DXP Enterprises Inc (DXPE) 2013 Q4 法說會逐字稿

Welcome to DXP Enterprises 2013 fourth-quarter and year-end results conference call.

(Operator Instructions)

At this time, I would like to turn the conference over to Mac McConnell, Senior VP of Finance and CFO. Please go ahead, sir.

Thank you. Good evening and thank you for joining us. Welcome to DXP's fourth-quarter conference call. David Little, our CEO, will also speak to you and answer your questions.

Before 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 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 fourth-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 fourth quarter increased 7.1% to $313.8 million from the fourth quarter of 2012. After excluding fourth quarter 2013 sales of $24.3 million for businesses acquired, sales for the fourth quarter decreased $3.6 million or 1.2% on a same store sales basis.

Sales of innovative pumping solution products increased $5.2 million or 10.8% to $53.6 million compared to $48.4 million for the 2012 fourth quarter. After excluding 2013 IPS segment sales of $12.3 million for businesses acquired, IPS segment sales for the fourth quarter of 2013 decreased $7.1 million or 14.6% from the fourth quarter of 2012 on a same store sales basis. This decrease primarily resulted from the timing of customer orders and vendor deliveries of components for our packages. The level of customer demand for these products continues to remain good.

Sales of our service center segment increased $16.9 million or 8.2% to $224.3 million compared to $207.4 million for sales for the fourth quarter of 2012. After excluding 2013 service center segments sales of $12 million for businesses acquired, the service center segment sales for the fourth quarter of 2013 increased $4.9 million or 2.4% from the fourth quarter of 2012 on a same store sales basis. This sales increase is primarily the result of increased sales of rotating equipment and safety supplies and services.

Sales for the supply chain services segment decreased $1.4 million or 3.7% to $35.9 million compared to $37.3 million for 2012 fourth quarter. The decrease in sales is primarily related to declines in sales to customers serving the automotive and truck manufacturing markets. When compared to the third quarter of 2013, sales for the fourth quarter of 2013 decreased $16 million or 4.8%.

After excluding fourth quarter 2013 sales of $900,000 from acquired businesses, sales for the fourth quarter decreased $16.9 million or 5.1% on a same store sales basis. Fourth quarter 2013 sales of innovative pumping solutions products, decreased $7.5 million or 12.3% compared to the third quarter of 2013. Again, this decrease is the result of the timing of customer orders and vendor deliveries. The level of customer demand for these products remains good.

Fourth quarter 2013 sales by our service center segment, decreased $8.3 million or 3.6% compared to the third quarter of 2013. Excluding sales on a same store sales basis of $900,000 from our acquisition of Tool-Tech, service center segment sales decreased $9.2 million or 4% from the third quarter of 2013. This decline is primarily the result of 3.1% fewer business days in the fourth quarter than in the third quarter.

Fourth quarter 2013 sales of supply chain services, decreased $200,000 or 6/10% compared to the third quarter of 2013. Again, the decrease in sales was primarily the result of 3.1% fewer business days in the fourth quarter.

Gross profit as a percentage of sales for the fourth quarter of 2013 increased to 30.2% from 29.5% for the third quarter. This increase is primarily the result of increases in the GPS and the gross profit percentage for the IPS and supply chain services segments related to changes in customer and product mix.

SG&A for the fourth quarter of 2013, increased $4.3 million or 7% from the fourth quarter of 2012, compared to the 7.1% sales increase. This increase is partially the result of $1.7 million of SG&A expenses associated with the acquisitions completed in 2012 and 2013. As a percent of sales, SG&A was consistent with the fourth quarter of 2012. Excluding expenses of businesses acquired on a same store sales basis, SG&A increased by 4.2%. This increase is primarily related to the 3.2% organic increase in gross profit.

SG&A for the fourth quarter of 2013 decreased $3.7 million or 5.2% from the third quarter of 2013. As a percentage of sales, SG&A decreased to 21.2% from 21.3% for the third quarter of 2013. The decline in SG&A is partially the result of the reversal in the fourth quarter of $2.8 million that was previously accrued for an earnout related to the acquisition of Natpro. Also, approximately $1 million of acquisition expenses related to the acquisition of B27 on January 2, 2014, are included in SG&A for the fourth quarter of 2013.

Corporate SG&A for the fourth quarter of 2013, increased $6.7 million or 106.3% from the fourth quarter of 2012 and increased $3.5 million or 36.4% from the third quarter of 2013. $1 million of the increase relates to the acquisition expenses for B27, which were incurred in the fourth quarter of 2013. The remaining increase is primarily the result from increases in compensation and health insurance costs.

Interest expense for the fourth quarter of 2013 decreased 19.6% from the fourth quarter of 2012. This decrease is primarily due to a reduction in the average debt balance between the two periods. Interest expense for the fourth quarter decreased 16.2% from the third quarter of 2013. Again, this decrease is primarily the result of the lower average debt balance in the fourth quarter compared to the third.

At December 31, 2013, total long-term debt decreased approximately $43.8 million from December 31, 2012, despite spending approximately $61.2 million of cash on acquisitions during the year. During December of 2013, DXP sold 236,000 shares of common stock at an average price of approximately $106 per share. Proceeds net of expenses were approximately $24.4 million.

We estimate that the proceeds from the sale of shares reduced the interest rate on our credit facility by 25 basis points; therefore, this sale of shares is not diluted. During 2013, the amount available to be borrowed under our credit facility increased approximately $44.4 million to approximately $154 million. This increase is primarily the result of decreased borrowings.

Our bank leverage ratio was 1.48 to 1 at December 31, 2013. At December 31, our borrowings under the credit facility were at an average rate of approximately 1.8%. Using the amount of debt outstanding at the end of February, the pro forma leverage ratio, including the effect of the acquisition of B27, was approximately 2.93 to 1. Borrowings under the credit facility at the end of February were at an average interest rate of 2.41%.

Capital expenditures were approximately $1.4 million for the fourth quarter. Cash on the balance sheet at December 31, 2013, was $5.5 million. Accounts receivable and inventory balances were $192 million and $105.3 million, respectively at December 31, 2013.

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

Thanks, Mac. Thanks to everyone on our call today.

DXP had another great year and an okay year by our standards, and I want to thank our stakeholders. First, our DXP people for your commitment to be experts and make DXP the best it can be. Second, our suppliers for your loyalty and desire to help DXP grow. Third, our customers for your trust in us to bring value to your organizations. And fourth, our shareholders for having the faith to invest your money in our performance.

DXP increased sales 13.2% to $1,241,510,000. This is short of our internal goal of 10% organic and 10% through acquisitions or 20% total growth. Given a flat economy and zero price increases from our vendors and little inflation, organic sales were a battle for market share. And we only had a positive organic growth rate of 0.43%.

Our outlook for 2014 is much brighter for all three segments and all five divisions forecast much improved organic growth. DXP's organic growth is based on increased activity we see, the customer's outlook, price increases we are seeing in the 2.5% to 3.5% range, economic forecasts, forecasting is slightly increased in gross national product, and our growth strategies and super center.

DXP's growth profit percentage increased 90 basis points, which I contribute mostly to product mix. DXP continues to work with P2 to increase the amount of sales that go through the systems logic. DXP will apply the P2 logic this year on a regional basis rather than a Company-wide basis, which we feel would get better compliance from the regions.

To increase our success with P2, we will increase compliance with the suggested pricing and increase the amount of different sales pipes that go through the system logic. Our goal for DXP is 30% overall gross profit margins. Selling and general administrative expenses were 1% too high in my opinion. There are multiple reasons for this and they all will be addressed this year.

The first reason is that we are a growth Company, and we spend money on people and initiatives. In a flat economy, expenses simply rise faster than sales. To some degree, we are okay with this, and if our forecasts for 2014 are right, then these were smart investments.

The second reason is that DXP feels strongly about investing in sales excellence and operational excellence and success. These programs either grow our people by making them better experts, or as with success, making their environment a safer and nicer place to work. We believe people feel better, work better, and are safer when they have an attractive, clean, and an efficient work environment.

The third reason is legacy pay plans. I don't care how much a high achiever makes, as long as he or she earns it, and the pay is in alignment with the Company goals. DXP tries really hard not to change pay plans of an acquired company, but over time, leadership should see the inequities that might exist and suggest changes. Unfortunately, that does not always happen.

The fourth reason is we are at a size that required reorganization of leadership so we can continue to grow. Most of the organizational changes are complete, and I feel good about DXP's leadership team going forward.

In conclusion, I believe that in the second half of 2014, we should start seeing gains in operating leverage. Our goal is 19% of sales, including corporate expense, so without depreciation and amortization expense.

EBITDA margins were flat at 9.9% of sales. Our stated goal is 10%-plus. There seems to be some confusion that a 10% contributed margin -- that is the Company goal for our service centers locations. This could work if we did not have any corporate expense. The corporate expense was 3.27% of sales, so contributed margin should be a minimum of 13% of sales with larger locations being even higher.

There are also different expectations based on different product mix. For example, DXP safety division with high asset needs and people needs, makes a higher contributed margin than they need to, which leads me to my next favorite subject. Our after-tax return on invested capital continues to be 31.5% for the fourth quarter and 32% overall for the year.

This gives us a huge competitive advantage against our peers and certainly the small independent distributors. As we continue to grow DXP's top line and bottom line to $2 billion and 10%-plus EBITDA margins over the next two years, I would like to again thank our stakeholders.

A special thanks to our customers -- they value and understand how a breadth of technical products and technical services, plus our DXP experts bringing solutions, helps them have a better business and helps them solve problems.

Through all the experts at DXP that fulfill our slogan, to be customer driven experts and providing MROP solutions, thank you for your continued effort to train and become better experts.

Thanks to everyone who is building a super center. Your customers will love you for it.

Thanks and welcome to all our new family members, acquisition of Natpro, Tucker Tools, Alaska Pump, Tool-Tech, our first acquisition of 2004 (sic), B27. DXP looks forward to supporting you and your successes.

Thanks to our regional sales and operational leadership. You guys make things happen. Your execution of DXP strategies and daily decision-making are so important to DXP success. Your recruitment, coaching, and teaching our equally important in a fast-growing Company like DXP. Your ability to not mess up an acquisition, which is our first primary goal, and then over time merge the acquisition's culture and processes into the new DXP culture and processes in a way that the old company wants to be DXP, which creates a stronger brand in the market.

Congratulations. As business people, you guys are the best.

It is all about being customer driven, from the shipping person to the salesman with a personal relationship with the customer. It is everyone's job to take care of the customer's need. The customer says he has a warranty problem, we go fix the problem first, and then we find out what the problem was or who might be at fault.

DXP is going to take care of its customer's needs, period. DXP believes our breath of engineering and technical products and technical service brings value to our customers. We believe our customers want DXP to have solutions through local expertise, just-in-time inventories, build relationships that understand their business, problems, and processes.

We are not a part number. It is how we apply the product and perform the services that brings value to our customers.

Many, many thanks to the administrative group, HR, IMP, IT, operations, marketing, credit, working capital, and accounting. You guys understand the internal and external customer service and we all thank you, each and every one of you. Your great attitude makes a big difference.

I believe we are all ready for an improved economy in 2014. With B27 on the books and other acquisitions in the pipeline, plus a good organic growth year, we, at DXP, are excited.

Allow me now to focus and summarize the activities of our three business segments -- service centers, supply chain services, and Innovative Pumping Solutions.

The service center segment sales increased 13.5% from 2012 to 2013. And operating income increased 20.5% for the same period with a 12% operating income margin. DXP's solid operational culture translated into profitable earnings; however, acquisitions contributed to the majority of the sales growth. While DXP service center segment performed well overall, 2013 proved to be a challenge.

The year started off slow with expectations of major pickup that never really materialized. Several factors contributed to the challenges we face this year. Modest GDP growth, measurable price inflation, increased regulation, lackluster capital spending budgets from our E&P customers relative to prior years, and a shortage of skilled labor and key energy markets.

The accumulative effects of these headwinds impeded our efforts to grow organically. Fortunately, we believe better days are ahead.

In 2012 and 2013, investments in people, facilities, and acquisitions are beginning to take traction. Our investments in the form of acquiring sales personnel, while remaining committed to growing from within through training and mentoring programs are paying dividends. We also made facility investments in our service center network that will create safer, more productive work environments.

Collectively, our investments allow us to take advantage of our industry-leading breadth of technical products and technical services. Throughout 2013 our service center management team, successfully converted four in-process service centers to super centers.

As we move into 2014, our network of 37 super centers has the momentum to convert an additional six by the close of the year. Our improved ability to convert service centers prospects to super centers, has led to a decrease in the number in processed super centers currently in the pipeline. We continue to actively seek out new super center candidates, and we will report our progress throughout the year.

Moving into Q1 of 2014, 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 sustainable business results for our industrial customers. The cornerstone of our branch-based model is our super center strategy. These customer driven strategies continue to create value for an industrial customer seeking to consolidate their vendor base without sacrificing local inventory and expertise.

Broadening our portfolio of technical products and services, recruiting top sales talent, acquiring great companies will continue to be a recipe for super center expansion. We are looking forward to competing and winning in 2014. Our focus will remain on further strengthening our North American service center platforms through the creation of super regions and super centers that will provide sustainable benefits to the industrial customers looking to improve their overall production and financial performance.

Supply chain services. In the fourth quarter of 2013, DXP supply chain services contributed significantly to the bottom line and secured additional customers and renewals. Of note, year end is typically slower based on fewer billing days and weather. The majority of SCS customer base close through holiday season due to slower business climates and mid-week holiday schedules.

SCS secured the renewal of seven major customer contracts throughout Q4. All seven extended their contracts by three years, ensuring continued revenue and potential for more locations.

In Q4, the SCS team began three on-site implementations. We are scheduled for completion and we'll begin to generate revenues in Q1 of 2014. These new customers are from a mix of markets from mining to manufacturing and will add diversity to SCS customer base.

They also have multiple locations that will allow us to expand over time. Additionally, SCS has two implementations underway in Q1, which will be completed in Q2. SCS continues to use technology as the differentiator to gain market share and establish the business segment as experts in automating supply channel. This allows SCS to deliver cost savings to the customer and increase bottom line.

We have increased our experienced personnel in vending, CMMS, B2B website solutions, warehouse automation, to support our efforts. We also have invested in technology, which helps our replenishment cycle and uses real-time data mining and analytics to assist decision-making, planning, forecasting, and reporting API.

Of note, supply chain services started the year off with 58 locations and 90 on-site locations and 96 off-site locations. In Q4, we ended the year with 62 on-site locations versus 58; and 96 versus 96 off-site locations. The outlook for 2014 is positive in both increased sales with existing contracts and our ability to obtain new contracts.

IPS segment. Upstream, oil and gas and mining sector. Land based, Innovative Pumping Solutions quote activity and order rate in this sector continue to remain strong. We were optimistic this profile will remain consistent through Q1. We experienced steady quote activity and order placement during Q4 of 2013.

Mining. We had good results from this sector in 2013. We're confident this should continue in Q1. Most of the success related to projects and equipment for the copper mines are in southwest United States and in Mexico.

Midstream. This sector continues to be our top performing sector as it relates to quote activity, orders received, and future order potential. The Eagle Ford, Permian, Bakkan, Niobrara shale plays are providing the majority of our activity. The Marcellus continues to provide opportunities; however, not at the rate of the other previously mentioned shale plays.

The majority of the products being quoted and sold in the Bakkan and Niobrara are associated with LACT units being produced in the Golden fabrication center. We are supplying equipment for the terminals loading/offloading facility, utilizing our centrifugal packages, horizontal packages, high energy split case pump and plunger pumps that are being fabricated in our 529 and PMI facility in Houston and our Golden, Colorado locations. The LACT units being produced in West Texas are being utilized at the Eagle Ford and the Permian Shale plays.

The Eagle Ford and Permian Shale play activity has a large component associated with our horizontal pumping equipment that is the DXP HP-Plus. Horizontal pump equipment is being utilized in the LACT unit process and pipeline applications. Our centrifugal equipment is being utilized in the gathering system locations, trucking loading and offloading systems, as well as booster pumps for the horizontal pump applications.

Our high-energy multi-stage equipment and re-manufacturing high-end multi-stage equipment is being utilized in the pipeline transportation and booster station applications. Innovative Pumping Solutions. Key differentiator versus our competition is our excellent lead times for faster deliveries.

Gulf of Mexico. Drilling activity is good but new production platforms remain soft. There are a few platform upgrade opportunities that have been quoted and have been in the works for a while and show some promise for moving forward. We have had success in obtaining orders for some of these modular packages that have been quoted. My own personal note is, the Gulf will come back someday.

Canadian markets. Municipalities. Eastern Canada has been in the area where we see a majority of the opportunities for municipal. 2013 activity was very depressed, 2014 is expected to be slightly better.

Oil and gas, land-based. This sector in 2014 is expected to be flat with 2013. Major players are slow to place equipment orders. Quote activity, order potential appears strong due to the seasonality. Open quotes for viable projects, we are confident we will experience a pick up in orders in Q1. I was talking about Canada.

We have had some success in quoting opportunities in the Houston engineering and contractor firms for equipment requiring delivery to Canadian sites. This equipment, due to Canadian regulations, will have to be built in Canada. Our Natpro facility in Calgary has worked closely with the Houston team on this project and will build the equipment.

Oil and gas offshore. Still talking about Canada. Natpro is working with our Houston-based team to look at opportunities for equipment for the White Rose project. The offshore equipment arena is a new territory for Natpro in Canada.

Mining. We're seeing an increase in our quoting activity in this sector. We are currently quoting opportunities mainly in eastern Canada with the iron ore, nickel, diamond, aluminum, and hot ash mine operations.

Canadian power, this sector is showing an increase in quoting activities. Our Natpro operation is currently engaged in quoting some opportunities in the hydroelectric markets.

B27, international markets. Our recent acquisition of B27 has provided access to international geographic areas that B27 has established representation, local presence and a solid customer base. B27 product offering, along with the addition of DXP's product offerings, will provide greater opportunities to increase our market share in these markets. B27's international market sector aligned with our domestic land-based and offshore upstream and midstream sectors.

Integrated flow solutions facility in Tyler, Texas, has several capabilities. Their IPS, DXP IPS, can leverage and B27 having fabrication through DXP in Houston can be leveraged and both sides are pleased with their new resources.

Latin America and Caribbean. This sector performed well in 2013 and is expected to continue in 2014 at the above 2013 levels. We are currently working on expanding our presence in the Ecuador markets. Having local presence allows us to take advantage of local inquiries of our products and services, as well as meet the requirement of local content laws in Ecuador.

Korea. B27's integrated flow is currently working directly with Korea with the local engineering procurements and contractors' EPCs. Along with three of the major shipyards, there are several offshore platform projects being bid by the South Korean contractors.

Mid-East, North America. B27 opened their Dubai office in 2013. This provides the opportunity to have direct access for quotes, for equipment and services for this market sector.

Activity level is steadily increasing and to keep pace, we are expanding our workforce to ensure we continue to provide outstanding customer service. IPS is optimistic that Q1 and all of 2014 will remain robust with our products and services supporting the major US oil and gas shale plays, our international upstream and midstream market in the Southwest US and Mexico finally.

I am done (laughter). I guess we're now open for questions. Thank you.

Thank you, sir.

(Operator Instructions)

Matt Duncan, Stephens Inc.

The first thing I've got -- you talked a little bit about the timing around IPS on the revenue side in the quarter. Did you see any impact from the Winter weather that we saw, especially in the Permian? Did that cause you any trouble on the service center side? What's all this Winter weather we're seeing across the country in the first quarter doing to you?

I guess your question sounded like it was related to IPS specifically?

No, just the whole Business, David. IPS -- was there an impact there, but just the whole Business in general?

We don't have any way of quantifying what the weather did to us. I mean, we had lots of stores that were closed for a day here and a day there, and two day's here, maybe. I don't really know how to quantify that.

I don't know how to quantify the fact that IPS has a lot of work, and most of our sales that we thought we might have gotten in the fourth quarter was in the area of IPS, and that business can be lumpy. As you know, when you are doing percentage of completion, and maybe weather affected a manufacturer from shipping us some components that we did not get that we were expecting to get, et cetera; that might have had an effect.

Okay.

Our service centers -- I think to paint this picture correctly, our service centers had growth in the fourth quarter, and so -- congratulations to them. The supply chain services, I think they blame weather, and just fewer days, and so, they barely missed sales. So, really, the shortfall was really in IPS, and yet we feel great about IPS.

IPS was good. They shipped a lot of product. They just did not get a lot of new equipment in. They have a good backlog. They have a really very favorable outlook towards 2014, so I am not losing any sleep over this.

David, I appreciate that this can be a little bit difficult to do because of the timing of shipments, but when you look at the first quarter, do you expect to make up for lost time in IPS, excluding B27? Do you think that business should have a nice sequential increase? Did you get all those things that you had expected to ship in the 4Q, did they get out so far in the first quarter?

Yes, these jobs are -- take multiple months to produce -- to quote, produce, ship, et cetera. So, whether we make up all the difference in the first quarter, I don't know. I don't know yes, and I don't know no.

(multiple speakers) I just know that at the end of the day, that IPS feels pretty good about growing their business pretty substantially next year. And so, I think we'll all be sitting here next year at this time being really happy.

I mean, the important thing is, especially after this B27 deal, the amplitude of the volatility in your quarterly results, probably is on the rise because of that IPS business. But at the end of the day, I just want to make sure I'm hearing you correctly. You're very positive on the outlook for that business; you would expect it to meet your 10% organic growth goal given what you are seeing in that business?

I would be disappointed if it only hit 10%.

That's helpful. Okay, thank you.

Just looking at B27 so far -- I know you are only a couple months into owning it -- how is that going? Are you seeing an opportunity to go in and cross-sell some packages you guys build and specialize in, to their customer base and vice versa?

The first fruits of labor have been around lowering each other's costs. As an example, they use a lot of cutting tools. We happen to know a company that sells cutting tools, like DXP. And then, they do ASME vessel work and we have to outsource that, and so, we see synergies there.

There are things that -- there are certain customers that would like something to be built in Houston versus being built in Tyler, where they can't go and look at it every other day. And so, there are some more synergisms around reducing our cost than there is sales at this point. But there is also -- we are calling -- we each have -- it's been pretty amazing, we each have a different customer base in the sense that there are customers that really like B27, and there are customers that really like DXP.

And so, I think some of the cross-selling stuff will happen. It's just going to take a little time, and I do think that our group and their group -- their group is looking at rotating equipment, including pumps. Their IFS group really kind of got out of the pump business. So, now, they are looking at: Well, wait a minute; DXP does this successfully, so let's start looking at some of those kind of products, and then some of our customers can look at some of their air stuff and other types of products they do. So, from an IFS and an IPS basis, the marriage of those two companies is really a really pretty thing.

Sure. Last thing, then I'll hope back in the queue. Mac, on the SG&A cost side, even after backing out the one-time items that you called out, you guys were down a couple million dollars in terms of SG&A costs from the 3Q to the 4Q. Is that just as simple as lower variable costs on the lower revenue and gross profit number, or was there some more active control of SG&A expenses going on there?

You know, I'd really like to tell you it was active control of SG&A, but I think it's just because, like you said, the gross profit's down sequentially, so compensation from that standpoint's lower.

Okay. Helpful guys, thanks.

Thank you.

(Operator Instructions)

Joseph Mondillo, Sidoti & Company.

Hi, guys, how are you doing?

Good.

First question I wanted to ask was related to the IPS segment. And obviously, qualitatively, you feel really good about it. But first off, I wanted to ask if you could put out any numbers, such as -- in terms of the backlog going into the year here? What kind of year-of-year comparison, or maybe sequentially compared to the end of the third quarter -- what's the comparison look like? If you have an actual percentage, that would be helpful.

I guess, the first question was backlog? And then the --

Yes, just the backlog at IPS -- are we looking at a substantially higher backlog versus, I guess, headed into 2014 versus heading into 2013 a year ago? And what has it done sequentially over the last couple quarters? (multiple speakers) If you don't have the actual numbers --?

I don't have the actual numbers. I know, from a conversation, that the backlog is -- at December 31 from other place during the year, but --

Okay. I guess, one thing that I'm just looking at is, in 2011, 2012, we obviously saw extremely strong organic growth. And one thing that I'm just trying to get my hands around -- and if you guys can help me out. We saw growth slow from 50%-plus in those years, and we saw 9% growth in 2013. You are obviously still very positive on the segment.

I'm just trying to understand what's going on. Was 2013 just a pause of projects after seeing such a strong growth in 2011 and 2012, and now we are maybe going to get a re-acceleration as projects continue to ramp up again? Any color on what you see over the last three years and going forward, I think would be helpful.

David could probably do a better job of answering this, but there was, clearly -- in the oil field equipment business in general, there was a marked decline. And I'm not talking about our business necessarily, but customers that we sold cutting tools to customers that we sold bearings to -- our customers had significant declines in building oil field equipment. I think we continued to have organic growth in Innovative Pumping Solutions, my guess is, is because we were selling a lot into the midstream that was still in the catch-up mode. (multiple speakers) There was a decline in the industry.

And by the way, our outlook is that we're going to grow that business. So, I don't think we've reached, you know --

I guess one of the reasons why I started off with backlog is this anecdotal conversations that you're having with customers, are you actually seeing it in your backlog? Where are you coming from, in terms of having that positive outlook of 2014?

Well, I mean, our backlog is good. It doesn't paint the whole picture, but our backlog is good. There's nothing about our backlog that isn't telling us that we're not going to have a good year.

That said, then we start with a budget process that starts with a salesmen starting -- talking to their customers. So, we listen to our customers. We get at what's their budget for the years. Is it an increase? Is it a decrease? What projects do they have on the board?

And so, a lot of our sales come from things that -- what I'm trying to paint is that we don't have a backlog that's going to say we're going to do $250 million next year, because a lot of this equipment that we sell, we do get an order today, and a month later we ship it. So, there's a bunch of that type of business.

There's the other kind of business that we work on for a year or more, and then we work -- we build it for a year, and then we finally ship it. And so, we have some visibility of backlog, but we don't have 100% visibility of backlog. And so, that's why we're not totally relying on backlog.

Okay.

So, we listen to our customers and our salesmen and our regional managers, and we bubble up a budget. And part of that budget -- our service centers sell IPS stuff. So, we got to get a forecast from them on how much IPS stuff do they see on the horizon, and we use that number. And then we have the salesmen that call and the engineering contractors, and they understand the bigger, more long lead-time items, and so we get a picture of that. And then we repair and service this stuff. So, we get a picture of that.

So, all of that has to be put together to come up with our forecast. And our forecast, as I think I've clearly stated now is above 10%.

Okay. All right. I was just trying to get some color, just given the significant slowdown of growth that we've seen. I know we've had some tough comps, and obviously it can't -- that 50%, 60% growth on an organic basis is not sustainable. But I was just trying to get an idea of. What --?

The wild card, to me, is that we're drilling in the Gulf of Mexico, but we haven't seen the new production platforms that will come on board at some particular point in time. Once they have a field, and then they need to now produce all the drilling that they've done. They build a new platform -- it's a multi-billion-dollar platform, and we sell a lot of equipment to that.

We haven't seen sales from that particular segment for -- ever since the BP spill. So, that's going to come back at some point in time. So, we're kind of looking forward to that also.

And at the same time, though, B27 has brought to the table a much greater international presence. So, where we're selling a few things to South Africa or et cetera, we think maybe B27 is going to allow us to knock on a few more doors than we used to knock on, and we can sell our product to a broader global base. And so, there's a lot of positive things out there.

Now that you bring that up, because that's a question that I did have, and now that you've gotten what, a couple, I guess two months on the books in terms of working with B27 since the close of the acquisition. How significant do you actually think that -- how significant is that going to be to your growth -- being able to have that more access to the global market?

Well, I think it's going to be real important and real successful. I don't -- again, these jobs, by the nature of them, don't -- we don't -- if we started on January 1, then we may not see any results from that until next year. I mean, not till 2015.

Okay. It's going to take a little time just getting into the business.

Right.

Okay. In terms of the margin at IPS -- it's been a little volatile. You saw 20% margins in 2012, and we've come down about 400 basis points in 2013. But you did see a pretty good ramp-up in the fourth quarter. So, what do you think is going on there? What happened in 2013?

I know Natpro did bring that down a bit -- just the mix issue. But how do you look at the normalized, I guess, operating margins at IPS? And what happened in the fourth quarter? Why, sequentially, you saw such a big jump, on a sequential basis?

Yes. You want me to try on that one?

Sure.

Okay. Well, first of all, you're absolutely correct. Without breaking down into organic versus inorganic, Natpro -- its gross margins are less, and their profitability is less, and so they're bringing down some of the numbers. And we're all over that. We look at that, frankly, as a big opportunity to not only grow our fabrication business in Canada, but to also grow it in a way we can make more money.

The other thing that happened this particular year is that our service centers had a bigger piece of IPS sales than normal. And again, they're just better connected with the land-based stuff, sort of the shale plays, and so their expenses are higher. Their expenses of doing business is higher than an IPS person and IPS doing it itself.

So, the bigger difference -- because I asked this question. It's a great question, by the way, and I asked it multiple times myself to about 10 different people. And the answer is that we allocate expenses to IPS for the sales that the service centers bring to it, and their expenses are higher. So, it was fair to bring higher expenses over.

So, that has caused expenses to go up, and expenses is basically where it is. It's not really in gross profit. It's in higher expenses. And so, that's -- and, of course, that makes the service centers look a little better.

Okay. I'm sure there's probably a lumpiness to the business as well, just given the lumpiness of the orders and such, too.

Yes. You heard me talk about gearing up for increased activity and et cetera, and so, it's hard to find good engineers and things like that. So, we're trying to stay ahead of the curve, and the sales weren't -- didn't finish the year off quite as strong as we would like. So, expenses look probably a little more out of line than they might normally be.

You said there was a timing issue in terms of IPS -- why it was a little below expectations. Is that all going to hit in the first quarter, then?

No.

I don't think so. But again, I don't always know how percentage completion's going to work. Percentage completion is based on labor hours, and it's also based on major components. So, when the major components hit, is when we have a pick-up on percentage completion. And so, therefore -- percentage completion, by the way -- just to give you some numbers -- it's hard to -- it was positive $12 million in third quarter, and it was negative $12 million in fourth quarter.

Okay. And then just lastly, the margin -- sticking on the margin question here. In terms of the service center margins, they were -- it looks like 13.9%, which is much higher than any of the past quarters. What exactly is going on there for that?

I hate to say it, but a piece of it could relate to pulling out; the same reason why the SG&A is higher in IPS for the fourth quarter is because we pulled SG&A out of the service centers. That helped them a little bit. Now, on their side, they say: Well, you took all this business away from us -- in the service centers. But we also took a lot of SG&A away, which helped improve their margin.

Okay. And then lastly, Mac, can you give me the corporate expense line and the amortization expense line?

Sure. For Q4?

Yes, for Q4.

Corporate expense was $12.9 million, and amortization was $2.6 million.

Okay, all right. Thanks a lot.

Sure.

Thank you. Holden Lewis with BB&T.

Great, thank you. Good afternoon.

Holden, how are you doing?

I'm all right, thank you. I just wanted to get a little bit of housekeeping first, but I missed the M&A numbers. Can you tell me: How much was the exact acquired revenues for the total business, as well as IPS and service centers?

Sure. For the fourth quarter --

Yes.

-- I assume. The acquired revenue was $24.306 million.

Okay.

The split is $12.279 million for IPS; $12.027 million for service centers.

Okay, great. And then I just wanted to make sure I understood also a couple pieces I think that were SG&A. You talked about $1 million from M&A as a drag, and then did you talk about a $2.8-million benefit from a reversal?

Yes. So, for a net of $1.8 million.

Okay. So, the $2.8 million is truly unusual, and where did that hit in terms of the segments?

It's all in SG&A. And when we originally did the purchase accounting for Natpro, we set up the goodwill and intangibles at that 50% IPS, 50% service center. And so, it came out $1.4 million in IPS, and $1.4 million in service centers.

Okay. And then, the $1 million in M&A -- it sounds unusual because B27 was obviously unusual, but you have been [through] a lot of acquisitions. Does that $1 million stand out as being truly unusual, or, of late, has that sort of been more the norm?

No, the degree of unusual -- we spent a bunch of money buying HSE also, but $1 million is a lot for us. The smaller acquisitions, we have our own counsel, we do the loan agreement, and we hardly have legal fees. B27 had -- we did quality of earnings, hired Grant Thornton to do a quality of earnings review. We hired consultants to do environmental work, and we had outside counsel helping us.

Okay. So, as an order of magnitude, $1 million is -- it definitely stands out as being a bigger number than is typical?

Coincidentally, Q4-to-Q4 comparison, we didn't have really expenses last year in the Q4. So, that $1 million is all in addition. When you look at it on a total year to total year, the acquisition expenses are also up [a bit] -- and corporate.

Got it. And then two last things. One is: Do you know how many days you're going to be having in 2014?

I haven't looked at that.

Okay. We'll get it offline.

And then, just talk to us about how the seasonality with B27 is going to work. We know how your traditional businesses work historically, but B27 -- to what degree -- how will that shift revenue and profit seasonality as you model it out?

I don't remember any seasonality.

Yes. I know how it worked for 2013, but I don't know if that's just the random -- because the business is so lumpy, it's the way it works. They definitely -- their profitability started out low in the first quarter, got a whole lot better in the second quarter, had a huge third quarter, and then declined in the fourth quarter. But I don't -- I think that's just the way it worked out, [unless] it's driven by when you get the orders from the customer.

Okay. We shouldn't necessarily change your historic seasonality at all for B27?

No.

And then lastly, it sounds like you went through a little bit of reorganization internally. You talked about changing how you were going to approach your pricing software -- going to more of a regional approach. You talked about changing some of your management structure to be in position for growth. All those seem like a bit of a hallmark of a little bit of a reorg internally. Can you just talk a little bit more about the thinking that went into that, how long that's been in the works, where you are in terms of implementing it, or anything regarding some of those moves?

Yes. Actually, most of the changes were done towards the end of the year, but they've been discussed and re-discussed all year long. And they're not really all that scientific, besides the fact that you can't have your Senior Vice President of service centers having 30 people report to him. So, it was really more about that.

It was a little bit -- and so, instead of having -- we had these 13 regions, and so we thought about creating maybe 4 super regions, we'll call them that. I don't know if that's a good term or not. And so, we've actually done two of them. We give those people a little more focus.

Then we moved around some of the administrative group, IT -- that somebody beside myself, who had actually had some time to spend with them. And just some shifts like that, just -- to some extent, I like to move people around -- just have another new set of eyes look at things. So, that's just some of my own style. But most of the critical parts of it was -- we were just [so plaid] that we had too many people reporting to [him].

Okay, so, essentially it involved putting another layer of management into the system?

Yes, but we didn't -- we don't -- I don't believe in doing it like: Okay, let's hire a President. You still just have one President. So, what we tried to do was to create -- where Todd Hamlin was watching with the service centers still has 11 reports, and this senior regional guy, (inaudible) super-regional guy, he still has 10 reports. And so, it doesn't do any good to create a layer where you still just have too many people reporting to a different person.

So, it's still designed to be as flat as possible. I believe in that wholeheartedly, and so it -- (multiple speakers)

We didn't hire anybody new.

Well, I did hire a new DXP safety guy, and I probably -- so, some of what I was doing, too, is strengthening the product division guys.

But all the costs related to what you've been doing are in the Q4 baseline?

Yes.

Okay. All right. Thanks.

You bet.

Thank you. Matt Duncan with Stephens, Inc.

Hello, guys, just a few quick follow-ups. On the three supply chain locations you guys implemented in the quarter, in terms of an aggregate annual sales contribution from those locations, what should we expect?

We'll have to get you that information. I don't know.

Okay.

You are right that we did three new sites.

Yes. Those -- in theory, you are going to be adding revenue dollars in the first quarter.

Exactly.

And then, on B27, at the time you guys announced that deal, I think they had expected $198 million in sales, and about $35 million in EBITDA. Did they end up coming in pretty close to that?

The EBITDA was $30.2 million.

Okay. What about the sales side, Mac? Do you know that?

I do. $175 million.

And, David, is that the same sort of deal that you saw? Is that just timing of when shipments went out? Because I know they're a percent of completion as well.

We never -- those were their numbers. They were the investment bankers' numbers, and those are not the kind of numbers we used when we forecasted what we think accretion would be. And so, I know all you guys thought we were nuts in terms of probably having a pretty -- a lower number than you thought. And so, I just think that you go into a deal like that, you know everybody is trying to put their best foot forward to: Well, we could, we possibly might, we -- if the world just was perfect, we'll hit $198 million or something.

I just don't think we ever felt that strongly about those kind of numbers. But it was their numbers. It was their investment banker numbers, and it was their general manager's numbers and --

But you still expect that business to grow at least 10% this year? I know that was your expectation at the time you announced that deal.

I do, absolutely.

Okay. And in terms of just -- in looking at the EPS accretion, Mac, I think one of the things that you had included in the accretion analysis that you did was the $1.3 million of acquisition-related costs following in 2014. It sounds like most of that ended up falling in 2013. So, we would at least need to back that out?

Yes. That is very correct.

Okay. The last thing I've got -- update on the M&A pipeline, just beyond B27. I assume you guys are still out there actively looking for things. What's that pipeline look like, David?

Kent is going to kill me. He had a whole write-up, and I just got tired of reading, so I skipped over it. Well, actually I accidentally skipped over it; I didn't mean to.

He says: Overall, we're pleased with our acquisitions during the first half of 2014. We anticipate closing one to two acquisition deals, and approximately two to three during the second half of the year.

So, two to three the second half of this year?

And one or two in the first half.

One or two in the first half, okay. Are any of those larger deals? Are they going to be more back at the bread and butter, $20 million to $50 million in revenue kind of deals we've seen you guys do so accretively through the years?

Yes. I think the ones that we could count on for sure are more the smaller deals.

Okay. All right. Thanks, guys. Appreciate the insight.

You bet.

Thank you. Holden Lewis with BB&T.

Hi. Thank you again. I guess I wanted to get a little bit more color on the margins in both of the -- the MRO and the IPS business, service (inaudible). You kind of sounded like you were trying to relay that one segment could -- one segment's margins might come as a sacrifice of the other, just based on how you're allocating expenses between them, based on the sales, but the margins in both businesses were very strong. I guess I didn't understand the message about allocation versus the fact that both segments were really strong.

Yes. We agree with you that both are still strong. I think we're trying to -- we're trying to answer why we did 19% operating margins in 2012 in IPS, and this year it was 16%-something. And so, when we dug in to look at that, it shows up in expenses, and then when we -- because margins are okay. Margins -- gross margins were okay.

So, we started looking at those expenses, and they're just two-fold. One is: They invested money and people to grow their business, and they could -- possibly got a little ahead of themselves, which is fine. Like you said, they still had very, very good margins.

And the other, though, is that there was a higher percentage of business that the service centers produced. And so, when Mac allocates expenses, will service center expenses run higher than -- per sales dollar -- run higher than IPS's expenses per sales dollar? And so, there's just a kind of a mix of who did what, and so I don't think it's a benefit or a hurt one way or the other. It's just a fact. It's just a fact that the service centers cost more to operate than IPS.

Sure. Well, I guess the other way to look at it is -- if you had $1.4 million related to the reversal in each of those businesses, if you back that out, I guess the IPS margin was really in the same ballpark that you saw in Q2 and Q3, whereas the MRO was up. Is that kind of -- (multiple speakers)

And so, the third piece, which I think you're talking about now is that we acquired Natpro. And Natpro's fabrication business is not as profitable.

Right.

Okay? And so, that's the $1.4 million you're talking about. So, if you take that out, then, yes, their profit percentage would go up.

Well, I was actually talking about the reversal.

I think if you're comparing Q3 to Q4, or Q4 to Q3 of 2013, both segments have an extra -- have a $1.4-million reduction of SG&A in them, which makes a bigger effect on IPS.

Right. Absolutely. If you strip that out, it looks like the margin on IPS is kind of steady from Q2 to Q3, and the margin in MRO is still quite a bit higher. Is that a better picture, or a better way to think about it?

Yes. That's fair.

Okay. Then, that $1 million of M&A -- that fell to the corporate, I assume.

That went in corporate.

Okay. And absent that, the corporate was about $11.9 million negative, which is still a pretty big number. What other bits are in that?

Corporate absorbs 100% of health insurance for the entire Company. So, as the Company adds all these employees, the health insurance is all going into corporate, not into the segments. That's a piece of it. Health insurance is a lot in there.

Okay.

And then there's also a kind of compensation -- I mean, I'll admit, corporate -- from the administrative side of accounting, I mean, we're a very central -- we have very centralized back office, and so as we add more and more businesses, corporate gets bigger. There are more people required to pay the bills. There are more people required to collect the receivables. So, it all grows.

But is that -- because it grew from $9.5 million in Q3, [to it's] $11.9 million in Q4. That's a big growth in a single quarter. Is there not one item in there or anything like that? Is that $11.9 million kind of the baseline for the pre-B27 corporate going into 2014?

Health insurance was higher, and some of that I guess could just be claims, and compensation was higher.

Okay. All right. Great. Thanks, guys.

Really, when you back out the $1 million of acquisition, then you're dealing with a smaller number, and I think health insurance and compensation covered the rest.

Thank you. There are no additional questions at this time. Ladies and gentlemen, this concludes the DXP Enterprises 2013 fourth-quarter and year-end results conference call. Thank you very much for your participation today, and you may now disconnect.