DXP Enterprises Inc (DXPE) 2014 Q2 法說會逐字稿

Presentation

Good day, everyone, and welcome to the DXP Enterprises Incorporated second quarter conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Mac McConnell, Senior Vice President of Finance. Please go ahead sir.

Thank you. This is Mac McConnell, CFO of DXP. Good evening and thank you for joining us. Welcome to DXP's second 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 impact 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 2014 results. David Little will share his thoughts regarding the quarter's results, then we will be happy to answer questions.

Sales for the second quarter increased $73.7 million, or 23.9%, to $381.6 million from the second quarter of 2013. After excluding second quarter of 2014 sales of $60.6 million for businesses acquired, sales for the second quarter increased $13.0 million, or 4.2% on a same store sales basis. This sales increase is primarily the result of increases in our service center and supply chain services segments of $8.0 million and $5.1 million respectively on a same store sales basis.

Sales of innovative pumping solution products increased $37.6 million, or 71%, to $90.6 million, compared to $53.0 million for the 2013 second quarter. After excluding 2014 IPS segment sales of $37.8 million for businesses acquired, IPS segment sales for the second quarter of 2014 remained flat from the prior corresponding period on a same store sales basis.

Sales of our service center segment increased $30.9 million, or 14.2%, to $48.8 million, compared to $217.9 million of sales for the second quarter of 2013. After excluding 2014 service center segment sales of $22.9 million for businesses acquired, service center segment sales for the second quarter of 2014 increased $8.0 million or 3.7% from the second quarter of 2013 on a same store sales basis. This sales increase is primarily the result of increased sales of rotating equipment to oil and gas related customers.

Sales for supply chain services increased by $5.1 million, or 13.8%, to $42.2 million, compared to $37.1 million for the 2013 second quarter. This increase in sales is primarily related to increased sales to four existing customers in the gas turbine, oil and gas, and truck manufacturing industries that amounted to approximately $2.9 million of this increase. The remainder of the increase was primarily the result of obtaining a new customer in the oil and gas industry.

When compared to the first quarter of 2014, sales for the second quarter of 2014 increased $33.1 million, or 9.5%. After excluding second quarter 2014 sales of $6.7 million from acquired business, sales for the second quarter increased $26.4 million, or 7.6% on a same store sales basis.

Second quarter sales for each of our three segments increased from the first quarter.

Second quarter 2014 sales of innovative pumping solutions products increased $10.7 million, or 13.4%, compared to the first quarter of 2014. This increase resulted from increased sales of pump packages to midstream oil and gas customers.

Second quarter of 2014 sales by our service center segment increased $17.6 million, or 7.6%, compared to the first quarter of 2014. Excluding sales on a same store sales basis of $6.7 million from our acquisition of Machinery Tooling and Supply, service center segment sales increased $11.0 million, or 4.7% from the first quarter of 2014. This increase is primarily the result of a $9.4 million increase in sales of pumps to the energy industry.

Second quarter 2014 sales for supply chain services increased $4.8 million, or 12.8%, compared to the first quarter of 2014. Sales increased to a broad variety of existing customers. The largest sales increases were to customers in the food and beverage, rubber, energy, and truck manufacturing industries.

Gross profit as a percentage of sales, for the three months ended June 30th, 2014, decreased by 62 basis points compared with the second quarter of 2013. This decrease was primarily the result of businesses acquired in 2013 and 2014 having a lower gross profit percentage than the remainder of DXP. On a same store sales basis, the gross profit percentage increased by nine basis points from the prior corresponding period as a result of improved gross profit margin for the IPS segment.

Gross profit as a percentage of sales for the second quarter of 2014 slightly decreased to 21.9% from 29.2% for the first quarter of 2014. This decline is a result of the May 1, 2014 acquisition of Machine Tools. On a same store sales basis, the gross profit percentage increased by seven basis points in the first quarter of 2014. Gross profit as a percentage of sales for the supply chain services segment declined by 11 basis points, which is essentially flat.

Gross profit as a percentage of sales in our IPS segment increased from 27.4% in the first quarter, to 29.8%. This increase in gross margin resulted from sales of higher margin pump packages to midstream oil and gas customers. On a same store sales basis, the gross profit as a percentage of sales in our service center segment decreased 50 basis points in the second quarter compared to the first quarter. This decline is primarily the result of declines in sales of higher margin safety services work related to work over rigs in the US and well completions in Canada.

SG&A for the second quarter of 2014 increased by [$14.54] million, or 21.1% from the second quarter of 2013, compared to the 23.9% sales increase. This increase is primarily the result of $10.1 million of SG&A expenses associated with acquisitions completed during 2013 and 2014.

Excluding expenses from businesses acquired on a same store sales basis, SG&A increased by $4.3 million, or 6.2%. This increase is primarily related to $2.1 million, or 84.4% increase in healthcare claims, and $2.2 million, or 3.2% increase in other SG&A expenses, which is consistent with the 4.2% increase in sales on a same store sales basis.

As a percentage of sales, the second quarter 2014 expense decreased 50 basis points to 21.7% from 22.2% for the prior corresponding period, primarily as a result of B27 having lower SG&A as a percent of sales than the rest of DXP.

The SG&A for the second quarter of 2014 increased $3.1 million, or 3.9% from the first quarter of 2014. Expenses of businesses acquired on a same store sales basis accounted for $1.2 million of the increase. A $1.9 million increase in health claims accounted for the remainder of the increase. As a percentage of sales, SG&A decreased to 21.7% from 22.8% for the first quarter of 2014, as a result of sales increasing 9.5% and SG&A increasing only 3.9%.

Operating income for the second quarter of 2014 increased $5.1 million, or 22.1% from the second quarter of 2013. This increase in operating income is primarily the result of the 23.9% increase in sales.

Operating income for the innovative pumping solutions segment increased 95.3%, primarily as a result of the 71.0% increase in sales. Excluding operating income from acquired businesses of $4.8 million, operating income increased $2.9 million on a same store sales basis. This increase was primarily the result of a 442 basis point increase in gross margin. The increased gross profit as a percentage of sales for the IPS segment on a same store sales basis is the result of sales of higher margin pump packages to midstream oil and gas customers.

Operating income for the service center segment increased 9.0%. Excluding second quarter service center segment operating income from acquired businesses of $2.5 million, service center segment operating income for the second quarter in 2014 decreased $400,000, or 1.8%, primarily as a result of a 64 basis point decline in the gross profit percentage for the segment on a same store sales basis. The decline in gross profit as a percentage of sales on a same store sales basis is primarily the result of declines in sales of higher margin safety services work related to work over rigs in the US and well completions in Canada.

Operating income for the SCS segment increased 13.3%, primarily as a result of the 13.8% increase in sales within the segment. Operating income for the second quarter of 2014 increased by $6.2 million, or 28.1% for the first quarter of 2014. B27 generated $3.8 million of this increase. Natpro's operating income improved by $900,000.

Interest expense for the second quarter of 2014 increased 88% from the second quarter of 2013, primarily due to increased borrowings to fund our January 2, 2014 acquisition of B27, and our May 1, 2014 acquisition of Machinery Tooling. The increased borrowings for acquisitions also increased the interest rate on our borrowings.

Interest expense for the second quarter decreased $200,000, or 6.5%, from $3.4 million in the first quarter of 2014 to $3.2 million. This decrease is primarily the result of interest rates on our credit facility in the second quarter being approximately 25 basis points lower than during the first quarter because the company's actual leverage ratio was lower than the pro forma ratio used starting on January 2, 2014.

Total long-term debt increased approximately $21.3 million, to $491.8 million, during the second quarter of 2014. This debt increase is partially the result of acquiring Machine Tools for $14.9 million, purchasing 100,000 shares of DXP stock for $6.8 million, and a $22.6 million increase in accounts receivable. The increase in accounts receivable is primarily the result of the terms of a large pump package which is expected to be collected during the third quarter.

At June 30th, 2014, the amount available to be borrowed under our credit facility was approximately $63 million. Our bank leverage ratio was 3.1 to 1 at June 30th, 2014, up from 2.99 to 1 at March 30th, 2014. At June 30th, our borrowings under the credit facility were at an average interest rate of 2.15%. Our interest rates will increase 25 basis points in August 2014 as a result of the increase in the leverage ratio.

Capital expenditures were approximately $3.0 million for the quarter. Cash on the balance sheet at June 30th, 2014 was $12.1 million. Accounts receivable at June 30th were $281.9 million. And inventory at June 30th was $111.9 million.

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

Thanks, Mac. Reviewing our first quarter results, second quarter results, we are pleased with the progress we have made since our first quarter, but we still believe we have a lot of work ahead of us. We experienced 24% sales growth year-over-year, and saw improvement in both Natpro and B27. Overall, DXP grew organically 4% with acquisitions adding $61 million for the quarter.

EBITDA year-over-year grew 25% from the quarter, with margins of 9.43%. And our after tax return on invested capital was 28% for the quarter, versus 31% for the same period in 2013.

With our progress, we continue to see areas we need to shore up, including targeting the right sales growth opportunities, profit optimization, working capital management, and continued improvement of our safety service division, Natpro and B27.

As it pertains to Natpro and B27, for the quarter, Natpro had $0.01 per share dilution versus $0.05 per share dilution in the first quarter. While B27 was $0.09 per share accretive versus $0.06 per share diluted in the first quarter.

At Natpro, we have begun to correct the engineering issues experienced in Q1, implemented some workforce reductions, and have added some new management depth. Our IPS team from Houston continues to spend increasingly more time with our team at Natpro, sharing best practices and beginning the early stages of leveraging engineering. As we discussed on our last call, we believe this is at least a six-month process, and we are seeing progress week-to-week and month-to-month, and we look forward to continued improvements for the remainder of the year.

Additionally, while we are still in breakup season in Canada, as we go into the second half of the year, we are encouraged by the improving rig count and the overall tone of the market. As of June 30th, 2014, Alberta rig count was up 35 rigs, or 29%, and Canada was up 30 rigs or 15% over the same period in 2013. We believe, should this trend continue, that we should see good results, not only from Natpro, but also from our other Canadian businesses, which are more heavily tied to rig count, such as HSC and Industrial Paramedic Services.

With regards to B27, we experienced sequential sales growth, along with a 300 basis point improvement in gross profit margins, and a 680 basis point improvement in EBITDA margins. Orders for IFS have increased each month, but are not at the levels we would like to see them at. They are working on some large orders that may be placed this year. The other parts of B27 are performing as expected.

DXP's safety services has grown on the product side of the business. The safety services side has declined because of a large account in our Canadian operation. Note that services have much larger gross margins. The large account is being replaced with new customers, and Canada is mostly seasonal, and they see some improvement in the second half of the year, with some slowness caused by capacity constraints of pipelines and rail cars.

I would like to thank our Canadian associates for their efforts on improving their operations. You have made some nice progress and I personally look forward to your continued progress and future successes.

Our working capital and cash flow needs, needs a little work, as accounts receivable increased $23 million in the quarter. The good news is most of this increase is the result of the terms of a large pump package, which is expected to be collected in the third quarter.

Overall I am pleased with our progress in the second quarter, and I like the direction of our financial performance and where we are headed. Our long-term goals and growth strategies are intact, including future acquisitions.

I would now like to summarize the activities of our three business segments, service centers, supply chain services, and innovative pumping solutions.

From Q1 of 2014 to Q2 of 2014, the service center segment sales increased 7.62%. Operating income increased from $24.4 million to $25.4 million, for a 4.35% increase. This sequential increase is primarily driven by improvement in our pump sales, offset by a decrease of 76 basis points of gross margin caused by a decline in our safety services business, which has high margins.

We are expecting our oil and gas customers to have modest growth in the third quarter, with upstream, midstream and downstream activities trending slightly up. Food and beverage will continue to run flat at present, while the general industrial market remains mixed. Our quotation activity is trending up, and we fully expect to grow by taking market share from distributors that lack the breadth of technical products, services and expertise needed in this highly competitive market.

We continue to focus on our sales channels development through commercial and technical training. The human capital investments made in the second half of 2013 are beginning to show some positive results. We are also thrilled to announce that our Ohio River Valley management team successfully elevated our -- sorry [about that] -- Avilla, Indiana service center to a super center status. We would like to recognize our employees, customers, and suppliers in the Avilla market for their dedication and support in gaining our latest super center. We move into the second half of the year with a network of 38 super centers, and a goal to deliver two additional super centers in the third quarter of this year.

In summary, we expect to complete and win during the second half of our physical year. Our customer driven strategy continues to create value for industrial customers seeking to consolidate their vendor base without sacrificing local inventory and expertise. Our focus will remain on future strengthening of our North American service center platform through the creation of super regions and super centers that will provide substantial benefits to industrial customers looking to improve their overall production and financial performance.

Supply chain services. In the second quarter of 2014, DXP supply chain services saw an increase from 65 onsites to 69 onsites, and from 98 offsites to 99 offsite facilities, which contributed an increase to both the top line and the bottom line versus the first quarter. During Q1 and Q2, the SCS team completed four onsite locations and one offsite, which will increase revenues over the next two quarters. These industries comprised of oil and gas, mining, automotive and energy, keeping a well-balanced customer mix in the supply chain segment. Implementations started in Q1 and Q2 will result in three additional onsite locations coming online by early Q3.

There was modest growth in existing accounts, as well as organic growth based on winning new deals. SCS continues to use technology as a differentiator to gain market share and establish the business segment as experts in automating the supply channel. The latest technology SCS has implemented uses a storeroom [e-pod] and remote point of use ordering device that allows customers to order storeroom or production supplies from a local [kiosk], which returns travel time, increases productivity. E-pod also allows us, yes, to further automate storerooms with electronic signature and real time issuances and cycle counts.

Management trainees are joining DXP at the rate of one new college grad a quarter, with degrees in supply chain and in industrial distribution. These grads are trained in DXP sales and operational excellence programs, and provide a great resource for implementation and later onsite management and business development. The career path has proven to be rewarding to the employees, DXP, and most importantly, to our customers.

IPS segment. Upstream oil and gas and mining sector, land based, quote activity and order rate and order hit rate in this sector continues to remain strong. We expect this profile to remain consistent through Q3. We expect very favorable order hit rates in Q3 as well.

Mining. Most of the success continues in the copper mines in the Southwest US, Central America, South America, and Mexico. Quote activity and order rate remain consistent in Central, South America and Mexico. We will see a pullback in US copper mining projects and feel this pullback is due to copper prices.

Midstream and upstream. This sector continues to be one of our top performing sectors as it relates to quote activity, orders received and future order potential. The Eagle Ford, Permian, Bakken shale plays continue to provide the majority of our activity. Marcellus and Niobrara continue to provide opportunities, however not at the rate of the Eagle Ford, Permian and Bakken shale plays.

The majority of the products being quoted and sold in the Bakken are associated with our LACT units. There has been a resurgence in activity in salt water injection market. We are supplying equipment for terminal loading and offloading facilities utilizing our centrifugal packages that are being fabricated in the 529 Houston and Golden, Colorado locations.

Our LACT units being produced in West Texas are being utilized in the Eagle Ford and the Permian shale plays. And a large component of the Eagle Ford and Permian shale play activity continues to be associated with our horizontal pumping equipment. The horizontal pumping equipment is being utilized in the LACT unit process, pipeline, gathering station, booster stations and salt water disposal applications. Our centrifugal pump continues to be utilized in the gathering system locations, truck loading, uploading systems, as well as the booster systems for the HP Plus or horizontal pump applications.

Our high engineered, multi-stage, remanufactured equipment and re-rate business is very robust. This equipment is being utilized in midstream sector, gathering stations and booster station applications. This equipment is being used in crude oil and LNG applications.

Recently we had a huge win with our plunger pump equipment with a major midstream customer. The equipment application was for a crude oil gathering station and pipeline service. This has resulted in 101 plunger pump packages being placed in service in the Permian and Eagle Ford shale plays in the upcoming months.

We continue providing a delivery proposition for our horizontal pump, centrifugal pump equipment, and our remanufactured high energy pump with lead times that allows us to outperform our competition when delivery is a major factor. We are very optimistic our US midstream, upstream opportunities will remain strong through Q3.

The Gulf of Mexico. This sector continues to remain soft. We are certainly active with upcoming new platform projects that will start issuing orders for equipment in Q3 and Q4. 2015 is showing signs of new platform projects that are presently on schedule to move forward.

Canadian markets. Municipal market in Eastern Canada still has not rebounded. Oil and gas, this sector continues to be sluggish. Major players are slow to place orders. Quote activity and order potential remain strong. The key factors associated with the Canadian oil is they have maximized the current infrastructure to export product due to current export pipeline and rail capacity. Due to the seasonality and open quotes for viable projects, we are optimistic Q3 should be consistent with Q2.

Latin America and the Caribbean. Oil and gas, we experienced some increase in order placement for modular equipment in this sector in Q2, however our order rates are behind our expectations. IFS is optimistic about the upcoming opportunities on modular equipment in Central America. We have been very successful in this region in the past.

Mideast and Dubai. At present this sector is performing on plan with our API product line equipment and modular packaging opportunities have developed as we expected thus far. We remain focused on the region and all opportunities. Our quote activity is consistent. The current state of rest in the region is definitely having a negative effect on the project opportunities moving forward.

We are optimistic Q3 will remain robust with our product and service supporting major US oil and gas shale plays in the upstream and midstream markets, along with Central, South America, Mexico mining markets. We are confident the Central American oil and gas markets will provide great opportunities in the upcoming months.

When the Gulf of Mexico opportunities arrive, we are poised and ready to respond quickly to support our customers that operate in this market. We have solid relationships and history with companies that should weigh in our favor for equipment for the current and upcoming project opportunities.

In summary, I would like to congratulate the supply chain solutions group for their 13.83% organic growth, and what appears to be a very good year for them.

IPS segment continues to have a great year, and we anticipate their efforts to improve Natpro and IFS.

Congratulations to our service center group for their new super center.

All of the divisions have grown, and a special thanks to the growth and increased margins of our rotating equipment division. We still have some areas to improve on. And thanks to everyone's efforts to making DXP the best it can be.

We are now open for questions.

Thank you.

(Operator Instructions)

We'll take our first question from Matt Duncan with Stephens. Please go ahead.

Good afternoon, guys.

Hey Matt.

Hey Matt.

So things sound a little better this quarter than last. It looks like you guys are seeing the energy side at least pick up quite nicely for you. Would that be fair to say?

Sure. No, I think that's fair to say. I think we've done a lot of work operationally and things are improving and heading in the right direction.

So just a few detail questions here. On B27, that was a pretty significant increase in revenue sequentially there. What drove that? And as we look at how to forecast that business, should we think that it's going to continue to put up revenues similar to what you had this quarter, or was there something in this quarter that may not repeat?

No, we feel like they had a lull in the first quarter. And then the second quarter, they certainly had a nice increase, like you said. A lot of it though was also an increase in their gross profit margins, which resulted in much higher EBITDA margins, which was nice.

And then I think as far as projections are concerned, well even if we get some significant orders that we're working on this year, most of that is going to affect 2015. So we think that they're going to be pretty flat for the rest of this year.

So flat around that $43 million number?

Yes.

Yes.

Okay. And it's now $0.03 profitable for the year. I think it lost $0.06 in the first quarter, but it was $0.09 accretive in the second quarter. Are you expecting the margins in that business to be pretty similar through the balance of the year as well as what it was in the 2Q?

Yes.

Okay. So we're now thinking that business is going to be profitable for you this year, by call it $0.20, give or take?

Yes.

Okay. Good. In terms of the service center uptick in organic growth, is it fair to say, just kind of going back to the energy side of things, that it's really energy that's driving that, and industrial, food and beverage are the things that you said are still pretty flattish, David?

We did see mixed results in the manufacturing sector in (inaudible). I thought this was interesting. The other day I was talking to our new acquisition in Chicago and they were talking about how manufacturing was really kind of picking up there. And I was like wow, I mean like automotive, what, you know? And they said, no, oil and gas. And I went, oh, okay. What do you mean oil and gas? Oh yeah, we have cutting tools to (inaudible) manufacturers and their products are all sold in oil and gas.

So I think there's -- when you look at manufacturing, I guess it depends on what markets you're looking at. And so those -- you know there's some bright spots there. But certainly the biggest growth market we have is oil and gas.

I mean the fact that when -- well supply chain had really good sequential growth Q2 to Q1. And I was expecting it all to be a new customer and it turned out, no the sales growth was all from just a variety of existing customers, which to me points to GDP.

Yeah, that's sort of was going to be my next question, Mac. I mean that segment tends to be a decent leading indicator because in that business you've got a hundred percent of a plant's MRO spend. So if you're seeing that kind of sequential improvement there, is there anything specific to the customers that you saw that uptick in, you know maybe something they're doing? Or do you guys think maybe that's an indication that there's some improvement coming on the manufacturing side?

Well interestingly enough, I mean it was a variety, so that $4.8 million increase was spread among a bunch of customers. And the biggest one was food and beverage. But it was across the board. We also -- you know [Haliburton], you know we think the oil and gas is showing signs that that may be picking up (inaudible).

Okay. Last thing and I'll hop back in queue. David, the organic growth number at IPS, if I'm going to nitpick, being a little bit flat this quarter, I'm sure is a little different than maybe what you had expected. What do you think caused that to flatten out? Is it just a function of you had a really good 2Q last year then you were up against a tough [cop]? Was it timing of package completions? What's your thought on what the growth ought to look like in that segment? Why did it flatten out here?

Yeah, I don't think it's -- you know you're right, its sales were flat. But we're not expecting it to flatten out, we're expecting to finish the year strong.

Okay. So it's probably timing, up against the tough cop. There's really nothing to read into that. And I know that the nature of that business is -- it can be pretty lumpy anyway. But it sounds like the quote activity, all that stuff is still very positive for you, that's the main thing.

Right.

Okay, thanks. Sorry, and I'll hop back in queue. Thanks guys.

(Operator Instructions)

We'll take the next question from Holden Lewis with BB&T. Please go ahead.

(Inaudible) thank you. Good afternoon. (Inaudible) against my model is that 17.4 IPS margin, which obviously was significantly improved over (inaudible) we've seen for probably six, seven quarters. You know as you've indicated, you think that it's sustainable, but can you give some color as to why it leapt so much from Q1? Is that sort of the organic business, the acquired business? Is it just mix? How are we thinking about the big jump in that metric?

I mean it is clearly mixed. You know each order is a custom made package. We're dealing with what's the competition. We're dealing with, when did we bid it and the process. Some packages were quoted a long time ago, some more recently, and so they each vary. I mean the easy answer -- the answer that I got was that the midstream business is really strong and that's where most of the business is, and it was just, it was better.

Okay.

And now (inaudible) Holden, I wasn't really too much into thinking going forward that our GP margins are going to be that high every quarter. I think we have to take -- when we look at gross profit, we look at operating margins. You know we kind of need to take an average for the year kind of approach, because it -- I mean we'll take a job at 20% if we think that's what we have to do to get it, but the next one -- and it will be the same kind of equipment -- you know we can get at 40% So you just kind of have to -- you're going to have to average that.

Right. Well I guess that's what I was going to ask, is I mean did you know -- because it is obviously a bit of a percentage completion type of business and that sort of thing. But I mean did you know coming out of Q1 into Q2 that this was the margin that you would get, just because it is a backlog for (inaudible) business? (Inaudible) how much visibility do you have into the Q3 and the back half margin?

You know we don't look at that, but we could. I mean you're absolutely correct, I mean you could sit there and say okay, David [Vincent], we have these 10 jobs we're working on, what is the margin that we expect to make on those? And he could tell us and then therefore we could calculate all that out and come up with an answer for you. But I'll just tell you, we don't normally do that.

Okay, but the way you would suggest we approach this is not to run the 17.5 out for the rest of the year, but maybe to sort of think about a 15ish type number for the rest of the year just to kind of average the Q1 and Q2. Is that the thought or is there some reason (inaudible)?

That's my thought. That's my thought.

All right, and you can kind of figure this out if you look at it. The operating income percentage for IPS, when you back out the acquired businesses, was 20% for two quarters in a row. And we've achieved 20% before. So that's -- I mean that's a really good margin for that business. It's also not one that we haven't achieved before when we're busy. I mean there are a lot of fixed costs that go into cost of sales.

Right.

And so they're -- in fact they can be running more shifts, so in theory they could do better. I'm not trying to say they are. But that's part of it, is that they're very busy right now, and they've moved into a time period where the jobs they're selling were quoted more recently, in a busier time. And so they're backed to, really I think they're back to where they've been sort of before, but that's not say next quarter could be down as a margin percentage, because (inaudible) unique.

Right. But [core] IPS, that was at about 20% in both Q1 and Q2?

Yeah, backing out acquisition, the operating income was 20% in both quarters.

(Inaudible).

And we've done that before, and it has come down. So I'm trying to say this isn't -- this is good, but it's not unusual. Yeah, David?

So if the core IPS was consistent from Q1 to Q2, but you had a big leap from Q1 to Q2 overall, which business did you see that leap occur in? Was it B27?

Well both B27 and Natpro. Even though Natpro was still diluted, it had a nice increase. It improved to having positive operating income. I mean its operating income grew by $900,000 between the quarters. And B27 generated $3.8 million more of operating income.

(Inaudible). And then also, sticking with the margin theme, in the MRO segment, obviously (inaudible) when it was low, when it kicked down a little bit more again in MRO, kind of what's going on there? It feels like it should be a better margin business than that. Can you give us some insights into sort of trend, whether you think that margin's bottomed? How are you thinking about that?

Well I think not all of it, but most of it relates to safety services not products. But safety services has the potential of having you know 40% margin, gross margin. So we lost a significant account, and then Canada has just gone through kind of a falling out, breakup part of their deal. So margins were down, in my opinion, because of those two events.

Now we've replaced a lot of the account, the large account we've lost, and sales are trending back up to them. And then the Canada piece is coming out of their slow season. So I would hope and expect margins to improve.

(Inaudible). It's a higher margin business, and the higher margin business declined in sales and in percentage.

Right.

So it had sort of a big impact on the gross profit percentage.

Again because of fixed overhead. Even in cost of goods sold, we're renting people and we're renting equipment, and if we're not a hundred percent utilized, well then margins will be negatively affected.

So most of the MRO business is running [stable], it's just that (inaudible) safety services so there's the margin is kind of the thought?

Right. (Inaudible).

All right. Thank you.

We'll take a follow-up question from Matt Duncan.

Hi guys. So Mac, do you have the month-to-month sales trend through the quarter? Did you guys see the sales momentum kind of build as the quarter went on? And how does July look?

We did see the trend. The sales per day in April were $5.6 million, $6.0 million in May, $6.5 million or [$6.552] million in June.

Okay. And then how does July look? I know that the last day of the month, which is today, could swing that pretty significantly, but just in terms of general tone of business, do things continue to look like they're picking up a little bit?

Yes, I believe that. And we see that in our short window of backlog, which is kind of increasing.

Okay, good. And then last thing for me, David, last call it sounded like you might step back from M&A for a little bit here to just sort of make sure you had all your recently done acquisitions sort of fixed, if you will. It sounds like you're feeling a lot better about Natpro after you've made some changes there. B27 bounced back pretty nicely. How are you feeling about M&A right now? What's the pipeline look like and sort of what's your appetite there?

Well the pipeline never went away and so we're back after acquisitions again.

Would you expect to get something closed before the end of the year?

Probably.

Okay. All right, thanks guys.

Thank you. And with no questions remaining, that does conclude today's conference. We thank you all for your participation.