year than less. So consequently, if they spend the money at the end of the year, well then they only have a few months to produce oil, whereas if they spent it at the beginning of the year they will do better.

Of course, they can't -- they don't have the ability to spend it all at one time. So they'll get the impression that it's always -- we're not going to have anything to for the rest of the year. It never works that way. But I would say that March is typically a very, very good month for us. And we started out with a good January.

Okay. That helps. Looking at your gross margin, it was obviously pretty strong this quarter relative to both last year and the quarter before it. Is that a -- roughly 30% gross margin -- is that something you can carry forward? And is there any way to call out how much you think the new pricing software is helping your gross margin right now?

It's -- our pricing software is installed in all of the regions and it's healthy. But it's only helping like a half a percent or something. It's not -- we're not getting the full benefit of that. And we -- we'll see continued improvement throughout the year. I think that we had some really nice fabrication jobs. And so we have an increase in IPS-type business.

That said, we had some of our -- some of the service center businesses, whether it was cutting tools or safety services or some of those things, did not perform quite as well as we would like. And so you're never hitting on all cylinders. And so I really feel like we're going to be able to maintain our margins range from the very high 28%-point-something to still having a goal, and we'll have months where we will hit 30%. So the answer to your question is, it's always a mixed question but I feel good about the direction of our gross profit margins.

Okay. So we should probably model that a little bit lower for 2013 than what it was in that one quarter because we might be seeing sort of the best of all worlds in that quarter. Because I guess you're saying --

Yes. I think you can modeled higher for the year but we did have a nice December.

Okay.

Nice fourth quarter, excuse me.

Last thing from me and I'll hop back in queue. Just on the M&A front, it sounds like you're expecting to close one or two deals here in the first half -- two to three in the second half. As we think about the size impact that that may have, total revenue basis when you put them all together, is it going to be enough to hit that at least 10% revenue growth via acquisitions target that you've set?

Yes. You can put it in the book that we're going to do one -- we're going to do $110 million.

Okay. Got it. All right. Thanks, David.

You bet.

(Operator Instructions).

Joe Mondillo with Sidoti & Company.

Hi, David, Mac.

Hi, Joe.

Hi, Joe.

First a question. Just regarding -- I just wanted to focus a little bit on the IPS business. First off, you mentioned that the backlog at the end of the quarter was $60 million. What was it at the end of the third quarter?

I don't know.

Okay.

I'll find out for you. I mean, I can find that out. It was less.

I thought -- okay, it was less. Okay, okay. I thought I had a number in mind and I guess that's incorrect. So I guess one of the big things that I'm trying to understand -- you gave a lot of information regarding what's driving that business. But if you could point out maybe one or two drivers that's really driving. I mean, you're seeing significant growth compared to a lot of other companies. Just wondering what -- if you could point to one or two drivers that's really driving that, whether it's the offshore in the Gulf, platforms coming online there or whether it's the midstream business that you were talking about or new products. If you could point to one or two drivers there, that would be helpful.

And then also, if you could talk about the competitive landscape. Give us a feel there -- how that's looking. That would be great. Thanks.

Well, Joe, you just answered your question is all the things you just listed. So you asked a great question. (Laughter) We've really added lack units and we're having really nice success with our HP Plus products. So we have, in fact, added new products. We've also pointed out -- and I think the projection is we've done some offshore stuff, but that, to us, looks like it's going to be increasing. Of course, we're past the point where we did no offshore stuff. And so now we're doing some offshore stuff and it's going to grow and we see some emerging market stuff growing. On -- and then -- you had one other point. It was products and then it was offshore and -- oh, and then markets.

When we look at markets -- and you pointed out midstream -- it's not just midstream. I mean, yes, they're trying to build more pipelines and stuff. But it's also production facilities. And so you'll have a small gathering facility that -- where they've punched 20 holes in the ground and now they're ready to produce that. They gather it up in a production facility out in the oil field. It's not like Cushing where they gather up billions of barrels. It's more just a small little gathering system.

Well, we sell equipment to that. And so it's that part of the equation that people are catching up on. And then from that production facility, they hope to tie in to a pipeline. And so, they've got the to build the infrastructure for that pipeline. And that's mid-market. And then so all of that is kind of in our sweet spot, and we're doing really well.

Okay. So sort of a combination between products -- I guess offshore drilling and midstream production facilities?

Yes. Yes, sir. Absolutely.

Okay. And in terms of new products, where are we in terms of introducing new products? Are these revolutionary products to the industry? And how does that match up -- I also asked before if you could talk about just the competitive landscape. How does that match up with your competition? And--

Right. What happened to us was that we were -- we've always been selling big recip pumps. And we had competitors -- manufacturers out there like Reda and The Woods Group and Central Lift that had this down-hole pump. And this down-hole pump was designed to produce oil out of the ground. It was -- it's designed to do something different than a lift situation like a lufkin. But they took that down-hole pump -- and it's just a long, centrifugal pump and the put it horizontal above the ground and started using it for disposal and water flood situations. And so what happened there is those people never sold through distribution.

So we decided that we needed to play in that field so we could have a high-energy pump. We could have a recip pump and then we could have this cheaper -- I shouldn't say cheap -- I just say less expensive centrifugal, long pump. And we decided to do that ourselves because nobody would play with us. And we felt -- so we went to -- we hired some people that knew how to make the pump. We went to China to have the parts made. We ship them here. We assemble them. We test it. And we have grown that business pretty substantially and it's a real nice piece of business for us.

Okay. Great. That's helpful. And then also you mentioned that there of about $1 million of restructuring at HSE. Could you just talk about that acquisition and what you're doing there and what that $1 million was spent on and how everything's going with that?

Well the two bigger pieces were around in the fourth quarter -- around $400,000 of severance pay. We spent several hundred thousand dollars to move people into the Eagleford and the safety area. HSE had US safety operations and they moved a bunch of people into the Eagleford. It cost several hundred thousand. And we're just doing things to help the Business grow.

The Canadian environment's kind of interesting. You can fire anybody, any time, but when you do there's a pretty big severance package that goes with it. It's all defined based on how many years you've worked there. And so, we felt pretty strongly that when we purchased HSE that there were some synergies between the United States and Canada.

But there was also kind of an overkill because HSE was a public company trying to grow itself and had an infrastructure that looked heavy to us. So we went into that understanding the need to right size the business. And it's just kind of expensive to do that.

Do you expect any further restructuring?

No. We do not.

Okay. And then --

Sorry. Wait a minute.

There's a -- say, $700,000 of severance in the first quarter.

Okay.

Oh, okay. I was thinking about current. Okay. Mac's right. I was thinking about that we've done --

We did it in January.

By the way, all of my Canadian buddies, we're not firing any more people up there. (Laughter)

All right. Good to know.

All behind us.

Could you -- Mac, could you also just give me the amortization and the corporate expenses that were associated in the quarter?

Sure. Oh -- quarter. I was flipping to the year. Okay. The Q4 amortization was $2.622 million, is what I calculated. And the corporate expense was $6.3 million.

$6.3 million. So that $6.3 million seems a little lighter compared to past quarters. Why would that be? And is that sustainable?

You know, we have -- probably need to get better at this. If you look, you'll see the SG&A outside of corporate was up. And so some of it is a swing -- we have historically have accrued for things in corporate that we didn't charge the locations for until the time it was paid.

Okay.

So bonuses, commission -- some things that end up swinging. And I admit we probably need to get better about making that. The year iss right.

Okay.

Just the swing between quarters.

Okay. All right. Thank you.

Thank you.

Holden Lewis with BB&T Capital Market.

Good evening. Wanted to ask -- now that you have a little bit more experience with the pricing software, you've perhaps picking up a few months here of data points and such -- I think you commented that maybe that was kind of a 50 basis point benefit for fourth quarter, but that was about it, and that there's still learning curve issue and things. Do you have a sense of how impactful -- when you feel like it's operating as you want it to operate -- how impactful do you think that will ultimately be on gross margin versus if it wasn't there. And how long do you think it's going to take you to get there? Any feeling based on your experiences so far?

Well we were told by the software company that our goal was to increase margins 2% to 3%. Now they're trying to sell us something, so I take that with a grain of salt. But nonetheless, it's a function -- yes. We have the ability to track how often do they use the suggested price or how often do they even raise the suggested price -- they get credit for that, too -- versus how many time do they go ahead and cut the price? And so what you're trying to do is you're trying to get to some 80% compliance where 80% of the times they're using the suggested price they believe in and they don't feel like they have to cut the price. We're probably in the 30% range. And it's just because we haven't been on it that long. They still don't trust it. And we still give them the ability to cut the price if they feel like they need to.

Okay. Fair enough. And so you don't have to -- it's entirely up to the branch still as to whether or not they comply or not. I mean, you're assuming that they're going to see that it's in their best interests. But I mean it sounds like you're not that confident based on what you've seen in this 200 to 300 basis points. If you're at 50 basis points and you're almost halfway to your compliance goal, and they suggested about 100 basis points. Why the difference between what the creators of the software tell you can do, and what it seems like you're on track to do? Is that just because you're not requiring them to live via the software? Is it still an option, so there's still too much bleeding out?

That's right. And so what we do is there's a report, there's an exception report. So every time the manager's supposed to daily go through and look at the exceptions of when they decided to not use the price. Now by the way, I mean let's say that there's a $100 item and they sold it for $99 instead. Well -- or worse than that, $99.90. Well they still get dinged for not complying, but it's awful close to the right number.

So -- but on the other hand, the manager says, hey, what's -- why did cut the price here? I mean it was only $0.10. And so there's followup, there's accountability, there's tracking of the individual. So we got Sandy over here who cuts the price all the time, and Mac doesn't ever cuts the price so why is that going on? There's a lot of trackability and a lot of accountability, but we do allow them to cut the price. And we're just not -- we're not 100% there yet. I mean, at some point if time we'd love to be Granger or MSC where they sit there and say this is the price and this kind of customer gets a 5% discount, this one gets nothing, et cetera. But we're not there yet.

Okay. And on the SCS business -- a lot of moving pieces there. I'm just sort of wondering what it all adds up to. It seems like we're seeing a little bit better general industrial activity. On the other hand, you have some markets in there such as the military and transportation that aren't doing terribly well. Sounds like you've added at least one contract, lost at least one contract. Can you give us a sense, directionally, of how you see that revenue playing out based on all these moving pieces? I mean, do you have a big pipeline of new contracts to implement? Or just -- directionally, how are you feeling that SCS is going to go over the next 12 months?

It's not looking that great. It's -- they're -- they've done a really, really nice job of becoming a better company and putting some dollars on the bottom line. But there's -- it's been a struggle to grow and land new business.

As an example, we worked on a $19 million deal and at the end of the day, Granger won it. And we were told we were the -- we were second. We were -- in fact, they wanted to just buy some stuff from us but they weren't going to go with us. It's been a struggle. I don't really have any confidence that -- I tell them all the time, they're my organic growth engine and they need to grow 20%. But if they did 10%, and part of that would come from just a better economy, which I kind of expect to have in the second half, then they will have had a good year.

Okay. So the idea is kind of mid, high single digit-type growth but sustaining kind of an 8%-type margin just because that's kind of how the model works now?

Yes. And, Holden, that's a really good point. We could get more deals if we were willing to give it away. And we're just -- you know me, I'm all about margin. I'm all about 10% EBITDA. And they're already under that.

So, and I've got a really good manager that's managing that that's just sitting there saying, hey, we're not going to just take these deals for the fun of it. We're going to either be able to make some money or not. And it just seem like there's other people that are willing to just do it for nothing. And we're just not willing to do that. What that's done to us is that's relegated us down into the more medium-size accounts. And we're having some success there where we can really bring more value than just a cheaper price.

Okay. Last thing I'll jump in -- you talked about sort of the 10% EBITDA. You're there in 2012. Can you give a sense of what kind of the next bogey and the next objective and when you plan on hitting that since you've achieved now that original bogey.

Well 2016 we're going to be at $2 billion. And I think we'll still be in the low teens with EBITDA margins. I don't really -- based on our -- on the type of customers we deal with, you take A, B, C, D accounts -- we don't have a lot of C and D accounts. And so we have the larger accounts with more pressure on margins. I just think you're going to see us in the low teens.

And part of that will be -- I've been amazed -- I've thought it but when it happened I was still sort of surprised, I guess. But you know, scale's important. And scale's important with purchasing power and scale's important with SG&A expense. And both of those things add up to increased margins. And maybe I will surprise myself.

But that still amounts to like 50 to 70 basis points just linearly carrying it forward -- that's still amount to 50 to 70 basis points of margin improvement a year through that period. To get there. Right?

No. Not to go from 10 to 11. I mean, but --

But 11's not low teens, right?

(Laughter) Exactly. Well I'm at 10, you know. I mean the last two quarters we've been 10 -- 10.5 on average. So it's just going to be incremental. It's going to be pretty small, incremental improvement. I do think -- I think there's improvement. I'm not going to say there's not improvement, because there is. But--

Okay. Thanks, guys.

Yes. 2016 -- to hit $2 billion requires a 20% growth rate. And the 20% growth rate and the leverage we get across the organization, it will drive better margins.

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