DXP Enterprises Inc (DXPE) 2013 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the DXP Enterprises 2013 First Quarter Results Conference Call. (Operator Instructions). The conference is being recorded today, Wednesday, May 1, 2013.

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

This is Mac McConnell, CFO of DXP. Good evening and thank you for joining us. Welcome to DXP's First Quarter 2013 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. I 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 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 first quarter 2013 results. David Little will share his thoughts regarding the quarter's results. Then we will be happy to answer questions.

Sales for the first quarter increased 15% to $290.1 million from the first quarter of 2012. After excluding the first quarter of 2013 sales of $41.1 million for businesses acquired during 2012, sales for the first quarter decreased 1.3% on a same-store sales basis. This sales decrease is primarily the result of two less business days in the 2013 first quarter compared to the 2012 first quarter. Sales for supply chain services increased 1.9% to $38.5 million compared to $37.8 million for the 2012 first quarter. Sales in Innovative Pumping Solution products increased 5.3% to $41.5 million, compared to $39.4 million for the 2012 first quarter.

Sales by our Service Center segment increased 20% to $210.1 million compared to $175.1 million of sales for the first quarter of 2012. After excluding 2013 Service Center segment sales of $41.1 million for businesses acquired during 2012, Service Center segment sales for the first quarter of 2013 decreased 3.5% from the first quarter of 2012 on a same-store sales basis. This sales decrease is primarily the result of two less business days in the 2013 first quarter compared to the 2012 first quarter.

When compared to the fourth quarter of 2012, sales for the first quarter of 2013 decreased 1%. This decrease is primarily the result of a decline in sales of pump packages. First quarter 2013 sales by our Service Center segment increased 1.3% compared to the fourth quarter of 2012. Fourth quarter 2013 sales for Supply Chain Services increased 3.2% compared to the fourth quarter of 2012.

First quarter 2013 sales of Innovative Pumping Solutions products decreased 14.2% compared to the fourth quarter of 2012 due to the lumpy nature of fabrication of Innovative Pumping Solution pump packages. IPS revenues are dependent upon the timing of tender deliveries. The first quarter of 2013 IPS revenue is greater than each of the first three quarters of 2012.

Gross profit for the first quarter of 2013 increased 24.7% from the first quarter of 2012 compared to the 15% increase in sales. Gross profit as a percentage of sales increased to 30.7% in the first quarter of 2013, compared to 28.3% for the first quarter of 2012. This increase was primarily due to product mix, as well as contributions made by businesses acquired in 2012 with higher gross profit margin.

Gross profit as a percentage of sales for the first quarter of 2013 increased to 30.7% from 29.9% for the fourth quarter of 2012. This increase was primarily a result of product mix and increased margins by our safety business in Canada during the first quarter. SG&A for the first quarter of 2013 increased $14.8 million or 28.8% for the first quarter of 2012 compared to the 15% sales increase. This increase was partially the result of $12.2 million of SG&A expenses associated with the acquisitions completed during 2012. As a percent of sales, SG&A increased to 22.9% from 20.4% for the first quarter of 2013. This increase is primarily related to businesses acquired in 2012 having higher selling, general and administrative expenses as a percentage of sales, combined with increased health claims in the first quarter of 2013.

SG&A for the first quarter of 2013 increased $4.2 million or 6.7% from the fourth quarter of 2012. As a percent of sales, SG&A increased to 22.9% from 21.2% for the fourth quarter of 2012, primarily as a result of higher health claims, which were $1.6 million greater than they were in the fourth quarter and payroll taxes, which were $1.2 million higher than in the fourth quarter.

Interest expense for the first quarter of 2013 increased 96% from the first quarter of 2012. This increase was primarily due to the higher average outstanding debt during the period. The increased debt was incurred to acquire additional businesses during 2012. Interest expense for the first quarter of 2013 declined 3.3% from the fourth quarter of 2012, primarily as a result of reducing debt during the first quarter of 2013. Total long-term debt increased -- I'm sorry, total long-term debt decreased approximately $18.1 million during the first quarter of 2013.

During the first quarter of 2013, the amount available to be borrowed under our credit facility, increased approximately $23.8 million to approximately $133.4 million. This increase was primarily the result of the reduction in debt combined with the effect of the increase in accounts receivable within the asset, as is defined by our loan agreement.

Our bank leverage ratio was 1.76 to 1 at March 31, 2013. At March 31, our borrowings under the credit facility were at an average interest rate of approximately 1.9%. Capital expenditures for the first quarter were $2.4 million. Cash on the balance sheet at March 31, 2013 was $7.2 million. Accounts receivable and inventory balances were $189.3 million and $99.7 million, respectively, at March 31, 2013.

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. I'm not happy with the fact that our 12 straight quarters of growing the topline and bottom line was broken by our Q1 2013 results. Despite the economy's slowness, our total Company sales on a shipment basis, which would exclude percentage completion, would have been up sequentially 1%. The Service Center segment was up 1.32%, SCS sales were up 3.24% and without the percentage completion, IPS was down 3.55%. Percentage completion help smooth out revenues, when we all know that IPS can be lumpy because of the size of their orders and the delivery of vendor shipments of major components.

When we look at the first quarter of 2012, the economy was growing pretty substantially and it was especially growing in the oil and gas sector. Starting in the third quarter of 2012, the economy started to slowdown and continued to slow through the fourth quarter and as best described as choppy for the first quarter of 2013. When we try to evaluate the reasons in areas of industry and customer softness, we are perplexed, because our customers in the same industry are headed in opposite directions. One customer is growing and charging ahead and the next customer is in a slowdown mode.

When we look at DXP's sales for January, it started off strong for January and February finished weak and March was much better, but not as big as usual, of which I contribute some of this to the early Easter. The oil and gas market is surprisingly soft. Oil and gas prices are good, manpower and infrastructure are lacking in certain areas, rotating equipment is up quarter-to-quarter and sequentially, bearings and power transmission is down quarter-to-quarter, but up sequentially. This could be a sign that our OEM oilfield business is rebounding. Safety services is flat to slightly down, which is good when compared to the drilling activity which is obviously down.

Our competitors, unless they are in the construction business seem to be down, so I'm not sure why we seem to be in a slow growth and down economy and our customers are best described as choppy, some up, some down. Given our cautious optimism, we continue to think our growth strategies will outperform the market and our theme and plans to balance the market share should result in continued sales improvement.

We have added two more SuperCenters under construction. We continue to add inside and outside salesmen. We have a new location to be added in an underserved oil and gas market. We increase production capacity for IPS. We continue to strengthen our presence in Canada, and we have a strong balance sheet to pursue market share internally and externally.

Our bottom line was negatively affected by two IPS jobs with low margins. Healthcare claims are unusually large for the quarter, and anticipated increased corporate and personnel resulting in increased salary expense. The result in EBITDA margins was below 10%. This will be corrected in the next quarter. We're cautiously optimistic about the economy in the second half of 2013 and we're optimistic that we will outperform the market.

DXP looks forward to starting a new streak of sequential quarter-to-quarter growth, both topline and bottom line and we have growth strategies, both organic and through acquisitions to meet these goals.

Not a great start for 2013, but not all bad considering the economy was slower than anticipated and expenses were unusually high. Allow me now to focus on summarizing the activities within our three business segments, Service Centers, Supply Chain Services, Innovative Pumping Solutions. DXP Service Center segment. From Q4 of 2012 to Q1 of 2013, the Service Center segment sales increased 1.32% and operating income increased 16.66%. Comparing Q1 of 2012 versus Q1 of 2013, sales increased 20% and operating income increased 35%. Our Service Center leverage comes from the form of top-down commitment to sales and operational excellence, five technical product divisions and an acquisition strategy around technical products and services.

Our customer feedback in the oil and gas industry indicate softness overall, with upstream land-based drilling trend slightly down, midstream activity slightly up and downstream activity trending flat to slightly up. Food and beverage and mining are maintaining a flat presence, while the general industrial market is trending flat to slightly down. While overall we are experiencing softness in our end markets, our objective is to continue to grow by taking market share from small and medium size distribution that lack the breadth of technical products and services and technical expertise needed in this highly competitive market.

Stimulated by the record 2012 year and continued success in Q1 of 2013, we continue to refine and strengthen our Operational and Excellence programs. Both programs are critical as we continue to have strong organic and acquisition driven growth. These programs assist our teams in transforming market share into strong earnings growth by providing our service center network with education programs and resources to capitalize market opportunities. Our Excellence Program reinforces culture of adding value through collaborative efforts with our customers, suppliers and product divisions. We would like to formally recognize all our operational and sales excellence committees for their continued dedication and commitment to continuous improvement and success in the marketplace.

As a result of our continued growth, development and success, we are pleased to have National Process Equipment, Inc. as part of our DXP family, commonly referred to as Natpro. Natpro is a Canadian -- Canada's largest national distributor of pumps, compressors, services and repairs, integrated system packages and related process equipment.

We are starting our second quarter with 33 SuperCenters and plan to convert an additional eight by the close of the fiscal year. Two new in-process SuperCenter candidates were added during the first quarter and we continue to report steady progress on existing [platforms]. The eight in-process SuperCenters projected for completion in 2013 are expected to be completed in the third and fourth quarters.

Our current in-process SuperCenter pipeline is now grown to eleven. Collectively our investments have allowed us to take full advantage of leverage that we have created by offering an industry leading breadth of technical products and services. Our focus will remain on further strengthening our North American SuperCenter platform through the creation of super regions and SuperCenters that will provide sustainable benefits to the industrial customers looking to improve their overall production and financial performance.

Supply Chain Services, our Supply Chain Services grew -- fared moderately well in the first quarter of 2013. We are seeing an increase in opportunities for MROP supply chain solutions based on enhanced customer interest for cost saving solutions in a softening market. SCS was successful in completing the implementation of a large gas turbine refurbishing facility, (inaudible) added revenues in Q2, helping support our topline. SCS also showed success in securing and developing a supply chain solution for a leading beverage company's parts division. This solution is not only utilizing DXP's warehouse in the United States, but it also employs a partnership with Canada's largest logistics and transporting company to deliver parts throughout Canada. This joint venture has resulted in viable cost savings and a reliable delivery to the end user.

We are still seeing softening in markets such as oil and gas, transportation, military, defense, mining and now we are seeing the general manufacturing markets begin to slow. The advantage we see in this softening market is the heightened SCS customers opportunity funnel for cost saving solutions in MROP. This can also have an impact on SCS's existing business. This softening was recently exemplified, as it affected the SCS mining customers and decided to in-source their MRO base on decreased production, making it no longer feasible to outsource. The customer reallocated internal resources avoiding additional layoffs. The optimistic outlook for many customers in markets that are of our projections starting in Q3 of 2013. While continuing to stay cautious, the outlook is encouraging moving forward.

Our SCS team continues its quest for operational and sales excellence. We deliver tangible cost savings to our customers, while producing solid bottom-line results for DXP. We're excited that through our continued effort enhancing our technology platform, we have the ability to offer the low cost best service solution for our customers.

These benefits go beyond just procurement and warehouse transactions, to the extent that we have CMMS systems, RFID, bending solutions, online secured portal ordering, maintenance planning and other technical areas.

Our on-site [full flat] package, SmartSource, now has the technology capabilities to automate warehouse operation by providing our technological expertise through a single customized in-house source, eliminating the manual process. SmartSource provides information and services for demanding, planning and reducing transactions, inventory, personnel time hassles. This multi-faceted approach allows us to use maximum efficiencies and optimal control to maintain the entire supply channel. For the first quarter, we lost two sites and added one, giving us 61 site locations. We also have 100 on-site -- off-site locations.

Innovative Pumping Solutions, IPS segment financial results. Sales were up over Q1 2012, sales were down from Q4 of 2012. Sales can be lumpy, because of manufactured lead times of major components, internal capacity and customers unable to accept deliveries due to project site delays. Profits were down because of two unusual jobs with low margins.

Looking at the downstream oil and gas and mining sector, land-based, current order placement profile continues to be in the 100,000 or less range. We anticipate a large project dollar value orders to be placed in the remaining quarters of the year. Some large projects have been delayed. It has been difficult to determine the exact cause of delays in large project orders release that have been approved and quoted. Feedback from the marketplace indicates the customers are behind on field and site preparation. This is due to a lack of available and experienced manpower. Therefore, there is a reluctance to place orders for approved projects until they are closer to being caught up with the infrastructure.

The Eagle Ford, Permian, Marcellus, Bakken, Niobrara shale plays are continuing to provide opportunities for our modular equipment packages. In the Rocky Mountains and North Dakota regions, we continue to be successful with our production equipment design, laciness with modular housing units, majority of these units are being shipped to the Bakken and the Niobrara shale plays. We feel in the Eagle Ford, the Niobrara, the Bakken shale plays there's been a reduction in activity as it relates to pursuing production that is dry gas or gas that has a high content or producing water. If the gas has high distilled value or oil content, these projects are being pursued.

In the Middle East, we are actively involved in opportunities for our modular packages in this geographic region, we have received orders that will be shipped to this geographic region in 2013.

The Gulf of Mexico, this market has not moved forward as we had expected in Q1 as it relates to projects. Projects that were put in play in 2012 are still onboard at present time. At present, we are unable to determine from customers the exact cause or reason for the delays in moving forward. We remain confident this sector will result in substantial opportunities in the future.

Offshore Africa, there has been no change from our report at the end of Q4. 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 existing presence in production arena with DXP's product offering. We remain confident in our ability to get the opportunity to provide modular packages on these projects.

Midstream, we see the quoting activity in this sector related to oil and gas pipeline opportunity is riding up high. 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 requirements. The long lead time for our API, high energy equipment has a negative effect on getting orders for this type of equipment. The majority of the time the customer requirements are for shorter lead times than currently being quoted.

We feel our remanufactured product offerings and HP-Plus product lines will continue to provide opportunities in this area, 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, Marcellus pipeline applications. We have expanded this product offering to provide product applications designed for use on modular [LAC] units. This product allows for a much shorter delivery, more cost effective solution than a plunger pump or a high energy split case application. DXP has the product line to offer the customers an option in all of these product categories. API high energy, remanufactured API high energy, Plunger pump and HP-Plus.

Q2 outlook. Based on major equipment lead times and the customers' ability to prepare their field size in order to accept our modular equipment, it will be difficult to keep revenues from slipping. Production pump Snyder facility continues to operate at capacity. This business unit continues to take advantage of expanded capabilities in electrical control programmings, troubleshooting and installation staff. This has provided the opportunity for increased revenue in this area. HP-Plus continues to gain traction, midstream is strong, live projects are in excess of $80 million, our backlog is consistent at $60 million plus. This said, order placements are being delayed and customers are delaying shipments of our equipment. For this reason, our outlook is great long-term, but choppy for the short-term.

An update on our acquisitions. In the first quarter of 2013, we did not complete any acquisitions. However, subsequent to the quarter close, we completed the acquisition of National Process Equipment, Inc. Natpro acquisition closed on Tuesday April 16, 2013 and we will start financial reporting in Q2 of 2013. Acquisitions completed in 2012 contributed $41.5 million in sales in Q1 of 2013. 2012 acquisitions included Mid-Continent, Aledco, Force, Pump & Power, Industrial Paramedic Services, Austin & Denholm and HSE.

Highlights from our recent Natpro acquisition include the following. Natpro is Canada's largest national distributor of pumps, service and repairs, integrated system packages, compressors and related process equipment. The last 12 month sales and adjusted EBITDA at acquisition were $69 million and $5 million respectively. They have eight locations in Canada, six service centers, two fabrication centers and one sales office, established DXP as a leading rotating equipment provider in North America. We have a dominant number one market share. We're excited to have Natpro as part of our DXP family. Natpro is another exciting edition to DXP in our recent growth in Canada. Gaining a national pump distributor in Canada is critical to our North American expansion plans. We are especially enthusiastic to now offer a complete North America offering of rotating equipment.

Since Q4 of 2011, we have completed 10 acquisitions. DXP's acquisitions are focused on adding scale and geographic reach to our product divisions, as well as establishing DXP's business presence across North America. Overall, we are pleased with the acquisitions we have completed since Q4 of 2011, and we remain excited about our pipeline. We continue to see opportunities in the United States and Canada. During the reminder of 2013, we anticipate closing three additional acquisitions through the year.

In conclusion, I believe that DXP people are performing the best they can, given the economic environment. Battling for market share in what I would best describe as a choppy marketplace has its challenges. I believe DXP people are up to the challenge and I look forward to a rewarding year.

We're now open for questions. Thank you for listening.

(Operator Instructions). Matt Duncan, Stephens.

Good afternoon, guys.

Hey, Matt.

The first question I've got is really just about the trends that you're seeing in the business. Can you talk -- you mentioned that January was a little lower, February is down, I think it was a little better on a sales per selling day and then maybe March was better than that. What have you seen into April in that regard?

Well, first of all, I think we had a fantastic January, by the way, and especially for our January start of the year, when every company in the world is trying to get everything they can out of the previous year. And then February was good, but it closed soft and then March was up substantially, but maybe not up as substantially as we had hoped. And then I would say April has been okay.

Okay. Mac, is there any way that you can quantify the impact of the timing of the Easter holiday? I know you guys take Good Friday off and that would have been one of the fewer selling days that you had, this year versus last, but is there any way to sort of quantify in dollar terms what the timing of Easter may have done to your revenues this year versus last, and shouldn't that be a tailwind here in April?

I mean, average sales per day were like $4.7 million for the quarter, so that would be the easy math.

But given that it was the last selling day of the quarter, would that not result in maybe it having a bit bigger impact in just the average day?

Well, if it were to the extent that people took Friday and Thursday off, they were getting ready for a long Easter holiday and as you know, Easter is a time for family travel. So, I would think it could not have helped.

Okay. And then, David, moving onto the Innovative Pumping Solutions business, it sounds like you are expecting a little bit of a sequential decline there, again, 2Q versus 1Q. Is there any way to quantify how much you think it might be down? And then it also sounds like you would expect that to bounce back in the back half of the year. Is that sort of a fairway to look at the shape of the year there?

I think our second quarter will be flat with our first quarter and then I were a little concerned about what the economy is doing and why the customer seems to be reluctant to release orders for projects that have been approved. And so, I think we have good color on second quarter and probably most of the third quarter. It's just that we're a little concerned going forward. So all that could change. I mean we did -- last quarter we talked about an order with Shell in Alaska off the Coast. That's been on hold because of permitting. We expected to get that order in the first quarter, we didn't. We got a $1 million order for some HP-Plus units, we got a couple million dollar order that I believe was going to Africa or the Middle East, somewhere over there. That happened a long time. There are some large orders that (inaudible) on the Gulf Coast, but they haven't released them yet and we really thought that they would. So I think we're a little more concerned about the reverse, where business should be okay next quarter. And then it may or may not tail off towards the end of the year.

Okay, but just too early to really tell. It depends on these projects that are in the holding pattern get released or not?

Exactly.

Okay. And then moving on to the Natpro acquisition, you talked about that a little bit, but I'm hoping maybe you can talk more about the strategy there. Obviously before this deal, if I remember correctly, through Austin & Denholm you guys only had two locations up in Canada. This sounds like it's going to add six more service centers. So you've got a little bigger footprint, but relatively small that you can add some products to. Those guys are a pump distributor, but given that you have a large safety services business in Canada, is there any plan to go in there and add some safety products to that Natpro footprint to try and sell those to the customers that are customers of HSE and IPS up there?

I think no. I think the answer to that is no. I think that said, we don't really have the logistics model down at this point to sell safety supply. And so, we are safety service company up there and so, services are sold a little different than what our SuperCenters typically do. That said, there is some really nice synergies. We are ecstatic about Natpro has only been in the fabrication, IPS type business for the last couple of years and are still ramping up. And so, we think there is best practices there, we think there is things we can do to make them more competitive with our purchasing power of valves and type and things along those lines. So we are really, really pleased with that.

And then we know that our bearing business goes in pumps and so there is opportunities along those lines. So there are some nice things that we can do to make Natpro's gross margins go up and so we are excited about that. We are excited about them learning to leverage their national footprint a little better. They are from the East Coast to the West Coast and they've got it all covered. And there are some product lines that we can work on together, us obtaining something they have and we obtaining something they have through authorization of the manufacturing, we're not just shipping out of our territory stuff like that. I don't want to give anybody that impression, because we're not going to do that, but getting authorized in each others territories. So, there is plenty of opportunity within the rotating equipment division that we're excited about.

Okay.

We'd now go on to other products.

Okay. And the last thing for me and I'll hop back in queue. The SG&A cost obviously jumped quite a bit sequentially. You mentioned that there is -- Mac, there is a couple of things going on with healthcare cost and payroll taxes, but it also sounds like maybe there was some headcount additions. David you made the comment that you were below a 10% EBITDA margin this quarter, but you are going to fix that in the 2Q. Should we take that to mean that you are looking at some fixed cost reductions to help in that regard or do you think it's really just a matter of leveraging a higher sales number?

I think it's a matter of leveraging a higher sales number. I think we add the expense and sales [comes] after the fact. So I think we will slow down our growth machine appropriately, but we went into thanking -- we knew that the fourth quarter was soft and we knew that the first quarter was going to be soft as well. What we didn't know was the softness that was coming out of the oil field and we didn't know that the softness would be quite as severe as that ended up being. So I think our headcount, which you know is -- I've got that number somewhere -- is easily up 40 people or something like. It's not that we're going to cut back issues that will slow down the growth of our headcount to be more appropriate what the economy has given us.

Okay. All right, thanks for all the color.

Joe Mondillo, Sidoti & Company.

Good afternoon, guys.

Hi, Joe.

Hi, Joe.

In terms of -- I missed when you talked about the IPS profitability in margins. I was wondering if you could just go over that again and if you expect that margin to sort of bounce back going forward?

Yeah, IPS had a couple of jobs. We made lower margins than we expected to make or that we typically quote at. One of the particular reasons for it and this is just one of those things that happen, so that's unusual. So we do see margins coming back. We are not trying to cut price to get business, there is plenty of business that we can just get the customer to let it, release it.

Okay, sort of looking, going forward, are we sort of thinking maybe high teens, but maybe a little under that 20% rate that we saw in the fourth quarter?

I am trying to rework on my operating income number here. So I got operating income of IPS in this 20% to 19% range and I think we should -- there aren't any reasons to expect that to be lower.

Okay.

Somewhere between 18.5% and 20%.

Back to the -- get close to the -- back to the 2012 operating income levels.

Okay. And just could you -- I understand what's going on IPS and seems like there is certainly a slowdown. What did the backlog look like at the end of the first quarter compared to the end of the fourth quarter, was it is sort of flattish and that's why going forward, you sort of thinking a flat second quarter, and then hopefully we see improvement in the back half?

Yeah, I think in the fourth quarter we said, we had a 60-plus backlog, and at the end of the first quarter, we still have a 60-plus backlog.

Okay. And then in terms of the pieces of that business, you go over a lot of different sort of pieces geographically. Could you talk about what's sort of driving the major part of that business right now? Is it mostly U.S. upstream oil and gas, and then you're expecting that Middle East comes in, Africa comes in, the Gulf of Mexico comes in or are you seeing benefits from all those pieces currently?

Well the emerging markets is always part of our plan, but it's restricted basically to the major oil companies. The customer takes us there. We don't have salesmen in the Mid East or anything like that. So through Chevron or Shell, somebody says, look, DXP is our preferred supplier of modular equipment and we want them to do the work. So that we get pulled there. So it's a matter where the major oil companies have projects that will drive those sales in those areas. And that's what we call our Gulf of Mexico and offshore industry group of people headed up by Tom Atkinson and a group of a people they call them engineering contractors in the major oil accounts. The on-land stuff is really done mostly by our service centers and the pump salesmen they have in those areas and that's driven by these shale plays and the infrastructure, it's not drilling, we're not typically on the drilling side, we're on the production side. So, we're on the small gathering facility in a field or a bigger gathering facility or a terminal or something like that and that's mostly described as midstream. And that infrastructure is very solid. Even though drilling rig count has been down, it's been down for a while.

The infrastructure backlog is still there and the companies are having trouble, because a lot of these plays are in places, they don't have big populations of -- certainly of technical people. So there is kind of this backlog of building this infrastructure. So, we're referring to the fact that the production facility is on the drawing board and it hasn't been started, because they're behind on their site preparation. And so, they are delaying our shipments to those projects. But that's going to be strong for quite a long time.

Okay. So, even if we don't see a rebound in drilling or the rig count, you still expect at least a year out of strength in that infrastructure part of the of the market?

Yes, more than a year actually, yes.

Okay.

And by the way -- I mean, that's somewhat based too on the fact that -- I said drilling is down, I mean, so it's down from 2,000 rigs to 1,700 rigs, there are still 1,700 rigs punching holes out there. So it's not like the business -- it's not like they're not building new fields or developing new fields, they are, it's just at a slower pace than it was a year and a half ago or two years ago.

Okay. And then just to jump on the SG&A just one last time, as a percent of sales it's obviously going up the last few quarters, and it seems like you are sort of working -- I mean, service centers, organic growth was sort of flat to down this past quarter. IPS seems like it's going to be flat into the second quarter. It doesn't seem like we're going to see the volume improvement, substantially anyways, until at least sort of the back half of the year. So are we expecting sort of that SG&A as a percent of sales to not sort of tick down until that back half of the year?

I think what we said was that we had some unusually high items that we hope will not reoccur and that was in healthcare, payroll taxes and high growth rate of our payroll.

But if your headcount is flat, will those costs still remain?

Yes it will, Yes and no. I mean we don't -- the healthcare is claims. I mean it's actually --

Yeah, I mean the claims between first quarter and -- increased from the fourth quarter by 76%, and we didn't miss that out with any more people.

Okay.

Yeah, we're self insured, so we are paying the claims.

Okay, okay.

And so that's way it's not like we've got an insurance policy over here and it's just per person kind of deal.

And the payroll taxes compared to a year ago went up substantially as compared to the fourth quarter. It's normal. There are a lot payroll taxes that are based on lower dollars of income and they go down as you go through the year.

Okay, got you, so that sort of $3 million might be cut in half or --

I hope so.

Okay.

Yes, we certainly hope so.

Okay, I'll hop back in queue, thanks a lot guys.

Bye then.

(Operator Instructions) Holden Lewis, BB&T.

Thank you. Good afternoon.

Hi, Hold.

The gross margin, tough quarter, but the gross margin did very, very well. Yeah, I guess you kind of sighted perhaps a little bit of mix, I thought maybe you could give a little color there. Is that just acquisition, or is there something else kind of in the mix that we should be aware of? But I was also curious about the pricing software. It seems like that received some credit for margin improvement in Q4, but you didn't really sight it in Q1, and I'm curious if it -- how sustainable this 30.5% to 31% gross margin is, or it might trend lower going forward?

Yeah. I'll start with answering some of it. I mean our margin was higher in the fourth quarter also, and that somewhat coming form the acquisitions that have occurred during 2012. And then addition in Q1, we found that our safety service businesses that we bought in Canada, they're selling labor and selling equipment rental. And so, when their revenues go up, which they did in the first quarter compared to the fourth quarter, their gross profit margin also goes up. And so, some of that if -- since the first quarter is their best, it can be their best quarter. There could be a seasonal factor to gross profit that we hadn't experienced before. And so, if their sales were to go down in the second quarter with the spring thaw, then their gross profit margin is also would be expect to go down with it.

And then lastly, I'll speak to P2. Our compliance to P2 is up. Over the last three quarters, our improvement is almost 1% a quarter. But we have to discount that and only 10% to 15% of our business at this point is being run through P2. So, our next phase is to get a bigger chunk of our business. But we're just now attacking sort of the smaller accounts in the low hanging fruit.

So, when you say that the improvement is a 100 basis points, you're talking about your margins on that 10% to 15% are up 100 basis points or company wide they're up 100 basis points because of?

No, 100 basis points of that 10% to 15%.

For that 10% to 15%, okay. Got it. They're really only getting -- okay.

Yeah, we're only getting, yeah, like 15 basis points of overall margin enhancement.

So, that gross margin is probably seasonally inflated. Do you have a sense of where that goes, sort of in the -- through the balance of the year, as you are getting better feel [for steadying] business, give a sense of where that goes the rest of the year?

Well actually like 30%, but I can't promise. As always, this is my target forever, Holden, but it's going to go down a little bit because of safety services, there is no question about that.

And then safety services are in the MRO business. I mean traditionally you have seen the MRO margin increase from Q1 to Q2, but I guess that typical pattern might not occur here?

I want to give you the magnitude of that, though. Let's say HSE and the Paramedic business up there will have -- that's $125 million worth of MRO business on a yearly basis, so we are talking about a quarter where it goes down. So I think you've got to take some percentage of that, so let's say it goes down a couple of percentage points, so -- and a quarter of that would be --

So 50 bps kind of thing?

Yeah, yeah. It's not just a killer, we are not talking about here.

Got it, okay. And then you touched on some nice sort of boundaries around Natpro. What was the accretion that you are expecting in 2013 or today?

It's like $0.01 a quarter. At macro it depends what we do with it. If we can get all these synergies, expand our pump business then we'll get more, but right now it's sort of that stuff.

We're doing nothing with it, it's about a $0.01 a quarter, or $0.03 to $0.05.

Okay. All right, fair enough. And then, yeah, I guess that's all I have. Thanks guys.

Thank you, Holden.

Matt Duncan, Stephens.

Is there any way to quantify the -- Mac, you gave us the acquired sales number in the quarter. Do you know how much they added altogether to earnings in the quarter?

Okay.

Just sort of what the collective EPS accretion would be?

Okay, yeah, I've got that, I'll have to find it.

While you are at that, David, maybe if you can, you said you do expect to close probably three more deals here in 2013. Most of the ones you've been doing more recently have been anywhere from sort of, call it, $6 million to $8 million of revenue year, all the way up to the HSE deal, which was a little bit bigger than usual, but the sweet spot seems to be kind of $10 million in sales to call it $50 million. Are all three of those probably going to fall in that type of size range? Are there any bigger ones in there?

$10 million to $15 million.

$10 million to $15 million in annual revenues each?

Yeah.

Okay. So, these are smaller transaction that's you are looking at right now.

Right.

And then back to the EPS accretion.

Well I'll give you the -- this is my math, includes interest on the acquisitions, and increased amortization of interest in our debt issuance cost that came because of the acquisitions.

Sure.

And I'd say, during the quarter they added $1.9 million or almost -- somewhere between $1.8 million to $1.9 million of pretax income.

Of pretax okay, okay. And the same tax rate, I would assume would apply to those that are applied in the rest of the business?

Yeah. Yes, because it's the matter of U.S. and Canada normally.

Okay. So that looks it's about a combined $0.08 of EPS accretion okay. Thanks.

Thank you. Ladies and gentlemen, there are no further questions at this time. That does conclude our conference for today. Thank you very much for your participation and at this time, you may now disconnect. Have a great day.

Thanks.