DXP Enterprises Inc (DXPE) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the DXP Enterprises Incorporated third-quarter conference call. Today's call is being recorded. At this time, I'd like to turn the conference over to Mr. Mac McConnell, Senior VP 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 third-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 could differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings, but DXP assumes no obligation to update that information.

I will begin with a summary of DXP's third-quarter 2014 results. David Little will share his thoughts regarding the quarter's results and then we will be happy to answer questions.

Sales for the third quarter increased $57.3 million, or 17.4%, to $387.1 million from the third quarter of 2013. After excluding third-quarter 2014 sales, up $46.4 million for businesses acquired, sales for the third quarter increased $11 million, or 3.3%, 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 $5.8 million and $7.3 million respectively on a same-store sales basis. These increases were partially offset by a decrease within our IPS segment of $2.2 million on a same-store sales basis.

Sales of the innovative pumping solution products increased $27.5 million, or 45%, to $88.6 million compared to $61.1 million for the 2013 third quarter. After excluding 2014 IPS segment sales of $29.7 million for B27, which was acquired in January, IPS segment sales for the third quarter of 2014 decreased $2.2 million, or 3.5%, from the prior corresponding period on a same-store sales basis. We believe this decline in sales is the result of the timing of orders and not a trend.

Sales by our service center segment increased by $22.5 million, or 9.7%, to $255 million compared to $232.5 million of sales for the third quarter of 2013. After excluding 2014 service center segment sales of $16.7 million for businesses acquired, service center segment sales for the third quarter of 2014 increased $5.8 million, or 2.5%, from the third quarter of 2013 on a same-store sales basis.

This sales increase is primarily the result of increased sales of rotating equipment, oil and gas related customers. We believe our oil and gas related customers increased purchases of rotating equipment primarily because of increased oil production in the US.

Sales for supply chain services increased by $7.3 million, or 20.2%, to $43.4 million compared to $36.1 million for the 2013 third quarter. Approximately $4.2 million of this increase in sales is related to increased sales to five customers in the gas turbine, oil and gas and trucking industries. The remainder of the increase is primarily the result of obtaining a new customer in the oil and gas industry as well as increased sales in the food and beverage industry.

When compared to the second quarter of 2014, sales for the third quarter of 2014 increased $5.5 million, or 1.4%. After excluding third-quarter 2014 sales of $3.3 million from acquired -- from an acquired business, sales for the third quarter increased $2.2 million, or 6/10 of 1% on a same-store sales basis.

Compared to the second quarter of 2014, third-quarter 2014 sales of innovative pumping solution products decreased $2 million, or 2.2%. Again, we believe this decline in sales is the result of timing of orders and not a trend.

Compared to the second quarter of 2014, third-quarter 2014 sales by our service centers segment increased $6.2 million, or 2.5%. After excluding third-quarter 2014 sales of $3.3 million from an acquired business, service center segment sales for the third quarter increased $2.9 million, or 1.2%, on a same-store sales basis. This increase is consistent with the third quarter containing one more business day than the second quarter.

Compared to the second quarter of 2014, third-quarter 2014 sales for supply chain services increased $1.2 million, or 2.9%. This increase is the result of increased sales to a variety of customers.

Gross profit as a percentage of sales for the three months ended September 30, 2014 decreased approximately 20 basis points from the prior corresponding period in total and on a same-store sales basis. Declines in gross profit as a percentage of sales for the service center and supply chain segments were partially offset by an increase in the gross profit percentage for the IPS segment.

Compared to second-quarter 2014, gross profit as a percentage of sales for the third quarter of 2014 slightly increased to 29.3% from 29.1% for the second quarter of 2014. The gross profit percentage increased slightly in all three quarters on a sequential basis.

SG&A for the third quarter of 2014 increased $11.4 million, or 16.2%, from the third quarter of 2013 compared to the 17.4% sales increase. Excluding expenses from businesses acquired on a same-store sales basis, SG&A increased by $3.3 million, or 4.7%.

This increase is primarily related to a $1.1 million increase in healthcare claims. Excluding the increased healthcare claims, the 3.1% increase in SG&A on an same-store sales basis is consistent with a 3.3% increase in sales on a same-store sales basis.

As a percentage of sales, the third quarter 2014 expense decreased approximately 20 basis points to 21.1% from 21.3% for the prior corresponding period, primarily as a result of B27 and other businesses acquired having lower SG&A as a percentage of sales than the rest of DXP.

Compared to the second quarter of 2014, SG&A for the third quarter 2014 decreased $1 million, or 1.3%. Expenses of acquired business on a same-store sales basis accounted for a $500,000 increase, which was offset by $1.6 million decrease for the remainder of DXP. This decline in SG&A is primarily the result of head count and cost reductions in our Canadian operations. As a percentage of sales, SG&A decreased approximately 60 basis points from the second quarter and 2014 as a result of sales increasing 1.4% and SG&A decreasing 1.3%.

Operating income for the third quarter of 2014 increased $4.9 million, or 18.2%, from the third quarter of 2013. This increase in operating income is primarily the result of the 17.4% increase in sales. Operating income from businesses acquired accounted for $5.6 million of this increase.

Excluding operating income from businesses acquired on a same-store sales basis, operating income decreased $700,000, or 2.6%, from the corresponding -- prior corresponding period. This decline is primarily related to the increased SG&A expenses discussed above.

Operating income for the IPS segment increased $5.9 million, or 65.4%, primarily as a result of the 45% increase in sales. Excluding operating income from acquired businesses of $5.8 million, operating income increased $100,000 on a same-store sales basis.

Operating income for the service center segment increased $1.9 million, or 6.9%. Excluding third-quarter service center segment operating income from acquired businesses of $1.4 million, service center segment operating income for the third quarter of 2014 increased by $500,000, or 1.8%, primarily as a result of the increase in sales. Operating income for the SCS, or the supply chain services segment, increased $500,000, or 16.2%, primarily as a result of the 20.2% increase in sales within the segment.

Interest expense for the third quarter of 2014 increased to 104% from the third quarter of 2013, primarily due to increased borrowings to fund our January 2014 acquisition of B27 and our May 2014 acquisition of Machinery, Tooling & Supply. The increased borrowings for acquisitions also increased the interest rate on our borrowings.

Interest expense for the third quarter increased 3.8% from the second quarter to $3.3 million. This increase is primarily the result of higher interest rates in the third quarter due to the Company's leverage ratio increasing to [3.1 to 1] as of June 30 from the [2.99 to 1] it was as of March 31.

Total long-term debt decreased approximately $42.2 million during the third quarter of 2014. During the third quarter of 2013 -- 2014, the amount available to be borrowed under our credit facility increased approximately $4.3 million to approximately $77.4 million. This increase was primarily the result of reducing debt.

Our bank leverage ratio was 2.9 to 1 at September 30, 2014. At September 30, our borrowings under the credit facility were at an average rate of approximately 2.41%.

Capital expenditures were approximately $3.4 million for the quarter. Cash on our balance sheet at September 30, 2014 was $9.9 million. Accounts receivable and inventory balances were $269.5 million and $117.1 million respectively at September 30, 2014.

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

Thanks, Mac. Thanks to all of our participants on our call today. Special thanks to our solid execution by our DXP people. DXP posted strong results in the third quarter 2014.

The DXP team continues to improve throughout the year and executed well on an inconsistent market environment. We continue to see progress in Natpro and B27. We have improved operating income margins, delivered better-than-expected earnings, generated strong cash flow for the third quarter.

We've experienced 17.4% year-over-year sales growth with most of our markets flat and 0% inflation. I am pleased with our efforts to take market share away from our competitors.

Our organic growth rate of 3.3% is okay and we are challenging ourselves to improve existing sales strategies and use our expertise and technology to better serve our customers and to create new sales growth opportunities. Profitable growth remains a primary focus, including M&A opportunities and organic initiatives, as we position DXP to deliver and drive increase shareholder value.

DXP serves all industrial markets, but our largest market is oil and gas. And with prices declining, the question is how will this affect DXP?

So in my opinion, first, the decline in prices is all about supply and demand and the value of the dollar. The US has plenty of demand and it can be -- because it can replace imports, but the prices are set by global demand and the strength of the dollar.

Second, the oil and gas industry has three parts: upstream, midstream and downstream. It is all about cash flow, in my opinion. If an oil company's upstream business has less cash flow because of lower prices, then he cuts drilling and he does everything possible to increase production/cash flow. The [exception] is long-term projects in companies with big balance sheets that can use low prices as an opportunity to take market share.

Midstream falls into the long-term capital investment. And if a downturn is long enough and reduces production and the flow of oil, then they also stop spending money. Downstream benefits from lower prices and so does the consumer. They have more free cash flow and demand goes up and they spend to grow.

In a perfect world, the price of a barrel of oil would allow the upstream guys to make money but low enough that other industries make money and the consumer has more disposable income to buy things. Not sure where that value is, but it would be nice for everyone to be there and to do great.

This is a very simple look at a complex industry and the point is, how does this affect DXP? We believe that the other 60% of our business will simply do better with lower gas -- oil and gas prices. Production is cash and DXP is heavily weighted on the production side versus the drilling side.

Long-term capital projects continue to move forward unless the price decline duration is over several years, which we simply don't see happening. Our customers are telling us business is normal and long-term projects are still moving forward.

Oil companies have to increase reserves or they decline in [value]. And the world needs chief energy. So when supply and demand are out of sync, then there's a correction that is usually short in duration to bring supply and demand in balance and we have prices that provides cash flow for everyone.

We are simply in the -- see the financial results of our third-quarter profits. Our deluded earnings per share increased 7% and increased sequentially 14%. EBITDA margins improved 39 basis points to 10.28% and, sequentially, 85 basis points. Our leverage ratio improved to 2.92 to 1 compared to 3.1 to 1 because of $42.2 million in debt reduction and increased EBITDA.

These results were because of gross margin, sequential growth to 29.3%, expense [control], which reduce SG&A sequentially 58 basis points quarter-to-quarter, and 22% -- 22 basis points as a percent of sales. Our after-tax return on investment -- invested capital improved to 29% for the quarter.

I would now like to talk about our segments. We are excited to report year-over-year service center segment sales increased 9.7%, operating income increased 8.09%, organic growth was 2.9% while organic operating income increased 7.98%. Sequentially, organic sales increased 2.5% and organic operating income increased 17.87%.

We are pleased with our year-over-year growth, which is primarily driven by market share gains in acquisition. The slight decrease in margins is driven by gross margin softness and sequential year-over-year increase is driven by continued improvement in our non-oil and gas MRO sales, gross margins, decreases in SG&A from the beginning of the year until the end of the third quarter.

We're expecting our oil and gas customers behavior to remain steady in the fourth quarter with upstream land-based drilling to be flat, midstream and downstream activity trends slightly up. We are seeing positive movement in food and beverage, aerospace and medical while the general industrial market remains mixed.

Our mission is to provide the highest quality customer service through our expertise of the products we distribute and the technical services we perform with a sense of individual product and Company [expertise]. This commitment to being customer driven experts and MROP solutions requires us to make ongoing investments in our employees, our latest commercial training target and our existing sales force involves successfully implementing the impacts sales process across 60% of North American sales channel.

The impact selling system covers the entire sales process from prospecting to retention. We strive to make investments that benefit our DXP people as well as our customers to further enforce our expertise in cross-selling efforts. When our sales professionals are trained in providing solutions and not transactions, the end results are mutually advantageous.

We are also thrilled to announce the creation of two supercenters, San Antonio, Texas, and Cedar Rapids, Iowa. We would like to recognize our employees, customers and suppliers in the San Antonio and Cedar Rapids market for their dedication and support in gaining our latest supercenters. We move into the fourth quarter with a network of 40 supercenters and a goal to deliver two additional supercenters by December 31.

In summary, our customer-driven strategy continues to create value for industrial customers seeking to consolidate their vendor base without sacrificing local inventory and expertise. During the final quarter of the fiscal year, we intend to complete and win -- compete and win as our focus will remain on further strengthening our North American service center platform to the creation of super regions and supercenters that will provide sustainable benefits to the industrial customers looking to improve their overall production and financial performance.

A little bit of data here -- we have presently at the end of Q3 143 service centers, 34 service centers -- those were US -- 143 US locations, 34 Canadian locations, 1 location in Dubai for a total service centers of 178, supercenters 40, supercenters in progress 6, distribution centers 8, fabrication centers 12. We are in 34 states.

The reduction, if you've been keeping track -- reduction in service center count is minus-1 due to the consolidation of Tool Tech in San Antonio pump locations in San Antonio to create a supercenter. San Antonio and Cedar Rapids, Iowa, conversion to supercenters resulted in a reduction in progress but added to the supercenter count.

Supply chain services. Supply chain services had a great third quarter with organic revenue increase of 20.23% and operating income increase of 16.17%. There was modest growth in existing accounts as well as new organic growth based on winning new deals.

In the third quarter of 2014, DXP supply chain service saw an increase from 29 on-sites to 72 on-sights and from 99 off-sites to 100 off-site facilities, which contributed an increase to the topline and bottom-line versus the second quarter. During Q3 and Q4, the SCS team completed three on-site locations and one off-site, which will increase revenue growth over the next two quarters. These industries are comprised of aircraft and general manufacturing, keeping a well-balanced customer mix in the supply chain segment.

Implementations completed in Q3 and Q4 will result in three additional on-site locations coming online by mid-Q4. The ramp-up time and pro forma revenue is usually six months and growth is anticipated in Q1 and Q2 of 2015.

SCS continues to use technology to differentiate to gain market share, establish the business segment as experts and automating the supply chain. [Customized] B-to-B, E-commerce ordering platform were developed and tested in Q2 and Q3 allowing customers to purchase authorize and standardized products online as well as providing additional channel to procure product.

The [SCS] management team begin the development, sustainability initiative with several customers in 2014 to integrate the use of green products, recycling products and energy conversion. These initiatives not only benefit the environment but also allowed for a creative opportunity for joint cost savings.

IPS -- sales were down a little in the third quarter on an organic basis. We contribute this to timing of shipments, not a trend. When we look at upstream oil and gas and mining sector, activity and land-based sector continues to be strong. We expect to have a good fourth quarter and 2015 looks like business as usual.

Mining -- we have seen a pullback in US copper mining projects. Until 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 work potential, the Eagle Ford, the Permian, the Bakken shale play continues to provide the majority of these opportunities. The majority of the products being quoted and sold in the Bakken are associated with our measurement equipment packages, known as LACT units.

We continue to see activity in the saltwater injection market. We are supplying equipment from the terminal loading and offloading facilities utilizing our centrifugal packages that are being fabricated in 529 Houston and Golden, Colorado locations.

The Eagle Ford and the Permian shale play activity continues to have a large component associated with our horizontal pumping equipment. The horizontal pumping -- horizontal pump equipment is being utilized in the measurement equipment process pipeline, gathering station, booster stations and saltwater disposal applications.

Our centrifugal equipment continues to be utilized in gathering system locations, truck loading and offloading systems as well as booster systems for the horizontal pump applications. Our high-energy, multistage remanufactured equipment and the [re-rate] business continues to be robust.

The equipment is being utilized in the midstream sector, gathering stations and booster station applications. This application for this equipment is crude oil and LNG applications. Our teams continue to provide delivery proposition for our horizontal pump and centrifugal pump equipment and our remanufactured high-energy equipment with lead times that allows us to outperform our competition when delivery is a major factor.

B27 API 610 product-to-market continues -- opportunities for this product domestically are good. The international seems to be slowing towards the end of the Q3, which we contribute to the unrest in that part of the world. We do not feel we have lost any opportunities, rather a slowness of releasing of orders.

This product is primarily used in midstream and upstream markets. Quote activity remains strong. The delivery proposition quality and price point we provided is very attractive to the customers with requirements for new equipment in this product line. We are very optimistic our US midstream and upstream opportunities will remain strong through Q4 and into 2015.

Gulf of Mexico -- we are currently active with four upcoming new platform projects that have started issuing orders for equipment in Q4. We are extremely -- we were recently awarded an order of $5.5 million for equipment on one of the projects. We were optimistic regarding the remaining opportunities and orders for this equipment will be in 2015 and 2016 delivery.

Canadian markets. Municipal markets in Eastern Canada still has not rebounded. Oil and gas, this sector continues to be sluggish. Major players are slow to place equipment orders yet quota activity and order potential remain strong for us. Due to the seasonality and open quotes, [proviable] projects, we are optimistic for Q4.

Latin America and the Caribbean -- oil and gas we experienced some increases and orders placed for modular equipment in this sector in Q3 and are optimistic about Q4 and next year.

IFS continues to be optimistic about the upcoming opportunities for modular equipment in Central America. We had been successful in the region with the companies associated with these upcoming opportunities.

Mideast and Dubai --we continue to perform on plan with our API product line equipment and our service and repair propositions. The modular packaging opportunities have not developed as we had expected thus far. We remain focused on the region and all opportunities. Our quota activity remains consistent. The current state of unrest in the region continues to create a negative effect on the project opportunities moving forward.

We are optimistic Q4 will remain robust with our products and services supporting major US oil and gas shale plays in the upstream and midstream markets along with Central, South America and Mexico mining markets. We are confident that Central and South American oil and gas markets will provide greater order opportunities in the upcoming months.

We're encouraged with the existing Gulf of Mexico opportunities we are actively with and remain poised and ready to respond quickly to support our customers that operate in this market. We have solid relationships and a history with these companies that work in the Gulf. That should weigh in our favor for equipment needs for the current and upcoming project opportunities.

In summary, we continue to make progress sequentially quarter-to-quarter. We continue to grow with acquisitions and take market share from the fragmented smaller distributors. We continue to increase shareholder value, financial performance by leveraging our size. We continued to manage our working capital. We continue to make acquisitions to grow our divisions and increase our footprint. And I look forward to our future success in achieving our visions and goals.

We are now open for questions.

(Operator Instructions)

Matt Duncan, Stephens.

Hello, guys.

Hey, Matt.

David, let's start talking, first, about B27. Mac, I don't remember you giving us the revenue and accretion numbers for those guys in the quarter. But let's start there and then maybe dive in a little bit on what you're seeing in terms of business trends there.

B27's revenues during the third quarter were $35.4 million and the accretion was between $0.12 and $0.13 per share.

So that the little less revenue, I think, than what you guys had thought it might do. I think was $43 million last quarter and the thought was that it would stay around there but, building upon the plus side, probably more importantly, the earnings accretion is up there.

So what's happening that's driven the profitability up while the sales numbers down a little bit? And what's the outlook like at this point for B27, David?

Well, I don't ever remember us forecasting earnings sales too much on the call. But that said, we're just really happy, I guess, that IFS has performed in an improving manner. It's not performing like it did the year before we bought them, but in and improving manner to that effect. I believe I'm right about this: that they had $10 million worth of orders the received in the first six months. And to date, they've already received in the second half of the year $20 million with several potential orders still to come.

So we are pleased with the progress that IFS has made. There's also in Central America several very large projects and jobs that we've been successful with in the past that are slated for the first of the year to receive orders on. So we're pleased. We are pleased with their operating results to -- they add some things that we've cleaned up from an accounting point of view in the first quarter and continued in the second quarter.

So their performance in EBITDA -- even IFS, I believe, with lower sales is going to generate something like 14% EBITDA margins. So that's pretty outstanding considering how far off their sales are. I'm pleased with the management of that group. I'm pleased with the improvement and I'm certainly getting happier with the accretion.

Yes. So, David, on the improvement in bookings there, is any of that coming from international markets? Or is that really, at this point, still pretty domestically focused? I know there were some larger international orders you guys have been hopeful about there. Just give us an update on that.

Yes. It's more domestic and -- I'm drawing a blank right now, but it was in an unusual area. It was in utilities, I believe, that they got some really pretty nice orders from. So the international stuff is doing well as it relates to the API 610 product, but as we stated in our conference call, the modular systems have not done well.

But there's some really nice stuff that looks like is going to happen and pretty sizable stuff that's going to happen that we think we have a really good chance of getting. So -- but the international market has continued to be soft.

Okay. Fair enough.

So moving on then to your own innovative pumping solutions business. I know you still see a pretty good outlook for that business. There's been a couple quarters in a row here where it's been down a little bit on an organic basis and it sounds like that's probably more a function of timing.

I know you guys don't typically report a backlog number for that business, but if you could just give us a general feel for what you're seeing in terms of bid activity, quote activity and then actual orders into your backlog. What does the trend line like look like for that segment?

IPS is having a good year. They're not growing 20% or anything, but they're having good year. They're having a really nice profitable year. They are going to have a better fourth quarter than the second and third. So they should end up the year with some positive growth.

They feel good about these orders that are starting to come out of the Gulf of Mexico. They feel good about the continuation of the business they've been getting on these shale plays out of the Bakken, the Eagle Ford, and the Permian basin.

The expansion of IPS into some international markets has not happened. The expansion of IFS going forward, it looks like it is going to happen. So we, again, I think we feel good about the fourth quarter and we feel good about 2015.

Okay. Last thing for me just on M&A pipeline. What's that looking like at this point? Do you expect that we might see anything get closed by the end of the year here?

Well, yes. But just one small deal, probably. But I would think we're working on some mid-sized, mid being $30 million-type deals, that I think you'll see more like in the first of next year.

Okay.

We're getting awful close to Thanksgiving and Christmas.

Sure. Understood. Thanks for the update, David.

Ryan Merkel, William Blair.

Hi. Good afternoon, everyone.

Hi, Ryan.

I want to start with IPS as well.

Again, it's sounds like you're attributing some of the sales softness to timing. I'm just wondering what causes -- what caused the timing delays? And then why are we confident that you're going to book some of these projects in the fourth quarter?

What causes timing is the manufacturers that are supplying us major components on the job. Because that's what triggers -- that and labor triggers percentage completion. And so we use percentage completion to try to smooth things out. But those two things can cause percentage completion not to be smooth -- to be a little more lumpy. So it's always a little bit lumpy.

What also, typically has -- if you go back and look at historic numbers of DXP, there's an awful lot of IPS-type stuff that always get shipped in the fourth quarter. And so we work on -- they get ordered this time of year and they take a year to build and they get shipped by the end of the year. And this is kind of how the cycle goes.

But again, we use percentage completion. I mean, one year we missed sales by $14 million because 2 jobs didn't ship. And so that was -- we were on a completed contract basis. And we said: Well, that wasn't pretty. So nobody liked that. That was back when we were much smaller.

And then we have relationships with customers. We're noted as being a preferred vendor for Chevron and some major accounts. And so we just typically feel really good about our chances on certain types of equipment and certain customers -- as far as why we feel good about getting orders.

And so we you have visibility then on those -- these delayed manufacturing components. You're going to be able to ship the projects in the fourth quarter.

Or we're going to at least get -- we will at least get the major components so that if something rolls over into 2015, there will only be 5% or 10%. It won't be the 85% or 95%.

Got it. Okay.

And then I was thinking the service center organic growth would be a little better than 2.5%. And I guess does this just broadly speak to the mixed industrial end markets, David, that you mentioned?

Well, I guess. (laughter) We're -- our markets, to us, have been pretty flat all year. And we've had flat markets and we've had flat inflation. And so, to us, to garnish [3.3%] organic growth, which would've been a little higher if IPS had maybe shipped everything or had everything shipped to them, is just a function of our ability to take market share away from other people. And so we try to do that responsibly where we're not trying to cut our price and just sell things to be selling them. So it's been tough.

Okay. Last one for me. Nice to see the EBIT margin recovering from the first quarter. And I'm just wondering if this level sustainable in your view? And then, second part of that question, should we expect the cost control to continue?

Just my opinion, I'm happy with 10% EBITDA margins and I'm not quite happy with where we are expense wise. I believe we are kind of -- there's times in life where you're kind of at an awkward size and that happens whether you're at $50 million or $100 million or $200 million.

And we have a lot of division people. We have a lot of in-house counsel. We have huge IT staff. I think we are designed to be a little bigger than we are. And so our expenses as a percent of sales is about 1% higher than I would personally think if we were running at optimal levels that we would be at.

Okay. Great. Well, thank you.

Does that make sense?

Yes, makes sense. Thank you.

Joe Mondillo, Sidoti & Company.

Hi, guys.

Hi, Joe.

Hi, Joe.

My first question -- IPS as well. And one of the questions that I have is that you organic growth has been trending -- the trend of growth has been trending organically, anyways, downward for several quarters now over the course of six, seven quarters. And now we've seen negative for the last two quarters.

Can you talk about competitive -- the competitive environment and pricing as well?

We do have competitors. (laughter) So I think that's a fair question. I don't think, though, that we are pricing ourselves out of the market. I don't think we feel like we're not getting our fair share.

We track quotes and we have $100 million, $200 million quotes out there all the time. We track hit rate. And I just don't believe that -- I'd have to really double check. I haven't looked at that number in a while, but I believe David [Vinson] said that our hit rate was pretty strong.

So I don't think we are having a competitive issue. I think what we're having is we have a little bit of oil prices going down and people looking over their shoulder. Again, I don't think that affects long-term projects. And I don't think it affects mid-market. And I don't think -- and it certainly -- it benefits downstream the petrochemical plants.

But upstream I have to believe that things are just really, really flat whereas a number of years ago when we first discovered fracking and everything went crazy, I mean we -- it was nothing for us to not have 16% organic growth. And so we're just at a point where we're reaching -- I don't know, we're reaching the peak of activity but we're certainly going to reach a peak of activity with oil prices going down.

I don't know. I'm thinking that our growth rate --

So the market may be a bit saturated after the huge increase that we've had over the last three or four years and then potentially with oil prices there's potential risk of more of a plateauing effect?

I like your term plateauing because I don't really -- we don't really see it declining. We don't see it declining. We don't -- we just don't see it increasing in any great extent either. And certainly if Saudi Arabia wants to take out all the nonprofitable producers, they can do so.

I think we're kind of at a place where we're holding our own. I don't know how to describe it any better than that really.

Compared to the revenue growth organically that you've seen, how has the order trends growth lies? Are you seeing contraction in orders as well like you've seen in organic revenue IPS?

No. We're both on the MRO side and the capital side, that's including our service centers and IPS. Frankly, we're seeing order sizes get bigger, but we're also not seeing our backlog really substantially increase. It's going up that 1% or 2% or 3%.

And so were just -- there's nothing really driving growth based on what we're doing today except to take market share away from the little, small mom-and-pops. And so that's exactly what we're doing. We are trying build supercenters. We are out there with more salesmen, more professionally trained salesmen, and with expertise and et cetera. And so we're picking on -- well, we're just taking market share.

Of course, we're not trying to target W.W. Grainger or MSC or somebody like that. We're trying to -- we're just picking on the thousands and thousands of little distributors that we should be able to beat in the game.

Okay. And then moving to my second question, which is related to service center segment.

Just wondering, with sales -- your organic sales have been trending not too bad compared to some of your competitors. It's been sort of flat to up.

I'm just wondering, in terms of the margin, year-over-year the last few quarters, including the one that you just reported, you've been seeing some margin contraction pressures. Just wondering what's going on there.

Well the service center margins, gross margin and bottom-line margins, both actually grew sequentially. So maybe year-over-year, we had a different product mix or a different makeup of our Company. But as far as Q2 to Q3, we made improvements.

Okay. And then it looks like you have a pretty tough comp in the fourth quarter. There's nothing seasonally that's going to drive a pretty big sequential increase in the fourth quarter that you expect, is there?

No.

And then just lastly, I know one of the past callers asked about M&A. I'm just wondering your viewpoint given the volatility in the markets right now and how fast and hard oil prices have come down and being below 80 now. Does that affect your outlook in terms of M&A?

And in terms of pricing, how is that affecting pricing out there? Are acquisitions maybe a bit pricey at this point in time? And do you want to take a step back and maybe see how things play out? Or how do you look at the M&A just given the volatility that we've seen here?

Well it's always -- it's our goal to cover more geography. And hopefully in doing so, have sort of the oil and gas segment decrease. And actually, I believe we were doing that until we jumped off and bought B27, which was strictly an oil and gas play. And a sizable one.

So we -- I truly believe that if you get anything out of this conference call, there is the perfect price of oil. And that price is enough for the oil companies to make money and for the rest of the world to do good at the same time. And we're always trying to seek that equilibrium because when oil -- I went on Fox Business and oil was at $140 and this guy was trying to set me up because he thought I was an oil field supply company only. So he asked me about oil. I said: Well, to start off with, I think it's too high. He's like: I can't believe you said that.

But anyway, there's a point where it's too high. There's point where it's too low. And there's a point where everybody can be happy at the same time. And it never gets there, but it gets close there.

Do you have a sense of where that -- where oil drillers can --

I really don't. I really don't.

I only ask because I hear it all the time and I'm just wondering if you have a better sense of it.

I think we'd all be happy at $85, by the way. That's just my own opinion of it.

All right. Okay. Well but does it for me. Thanks a lot.

(Operator Instructions)

Matt Duncan.

Hi, guys. Just back on the service centers and supply chain services for a minute.

We've seen some of your peers who have seen an increase in growth rate, I think in the month of October. And it sounds like things have picked up a little bit potentially on the industrial side. I'm curious, as you look at that slice of your customer base, what you guys are seeing out in the market, what you're hearing from your customers.

David, I know you characterize it as mixed. Are there any signs that's perhaps improving?

Well let me peruse when supply chain services has growth with existing customers. That means that the marketplace and our customers are doing better. And they don't typically have -- they might have an oil field service company, but they really don't have oil companies that they're doing integrated supply with. I think we've -- I personally think 2015 is going to be really a strong catalyst for other industrial people from automotive to plastics to petrochemical, chemical, consumer.

If oil prices stay at $80, I think we will still have plenty of oil field shale play-type stuff going on and plenty of midstream. And I think people will be wanting to generate cash flow. I look at it all as cash flow and so on the production side. And at the same time, people will be paying less at the pump, et cetera. But I think 40% of our business isn't going to at all suddenly increase 10% next year because there's not going to be a huge incentive. But on the other hand, if oil went to $140, that business might increase 20% but then the rest of the world does bad.

We are in a good spot where we can grow our business, unless something catastrophic happens. Now, if oil goes to $60 and it stays there for two years, then DXP is probably not going to do that well. But as long as it's at a decent price where they can still make money and still produce, and then the rest of the world does better because oil prices and products are less, then you kind of have a win-win.

Sure. Last thing -- just going back to the supply chain business for a minute, that is a business you've seen a very nice improve in growth trend in -- I don't know if there's anyway to look at that and sort of break it out between improvement in the market versus DXP serving its customers better, adding new locations.

I know that's a segment you guys have put a lot of blood, sweat and tears into improving. And it looks like it's starting to pay off. And so I'm trying to understand how much of that is improving market versus you guys' actions to improve that business.

We're talking about supply chain? I'm sorry.

Correct. Yes.

We've improved the business a lot. But we've also had -- there was a time when we were getting some new accounts and growing the business but our customers were just simply buying less. And by design, supply chain is supposed to take and reduce the customer spend. So you're always fighting against yourself. But we had -- we're having increased spend and we're landing new deals. And the increased spend has been modest and the new deals have been most of the growth.

Okay. So a lot of this is competitive wins. You guys doing a good job targeting growth and winning.

Right.

Okay. Very helpful. Thank you.

And a lot of the growth is coming from existing customers giving a -- we're winning more at their locations. So it gets a little confusing on -- because most of the revenue growth is coming from existing customers. But those existing customers have added -- we've accomplished getting more of the customers locations.

Did I confuse you?

Are we done?

Thank you. Yes, sir. That does conclude our question-and-answer session as well as the conference. Thank you all, again, for your participation.

All right. Thank you.