DXP Enterprises Inc (DXPE) 2013 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the DXP Enterprises, Inc., 2013 second-quarter 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 conference is being recorded today, August 1, 2013.

I would like now to turn the conference over to our host, Mac McConnell, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

This is Mac McConnell. Good evening and thank you for joining us. Welcome to DXP's second-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 second-quarter 2013 results. David Little will share his thoughts regarding the quarter's results, then we will be happy to answer your questions.

Sales for the second quarter increased 17.6% to $307.9 million from the second quarter of 2012. After excluding second quarter of 2013 sales of $45.3 million for businesses acquired, sales for the second quarter increased $700,000, or 0.3%, on a same-store sales basis. This increase is primarily the result of two more business days in the 2013 second quarter compared to the 2012 second quarter.

Sales of Innovative Pumping Solution products increased $17.8 million, or 50.5%, to $53 million, compared to $35.2 million for the 2012 second quarter. After excluding 2013 IPS segment sales of $7.9 million for businesses acquired, IPS segment sales for the second quarter of 2013 increased $9.8 million, or 28%, from the second quarter of 2012 on a same-store sales basis. This increase resulted from increases in capital spending by our oil and gas and mining-related customers.

Sales by our Service Center segment increased 18.4% to $217.9 million, compared to $184.1 million of sales for the second quarter of 2012. After excluding 2013 Service Center segment sales of $37.4 million for businesses acquired, Service Center segment sales for the second quarter of 2013 decreased $3.5 million, or 1.9%, from the second quarter of 2012 on a same-store sales basis. This sales decrease is primarily the result of lower sales of bearings and power transmission products to oilfield equipment manufacturer customers.

Sales for Supply Chain Services decreased $5.5 million, or 13%, to $37.1 million, compared to $42.6 million for the 2012 second quarter. This decrease in sales is primarily related to declines in sales to customers serving oil and gas, military, mining, and truck manufacturing markets.

When compared to the first quarter of 2013, sales for the second quarter of 2013 increased 6.2%. After excluding second-quarter 2013 sales of $15.3 million from acquired businesses, sales for the second quarter increased $2.5 million, or 0.9%, on a same-store sales basis.

Second-quarter 2013 sales of Innovative Pumping Solutions products increased $11.4 million, or 27.5%, compared to the first quarter of 2013, primarily due to our acquisition of Natpro. Excluding Natpro sales, IPS sales increased $3.5 million, or 8.4%, compared to the first quarter of 2013.

Second-quarter 2013 sales by our Service Center segment increased $7.8 million, or 3.7%, compared to the first quarter of 2013, primarily due to our second-quarter acquisitions. Excluding sales of $7.4 million from our second-quarter acquisitions, Service Center segment sales increased $400,000, or 0.2%, from the first quarter of 2013.

Second-quarter 2013 sales for Supply Chain Services decreased $1.4 million, or 3.7%, compared to the first quarter of 2013. The decrease in sales is primarily related to declines in sales to customers serving the oil and gas, military, mining, and truck manufacturing markets.

Gross profit for the second quarter of 2013 increased 19.4% from the second quarter of 2012, compared to the 17.6% increase in sales. Gross profit as a percentage of sales increased to 29.7% in the second quarter of 2013, compared with 29.3% for the second quarter of 2012. This increase was primarily due to contributions made by businesses acquired since June 30, 2012, with higher gross profit margins.

Gross profit as a percentage of sales for the second quarter of 2013 decreased to 29.7% from 30.7% for the first quarter of 2013. This decrease was primarily the result of declines in GP --- in gross profit percent for the IPS and Service Center segments.

SG&A for the second quarter of 2013 increased $12.5 million, or 22.4%, from the second quarter of 2012, compared to the 17.6% sales increase. This increase, this $12.5 million increase, is the result of the $13.7 million of SG&A expenses associated with acquisitions completed during 2012 and 2013.

Excluding expenses from businesses acquired on a same-store sales basis, SG&A decreased by $1.2 million, or 2.2%. This decline is primarily the result of lower health claims and commission expense in the 2013 quarter. As a percentage of sales, SG&A increased to 20.2% from 21.3% for the first quarter of 2013. This increase primarily related to businesses acquired since June 30, 2012, having higher SG&A expense as a percentage of sales.

SG&A for the second quarter of 2013 increased $1.8 million, or 2.8%, from the first quarter of 2013. After excluding expenses of businesses acquired in the second quarter of $4.1 million, SG&A declined $2.2 million, or 3.3%.

As a percentage of sales, SG&A decreased to 22.2% from 22.9% for the first quarter of 2013. This decrease is primarily the result of the first quarter incurring higher medical claims and payroll taxes.

Interest expense for the second quarter of 2013 increased 122% from the second quarter of 2012. This increase was primarily due to higher average outstanding balance of debt during the period. The increased debt was incurred to acquire businesses during 2012 and 2013. Interest expense for the second quarter was consistent with the first quarter of 2013.

Total long-term debt increased $8.9 million during the first six months of 2012. During the first six months -- sorry, I should have said during the first six months of 2013. During the first six months of 2013, the amount available to be borrowed under our credit facility decreased approximately $3.9 million to approximately $105.7 million. This decrease was primarily the result of paying $42.1 million for acquisitions during the second quarter, partially offset by debt payments made with cash provided by operations and the effect of increased accounts receivable and inventory balances within the asset test, as defined by our loan agreement.

The bank leverage ratio was 1.94 to 1 at June 30, 2013. At June 30, our borrowings under the credit facility were an average interest rate of approximately 1.8%.

Capital expenditures were approximately $2.1 million for the quarter. Cash on the balance sheet at June 30, 2013, was $12.1 million. Accounts receivable balances were $188.6 million and the inventory balance was $108.8 million at June 30, 2013.

Now, I'd like to turn the call over to David little.

Thanks, Mac, and thanks to our participants on our conference call today.

To grow sales 17.58% and net income 12.91% year over year, and sequentially sales growth of 6.15% and net income of 3.91%, in this economy of low inflation and low GDP is a nice accomplishment, and I'm pleased. How we got there and how it could have been even better is exciting.

First of all, we all know that the second quarter in Canada is their slowest quarter. And then, you add the unfortunate flooding and bad weather. Sales ended up being much lower than we had expected. We look forward to increased sales through the rest of 2013 from our Canadian friends.

The second event is the oilfields improved the productivity of their drilling and production, which had a big effect on our OEM customers, and they have had to slow their production of equipment to reduce their overbuilt supply. The good news is we think this is over and we see signs of them ramping up production again, which is good for us.

Third is our Supply Chain Services, which has struggled with customer consolidations caused by the flat market, which is bad, but the same flat market or slow growth is causing new customers to look at our services because we can save them money, which is good.

The fourth is our acquisition program is how we will grow even in a flat market, and our pipeline of targets is growing, which could be caused by the world's slow growth.

In conclusion, we are optimistic about organic and external growth in revenues in the second half of 2013. As to the bottom line and EBITDA margins, we expect gross margins, which were down 1% for the first quarter, to be under pressure, caused by market conditions being slow. As we battle our competitors for market share, I'm not surprised at this result.

In addition, lack units being sold by IPS are at lower margins and our Natpro acquisition has lower gross margins, which we will improve over time.

Expenses as a percent of sales are down some, but are higher than optimum because we continue to invest in our growth strategies, which will pay off in the future. This is a great time to be investing in our future where our small competitors are just trying to survive. This results in EBITDA margins being slightly lower than we would like, but we will have positive results when the economy starts growing again.

Our return on invested capital continues to be strong at 30.5% after tax. We continue to be focused on asset management and cash flow. With DXP's debt leverage ratio of 1.94 to 1, our balance sheet as strong and we have substantial dry powder to fund future organic and acquisition growth.

In the second quarter of 2013, we completed two acquisitions -- National Process Equipment, Inc., called Natpro, and Tucker Tool, and Alaska Pump & Supply. That actually makes three. So subsequent to Q2, we completed the acquisition of Tool Tech Industrial Machine & Supply. Tool Tech will begin financial reporting in Q3 of 2013.

Including the Tool Tech acquisition, DXP has acquired over $107 million sales, or 9.7% of 2012 DXP sales of $1.1 billion, which, you all know, 10% is typically our goal. Acquisitions contributed $45.2 million in sales in Q2 of 2013 and $86.4 million in sales year to date.

Highlights from our two recent acquisitions include the following. Tool Tech, a leading provider of cutting tool, abrasive coolant, machine shop, and industrial supplies focusing on serving the oil and gas, machining, aerospace, and industrial markets.

Both LTM sales and adjusted EBITDA of $12.8 million and $1.4 million, respectively. Single load patient serving the San Antonio market and surrounding Southwest market. Provides additional scale to our metal-working division and deepens our market presence in Texas.

Alaska Pump. Alaska Pump is Alaska's largest distributor of pump products and related process equipment, serving the commercial, municipal, and industrial markets, and the LTM, sales and adjusted EBITDA of $16.1 million and $2.4 million, respectively. It has one location, in Anchorage, Alaska. Enhances our rotating equipment product offering and adds geographic reach to our Western region.

Tucker Tool, leading provider of cutting tools, machine-shop industrial supplies, focusing, servicing the chemical, oil and gas business, power generation, and transportation markets. LTM sales and adjusted EBITDA of $8 million and $1 million, respectively. Complements our growth of metal-working division and deepens our market presence in the Northeast region.

Natpro. Natpro is Canada's largest national distributor of pumps, service, and repair, integrated system packages, compressors, and related process equipment. LTM sales and adjusted EBITDA at acquisition of $69 million and $5 million, respectively. Eight locations in Canada, six service centers, two fabrication centers, and one sales office. This establishes DXP is a leading rotating equipment provider in North America with number one market position.

Overall, we were pleased with the acquisitions we have completed this year and we remain excited about our pipeline. We continue to see opportunities in the US and Canada. While we have our goal for 2013 met, we currently anticipate closing additional acquisitions.

Allow me now to focus on summarizing the activities within our three business segments -- Service Center, Supply Chain Services, and Innovative Pumping Solutions.

DXP's Service Center segment. From Q1 of 2013 to Q2 of 2013, or sequentially, the Service Center segment sales increased 3.72% and operating income decreased 6.66%. These results would have been better if not for Canada-related weather and the oilfield OEMs that are burning through their overbuilt inventory of equipment. Comparing Q2 of 2012 versus Q2 of 2013, sales increased 18.37% and operating income increased 3.93%.

We are cautiously optimistic that our oil and gas customers will increase activity in the second half of this year, with upstream land-based drilling starting to trend slightly up, midstream activity trending slightly up, and downstream activity trending flat.

Food and beverage and mining are maintaining a flat presence, while the general industrial market is trending flat to slightly down. While we are experiencing softness in some of our end markets, our objective is to continue to grow by taking market share from small and medium-sized distributors that lack the breadth of technical products and services and technical expertise needed in this highly competitive market.

We continue to refine and strengthen our operational and sales excellence programs. Both programs are critical as we continue to have strong, organic, and acquisition-driven growth. These programs assist our teams in performing market-share gains into earnings growth by providing our Service Center network with education programs, resources, and capitalizing on market opportunities.

We would like to formally recognize ourselves our Sales Excellent committee for their successful integration of an enhanced onboarding workshop and technical training curriculum. The improvement will allow us to onboard and train new sales professionals and add efficiency and effectiveness.

As a result of our continued growth, development, and success, we're pleased to add Tucker Tool, Alaska Pump, Tool Tech as part of the DXP family. Tucker Tool and Tool Tech will complement and enhance our product offering, market presence, and key relationships in the Pennsylvania and Texas markets, adding scale to our DXP metal-working division, while Alaska Pump will complement and enhance our rotating equipment product offering to add scale to DXP rotating equipment division in the Western region of the United States. We look forward to their positive contribution and our future growth together.

In Q2, our Southwest management team successfully elevated our Abilene, Texas, service center to a supercenter status, broadening our opportunities. We would like to recognize our employees, customers, and suppliers in the Abilene market for their dedication in helping us create our latest supercenter. We presently have 34 supercenters, 10 in progress. Five in-progress supercenters are projected for completion in the third and fourth quarters of 2013.

Collectively, our investments have allowed us to take full advantage of the leverage we've created by offering an industry-leading breadth of technical products and services. Our focus will remain on future strengths of our North American service center platform through the creation of super regions and supercenters that will provide substantial benefits to the industrial customers looking to improve their overall production and financial performance.

Some data points here, service centers in America, United States, is 130. Service centers in Canada is 34. Supercenters, 34; supercenters in progress, 10; distribution centers, seven; fabrication centers, 10; and we are in 35 states.

Supply Chain Services. Our Supply Chain Services segment for Q2 of 2013, compared to Q2 of 2012, decreased $5.5 million for a negative 13% and operating profits were down 19%. Q2 of 2013 compared to Q1 of 2013, sales decreased $1.4 million, or negative 3.67%, and operating profits decreased 0.86%.

We've managed to maintain a healthy bottom line through Q2. SCS has LOIs on several new deals with implementations beginning in late summer. Based on enhanced product interest for cost-saving solutions and a soft market, we're still seeing an increase in opportunities for MROP supply chain solutions.

SCS has successfully been completing the implementation of a large gas turbine manufacturing facility, adding revenues in late Q2 and helping support our topline. This helped us maintain revenue with plant closings and consolidations we're seeing in several industries. We have a number of customers that are under contract that have not set a date for implementation, due to economic conditions and union-related issues.

There are still rough conditions in markets such as the oil and gas, transportation, military, defense, mining, and now we see the general manufacturing markets begin to flatten out. With that being said, we have some bright spots of one of our large oil and gas service companies revising their Q3 and Q4 billed forecast up by 12%.

Sales and marketing of SCS has been a top priority by everyone on the team. We are in a unique position to offer cost savings with the first product and expertise in a time when the customers are looking at leaning their supply chains. We've seen a healthy increase in opportunities and expectations to take market share from our competition high in the second half of the year.

We have invested additional trainees that have come on board the SCS team over the last year that will help grow our sales force and operations in the near future. These trainees are instrumental in the implementation of our new sites in Q3 and Q4.

IPS segment. Q2 update and Q3 outlook. IPS continues to perform with a sequential growth of Q2 from Q1 increasing sales 27.53% and operating profits of 13.68%. Q2 of 2013 compared to Q2 of 2012, sales increased 50.54% and operating profits increased 16.62%.

Upstream oil and gas and mining sector, land based. Quote activity and order rate in this sector remains strong. We are very optimistic this profile will remain consistent with Q2 performance through Q3. We have experienced an increase in quoting activity towards the end of Q2.

Mining, we had significant success in this sector in Q1 and Q2. We are confident this will continue in Q3. Most of the success has been in copper mines in the Southwest and in Mexico.

Midstream sector. Today, this sector is our top-performing sector as it relates to quote activity. Orders received, future order potential, the Eagle Ford, Permian, the Bakken, Niobrara are providing the majority of this activity. The Marcellus continues to provide opportunities, however not at the rate of the Eagle Ford and the Bakken and the Niobrara and Permian.

The majority of the products being quoted and sold in the Bakken and Niobrara are associated with lack units being produced at our Golden fabrication facility. We are supplying equipment for the terminal loading and off-loading facilities utilizing our centrifugal packages that are being fabricated in the 529 Houston and Golden, Colorado, locations.

Our lack units being produced in west Texas are being utilized in the Eagle Ford and the Permian shale play. The success of our new trailer-mounted lack unit head that we have designed at our customer's request and resulted in follow-up unit orders. Our trailer-mounted lack unit is currently being fabricated in production pump Snyder location.

The Eagle Ford and the Permian shale play activity has a large component associated with our horizontal pumping equipment. The horizontal pump equipment is being utilized in the lack unit process and pipeline application. Our centrifugal equipment is being utilized in the gathering system locations, truck loading and off-loading systems, as well as the booster systems for our horizontal pump applications. Our high-energy multistage equipment is being utilized in the pipeline transportation and [bolsterization] application, as well as DXP's offering with our remanufactured high-energy multistage equipment.

We are currently providing delivery of our horizontal pump and centrifugal pump equipment in a remanufactured high-energy pump with lead times that are attractive to our customer base. We are very optimistic about our midstream opportunities that will remain strong through the second half of the year.

Gulf of Mexico. This sector continues to remain soft. There are signs that some projects for new platform sites will be put out for an RFQ in Q3 and Q4. Purchase orders for these will not be rewarded -- awarded in 2013. There are a couple of platform upgrade opportunities that have been quoted and have been in the works for a while and show some promise of moving forward in Q3 and Q4.

Offshore Alaska. This was a previous opportunity that was put on hold due to permitting. Permits for this opportunity have been issued now for this project and it shows signs of moving forward. We are optimistic about our chance of success in this opportunity.

We're optimistic that Q3 will remain robust, with our products and services supporting the major US oil and shale gas plays in upstream and midstream markets, and in Southwest and Mexico mining markets. When the Gulf of Mexico decides to wake up, we are poised and ready to respond quickly to support our customers that operate in this market.

In conclusion, it will take more than a choppy market to slow DXP's growth. We have too many growth strategies to employ, such as supercenters, five product divisions, breadth of technical products and services, geographic expansion, market expansion, and acquisitions. Please note that acquisitions are not a one-time event at DXP but are how we expand our product divisions, grow supercenters, and expand geographical presence.

When we organically grow the --- then, let me rephrase that. Then we organically grow the acquisition by adding new product divisions to their customers. This creates a win-win for us and them.

I would like to thank and welcome all our new acquisitions and thanks, everyone, at DXP for their efforts of doing a great job executing DXP's growth strategy. We are now open for questions.

(Operator Instructions). Matt Duncan, Stephens Inc.

The first question I've got, Mac, how did the sales trend month to month through the quarter and what does July look like for you guys? Did you see --- it sounds like from the press release maybe you saw a little bit of momentum building in the quarter.

Hold on, I've got the right schedule here for sales per day in the first quarter. They were --- in April of 2013, $4,508,000; May, $4,705,000; June $5,262,000.

And of course, the last month of a quarter for us, we ship --- tend to ship more of our Innovative Pumping Solution packages, and so they get skewed a little bit.

Okay, and then as you look at the Service Center business, maybe, is that showing a continued progression into July? I mean, obviously, it probably would normally anyway from the end of a quarter to the first month of the next one. It might tick down a little bit, but are you still feeling good that that momentum can continue here in the back half?

The packaging business, Innovative Pumping Solutions comes into play. It appears that the business was really strong in June and wasn't strong in July, which is what we'd expect. The rest of the business look like it was flat to up. I mean, it looked like it built a little bit.

Okay, and then, a couple questions on some of the acquisitions. I don't guess I remember hearing about the Tool Tech deal. I don't think you guys issued a press release on that one. Is that something you guys have just closed? When did that (multiple speakers)

It closed yesterday, last night, actually. The wires were sent at 4 p.m. yesterday.

Okay, so Tool Tech closed last night, all right. And then, the revenues for that, then, are going to kick in as -- you'll have two months of revenues there?

Yes, that's correct. And Alaska Pump was on August -- I mean, July 1 or something like that. It was a July acquisition.

All right. And then, on Natpro, I guess I remember when you guys closed that deal, David, that one was a little bit more of a Service Center-based business and a little less on Innovative Pumping Solutions. But it looks like this quarter, it was about 50%-50%. Is that what the mix is likely going to be like there going forward or was this maybe a seasonal deal in the Service Center business where Canada would be soft in Q2 and it should get a lot better for their Service Center business for the balance of the year? How do you think their revenues are going to split up at Natpro going forward?

I think that they think their Innovative Pumping Solution piece is the part that's going to grow, and they feel pretty good about it growing pretty substantially. And we feel pretty good about helping them make more money at it.

And so, I guess we had about two months, a little over two months with them on our financials, so we should see a little more incremental business going forward when we get a full three months. And then, they feel pretty good about their growth prospects through the year. Again, they have a soft second quarter in Canada, just like everybody else. You can't shift that stuff.

But they are on a percentage completion, so they are kind of --- they don't have to shift those Innovative Pumping Solution things.

David, is there any way to look at the revenue they had in Innovative Pumping Solutions and carve out how much of that is revenue they probably would not have had had you not bought them? Was there some business they were able to win and they were able to get recorded revenue in the quarter after being bought by you guys?

No, I don't think so. I don't think we helped them at all. They've only been in that packaging business for two or three years. They've not been in the business for a long, long time, so they're still having a bit of a learning curve.

Where we think we can help them is along the best practices, but also in how they buy equipment and help them with our purchasing power.

Okay. On the gross margin comment that you made, if I remember correctly the Canadian business, the gross margin is going to be quite a bit lower there in Q2 than in Q3 and Q4. So I want to make sure I understand your comment correctly about your margins might stay under a little bit of pressure.

Is that --- would you expect to see the normal seasonal uptick in gross margin percentages in Canada, and other than that not really get any improvement, so maybe it will be a little better than in the Q2 over the balance of the rest of the year, but not a lot? I guess I'm trying to understand sort of balancing that out with I know you got the pricing software that you had been putting in place last year and how that has helped.

We're doing everything possible to get our margins up, so we're not losing focus on that.

And I think you described it pretty well, Matt. I think that as Natpro's volume picks up, they leverage fixed assets in their manufacturing facilities. So I think their margins should get better. I think -- I know David Vincent and those guys are having trips up there to help them.

And then, I think the negative is it's a buyers' market, not a sellers' market, and I think it's -- what was I going to say? The lack units tend to have lower margins. So how all that mix works out, things we're doing to improve, and then things that we know where product mix that are bringing us down little bit. I would say, generally speaking, that if we continue to have slow growth, that that helps a little bit versus no growth or negative growth. So if I was guessing, I would say there might be a little bit of room for improvement, (multiple speakers) but not a lot.

Not a lot. Okay, and then last thing for me, and I'll hop back in queue. Just in terms of organic growth expectations for the back half of the year, I think you're tracking down a little less than a percent, combining the first and second quarters together. It sounds like obviously things have trended into positive territory. How much organic growth do you think you can get out of the business in the back half and what should it look like for the whole year?

You know, I think we're going to have to fall in the camp with everybody else and say that there's not a lot of positive signs that things are going to just get real robust in the second half of the year.

That said, I feel like our Canadian friends are going to have growth from the second quarter. I feel like IPS is going to have growth from the second quarter. I think our service centers had some nice supercenters that are building and should have some growth in the second quarter.

So, I still think we have very low inflation. That doesn't give us any price increases. I think GDP there sounds like it's going to be low and therefore not really a gigantic, dynamic marketplace. So, I would have to --- I'm going to have to go and say going forward, we might be only talking about 3% organic growth. I think we're going to have some and I think that it's going to be as good as we can make it, but there's not --- there's nobody giving it to us.

Okay. So about 3% second half of the year, and then, obviously, it's just too early to tell when you can get back to that 10% level? Obviously, that's the goal, but you need a little better economy to help you there.

Right.

Okay, thanks for all the color. I appreciate it.

Joe Mondillo, Sidoti & Company.

Just wanted to --- I had a couple questions on IPS. So first off, the margin, excluding Natpro, it looks like you came in fairly consistent with the first quarter, right around sort of 17%-ish, which is still quite a bit down from last year. So is this sort of the new normal, and if so, what is the dynamic behind that? Do you think there's any sort of upside or is it just because it's a tougher market, it's tougher pricing and demand and such? If you could just comment on that.

Well, first of all, I'm not going to lose sight of the fact we had a couple of jobs that had unusually low margins that were just basically misquoted. And then, I'm not going to --- you know, the lack units are generating growth, but it's not quite as profitable growth as our normal business. So that's having an effect.

So I think that if David Vincent was here, he would say that he's going to have some improvement. Whether he gets back to where we once were or not, I would probably guess that he would say no.

Is a large part of that just pricing?

These lack units are -- for whatever reason, we don't --- maybe there's more competition or something, but I know that we just don't make the 35% and 40% margin on those things. They're more like 20% and 25%.

So it's sort of a product mix issue?

A lot of the growth in IPS right now is coming from the lack units, especially in the second quarter.

Okay. Is that the midstream that you were referring to? The midstream business?

Yes, what a lack unit does is it goes on a production facility and it measures the amount of oil that's being gathered, so that we can -- so everybody gets the right royalty payments and everybody gets paid correctly.

And what --- how much does the midstream part of that business do, because I thought upstream was your biggest piece of the pie in that business?

This is falling into the gathering systems and it's at the wellhead. So I don't know the answer to whether we're in that fall, whether that's really midstream or upstream, because these units are right there in the oil field.

Okay, so how much has that part of the business sort of been tracking as a percent of that total IPS business?

You know, lack unit (inaudible) I'm sorry to harp on this, I'm not trying to harp on it, but I'm going to have to ask this question. You know, you're right. A lack unit is kind of right after the production facility and right before it goes into a pipeline. So the pipeline is definitely midstream and the production facility is upstream. So it's kind of a -- it's in no-man's land, I guess. (Laughter). Anyway, I thought that was funny that you asked that question. I would guess that we were probably calling that midstream, though.

Okay, not a problem. I guess bigger picture, I'm just trying to get a sense of what sort of the -- what these different types of parts of the supply chain or parts of the energy industry is really driving your business, and what -- is that part of the business a third of the business, and then right at the well sort of those watertight pumps that you're selling, the water extraction type pumps, is that another third? And then, everything else a third? I'm just trying to get a sense of the drivers? Quantitatively, what is driving the overall IPS business, just numbers wise?

Well, first of all, we're not selling any pumps that go on a drilling rig. And we are not --- so we don't sell frack pumps. We may be selling some small pumps that will only go on a frack truck, but it's not the big pumps and et cetera.

So most of ours is always going to be production related. So the midstream/upstream deal is, is an oilfield production or is it pipeline gathering, shipping to a chemical plant? And so, typically I would say that what the cycle is is that they've been drilling less holes because the oil and gas companies have really gotten more productive on how they do that.

Now those holes are producing more, and so it's that production that we play in, and they're behind on their infrastructure of gathering that oil from the well to a facility, and then cleaning it off or whatever, making it appropriate then to go into a pipeline or a train or some other way of carrying it, and taking it market and selling it. Now, they are behind on those production facilities, so that's really -- when you talk about land based, whether it's a pumping system or a lack unit or whatever, they are behind on those infrastructure on those production facilities.

Okay, and it sounds --- I was just going to say it sounds like the next six to 12 months because they are behind, it sounds like the business is sort of forfeiting or you're going to still see very solid growth because of that?

That's exactly right, and the fact that whether they are drilling 2,000 wells and have 2,000 drilling rigs out there, or they're only poking in holes, 1,700 of them, they're still producing a lot of oil that needs these production platforms.

So I guess if drilling went down to nothing, then eventually they wouldn't need any more production platforms, but as long as they're drilling to some extent, then they're going to need these things. And of course, there is --- I'm not saying that there's not more need if there's 2,000 holes going in the ground versus 1,700.

But the other part I would say is that we are now starting to see a little uptick in the amount of drilling activity, too, which can't help but be good.

Okay, great. And then, just finally, just to follow up on that whole picture. It seemed like you were very -- sort of cautious in April and it seems like you're a little more positive. Has that just environment, like we've just been talking about, just gotten that much better since -- over the last three months?

There's two things going on. First of all, DXP did not hit on all cylinders last quarter, and I was trying to point that out.

And some of this is one-time event stuff, too, and that is Calgary didn't ask for the whole city to be put under water, and they didn't ask for all the rains and all the deterioration they had on roads and et cetera. So there's things happening there that we just know will get better. Maybe the economy, maybe the activity is not any higher level than it just --- there were just weeks and weeks that you couldn't do anything. And so now, they're going to start back up.

So we think there's some -- and our OEMs that overbuilt equipment and haven't been buying stuff from us are now starting to ramp back up.

So, I don't --- I guess I'm going to have to say that I don't know that the general economy is getting a whole lot better. I just know there's things we're doing that are going to get better. So, that's part of it.

And then, I will just say that I think that the oil and gas companies, that's a big segment for us. To us, there's more activity. There's more quoting. There's just a lot more activity than there was in the first half, and we see it sort of coming as it relates to oil and gas.

Okay, great, thanks a lot. That's a lot of good information. I'll just ask one last question quickly, housekeeping question. Mac, the corporate and amortization expenses that you break out in the 10-Q, do you happen to have those for the second quarter?

Sure, so you want the corporate expense?

And the amortization, if you have it.

Corporate expenses in the second quarter were $8,216,000. Amortization was $3,145,000.

Great. Thanks a lot.

(Operator Instructions). Holden Lewis, BB&T.

It's been brought up. Why was the corporate expense about $2 million lower in Q2 than it was in Q1 and Q2 last year?

Health claims were lower. No, that's the big decline Q1 to Q2, and payroll taxes, but not compared to last year.

Payroll taxes, meaning the LTM cost you talked about or commissions, or are commissions (multiple speakers)

In Q1, one of the sequential big increases in SG&A expense from Q4 was a big increase in payroll taxes, which we always have in the first quarter, and then it goes down as you go through the year. (Multiple speakers) legal fees and SG&A is still down, even with the legal fees in Q3 incurred in Q2.

All right, how about I follow up offline?

Can you also -- it looks like the tax rate, which did sort of nudge down in Q1, was down to about 36% in Q2. Historically, you've been sort of in the 39%, 40% range. Is this an assumption of a single discrete event, or have you got a tax strategy that allows us to believe that we're sort of going to be sustaining this type of tax rate? How should I view that?

This is the tax rate for the year. It's what I expect it to be in the third and fourth quarters, also.

All right, so you're basically truing up, and so now we can sort of assume it's kind of in the 37% range for the year?

Yes.

And again, is that what you're doing (multiple speakers)

(Multiple speakers) the rate for the six months.

Right, yes. Then, again, is this something that you're doing to get tax rates lower so we can carry this forward to 2014 and 2015, or is this a discrete event that's specific to this period?

No. I mean, part of it is for us, in the end, the tax for what was in Canada is actually a little higher and Canada didn't make as much. I mean, there's lots of different (multiple speakers)

Okay, Canada is a little higher. The US code, I think, is higher than 36%. If Canada is higher, even if they didn't do as well ---

Canada, there was a lot more --- the tax rate in Canada is lower than the US, but by the time you provide for taxes to bring that income into the US, you end up with a higher rate (multiple speakers) is what I was kind of trying to say.

Got it, okay. Understood. And then, can you just talk about the Canadian performance, maybe frame how weak that was in Q2? If we look at just the Canadian businesses year over year, was that business down much more than the overall business? Are you able to frame that?

Well, you're using the year over year and we didn't own them last year.

I didn't know if you had historical records or not.

Not.

And then, just one last piece of housekeeping. Do you know what -- the days, I think, in Q2 were 63. Do you know what they are in Q3 and Q4?

What's the question? Are you asking about how many days are in the rest of the year?

I mean, how many days per quarter?

I haven't looked at what --- if you're talking about Q3 of 2013 and Q4 of 2013?

Right.

I don't have that.

All right. Thanks, guys.

Joe Mondillo, Sidoti & Company.

I just had a question regarding the service centers. The profitability, you were running at 11.5% last year. In the second quarter here, you were at 10.7%. I was just wondering sort of what the expectations in the back half of the year regarding that part of the business?

Yes, I think that our Canadian friends did not perform in a way that brought us -- brought that down a little bit, and we would see them doing better for the rest of the year. So we would see that go back up to that 11% type range.

If you back out the effect of acquisitions, the Service Centers operating income level was very consistent with last year and actually just slightly up, Q2 to Q2 (multiple speakers)

Around 12%, then, ex any costs related to acquisitions?

Yes.

And then, the --- because of the Natpro acquisition, I'm just wondering what sort of type of margins in the back half you are looking at IPS. You mentioned that could become a bigger portion, Natpro could become a bigger portion of IPS down the road. Does that mean in the back half we should expect that? And if so, should we expect margins slightly trending a little lower? You also mentioned there was a mix of lower-margin stuff in the second quarter. So I'm just trying to get an idea from that sort of 15%-ish level that we're in in the second quarter, what we are looking at in the back half.

I think worst case is that IPS' margins would not improve. But they're not going to go down. And I think David Vincent would feel that they're going to go back up.

Okay, so maybe like a flat to up?

Yes.

Yes.

Okay, great. Thanks a lot.

Ladies and gentlemen, this concludes the DXP Enterprises, Inc., 2013 second-quarter results conference call. Thank you for your participation. You may now disconnect.