DXP Enterprises Inc (DXPE) 2016 Q1 法說會逐字稿

Good day and welcome to the DXP Enterprises Incorporated first-quarter conference call. Today's conference is being recorded.

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

Thank you, James. This is Mac McConnell, CFO of DXP. Good morning and thank you for joining us. Welcome to DXP's first-quarter results conference call. David Little, our CEO, will 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 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 are contained in our SEC filings, but DXP assumes no obligation to update that information.

I will begin with the summary of DXP's first-quarter 2016 results. David Little will share his thoughts regarding the quarter's results. Then we will be happy to answer questions.

Sales for the first quarter of 2016 decreased 25.8% to $253.6 million from $341.6 million for the first quarter of 2015. After excluding first-quarter 2016 sales of $5.8 million for Cortech and Tool Supply businesses acquired September 1, 2015 and April 1, 2015 respectively, sales for the first quarter decreased $93.8 million or 27.5% on a same-store sales basis. This decrease is primarily the result of declines in sales to customers engaged in the upstream oil and gas markets. Sales by our Service Center segment in the first quarter of 2016 decreased $58.3 million or 25.8% to $167.5 million compared to $225.8 million of sales for the first quarter of 2015. After excluding 2016, Service Center segment sales of $5.8 million for Cortech and Tool Supply, Service Center segment sales for the first quarter of 2016 decreased $64.1 million or 28.4% from the first quarter of 2015 on a same-store sales basis. Again, the sales decrease is primarily the result of decreased sales of bearings, pumps, metalworking products, and safety services to customers engaged in the upstream oil and gas markets or manufacturing equipment for the upstream oil and gas markets. The strength of the US dollar also contributed to the sales decline.

Sales for Innovative Pumping Solutions products decreased $26.8 million or 36.1% to $47.4 million compared to $74.3 million for 2015 first quarter. This decrease was primarily the result of the decline in capital spending by oil and gas producers and related businesses.

Sales for the Supply Chain Services segment decreased $2.9 million or 7% to $38.6 million compared to $41.5 million for the 2015 first quarter. The decrease in sales is primarily related to decreased sales to customers in oilfield services, oilfield equipment manufacturing, and trucking industries.

When compared to the fourth quarter of 2015, sales for the first quarter of 2016 decreased $25.1 million or 9%. This decrease was primarily the result of declines in sales to customers engaged in the upstream oil and gas and related industries. First quarter of 2016 sales by our Service Center segment decreased $19.9 million or 10.6% compared to the fourth quarter of 2015.

First quarter of 2016 sales for Supply Chain Services decreased by $500,000 or 1.2% compared to the fourth quarter of 2015. First quarter of 2016 sales of Innovative Pumping Solutions products decreased $4.8 million or 9.1% compared to the first -- fourth quarter of 2015.

Gross profit for the first quarter of 2016 decreased 29.8% from the first quarter of 2015 compared to the 25.8% decrease in sales. Gross profit as a percentage of sales decreased to 27.1% in the first quarter of 2016 compared to 28.7% for the first quarter of 2015. This decrease is primarily the result of an approximate 620 basis point decline in the gross profit percentage in our IPS segment and an 80 basis point decline in the gross profit percentage in our Service Center segment. The decline in gross profit percentage for the IPS segment is primarily the result of competitive pressures resulting in lower margin jobs and $1.7 million of unabsorbed manufacturing overhead related to the startup of our A&D pump manufacturing facilities. The decline in the gross profit percentage of our Service Center segment is primarily the result of declines in sales of higher-margin pumps, safety services, and metalworking products.

Gross profit as a percentage of sales for the first quarter of 2016 decreased to 27.1% from 27.6% for the fourth quarter of 2015. This decrease is primarily the result of a 155 basis point decline in the gross profit percentage in our Service Center segment, partially offset by a 279 basis point increase in the gross profit percentage of our IPS segment and an approximate 90 basis point increase in the gross profit percentage of our Supply Chain segment. The decline in the gross profit percentage for our Service Center segment is primarily the result of declines in sales of higher-margin pumps, safety services, and metalworking products. The gross profit percentage for the IPS segment increased because of a better mix of jobs in the first quarter compared to the very low margin jobs in the fourth quarter. The gross profit percentage for the Supply Chain segment increased as a result of decreased sales and lower margin products to oilfield service and trucking-related customers.

SG&A for the first quarter of 2016 decreased $9.1 million or 11.4% from the first quarter of 2015. After excluding the first-quarter expenses from Cortech and Tool Supply of $2.2 million, SG&A decreased by $11.3 million or 14.2% on a same-store sales basis. The majority of the decline in SG&A is a result of a $6.3 million decrease in payroll, incentive compensation, payroll taxes, and 401(k) matching expenses, due primarily to 2015 headcount reductions.

Additionally, amortization expense declined $1.1 million on a same-store sales basis.

As a percentage of sales, SG&A increased to 27.9% from 23.4% for the first quarter of 2016 as a result of the sales decreasing 25.8%, while SG&A declined only 14.2%. SG&A in the first quarter includes approximately $750,000 of severance-related costs for employees terminated during the first quarter of 2016. These severance costs generally offset the savings from headcount reductions and salary cuts implemented during March of 2016.

SG&A for the first quarter of 2016 decreased approximately $700,000 or 9/10 of 1% from the fourth quarter of 2015. First quarter of 2016 declines in salary and other expenses were largely offset by increased payroll taxes and health claims during the first quarter.

As a percentage of sales, SG&A increased to 27.9% from 25.7% for the fourth quarter of 2015 as a result of sales declining 9%, while SG&A only declined by 9/10 of 1%.

Corporate SG&A for the first quarter of 2016 decreased $0.5 million or 4.6% from the first quarter of 2015 and increased $400,000 or 4.3% from the fourth quarter of 2015. The year-over-year decrease was primarily the result of reduced compensation costs. The sequential quarter-over-quarter increase was primarily the result of increased health claims.

On May 12 -- yesterday -- we amended our credit facility to reduce the revolving line of credit commitment by $100 million from $350 million to $250 million to provide a financial covenant holiday as of March 31, 2016, for the consolidated leverage ratio and fixed charge coverage ratio, to increase interest rates by 50 basis points and reduce the asset coverage ratio to 0.9 to 1 beginning March 31, 2016 through July 31, 2016.

Interest expense for the first quarter of 2016 increased 27.1% from the first quarter of 2015 and 12.6% from the fourth quarter of 2015. This increase was primarily due to the write-off of $400,000 of debt issuance costs combined with increased interest rates. The write-off of the debt issuance costs resulted from the $100 million reduction in revolving line of credit commitment in connection with yesterday's amendment of our credit facility.

Total debt increased approximately $13.3 million during the first quarter of 2016. The debt increased to $364.8 million from $351.5 million at December 31, 2015. The increase in debt during the quarter is primarily the result of normal first-quarter payments of property taxes and insurance premiums and the normal first-quarter increases in payroll taxes combined with a slowdown in collections from our customers.

As of yesterday, our debt balance had increased by -- had decreased by $11 million since March 31. As of Monday morning of this week, we had reduced debt by over $20 million. This week's biweekly payroll and a large once a month payment reduced the debt paydown. DXP is generating free cash flow and paying down debt during the second quarter.

During the first quarter of 2016, the amount available to be borrowed under our credit facility increased approximately $2.5 million to approximately $22.2 million. This increase in availability is primarily the result of the reduction in the minimum acquired asset coverage ratio to 0.9 to 1 at March 31, 2016 from 1 to 1 at December 31, 2015.

Our bank leverage ratio was 5.56 to 1 at March 31, 2016. At March 31, our borrowing under the credit facility were at a rate of approximately 2.69%. In early April, our interest rate increased 50 basis points because our leverage ratio exceeded 4 times at December 31. On May 12, 2016, our interest rate increased an additional 50 basis points as a result of the amendment. The interest rate we are paying today is approximately 3.7%. Capital expenditures were approximately $1.7 million for the quarter. Cash on the balance sheet at March 31, 2016, was $622,000. Accounts Receivable balance was $160.7 million, and inventory balances were $105.9 million at March 31, 2016.

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

Thanks, Mac. Thanks to everyone on our conference call today. I would like to personally thank all of our DXP people for their continued efforts.

Additionally, our thoughts and prayers are with our employees impacted by the forest fires in Fort McMurray, Alberta, Canada. We are grateful to all of the emergency responders, volunteers, citizens, and employees of DXP for their support during these fires.

Let me begin with a review of market conditions and then summarize our performance in today's environment and provide direction for DXP going forward. Then we will open the call up for questions.

As expected, the market remained difficult in the first quarter. It was a story of two halves. During the first half of the quarter, oil prices continued to decline, reaching what would appear to be a bottom around the mid-[20s] in early February. This resulted in other declines in our customers operating and capital spending decisions and focused on -- as they focused on preserving and managing cash. Sustained low oil prices, along with the relative strong US dollar and its negative impact on export demand, continued to be a drag on manufacturing activity impacting the industrial side of DXP.

During the second half of the first quarter, oil prices began to rise, removing concerns of an outright collapse. The price is well above the lows reached earlier in February.

That said, oil and gas, which is 40% of DXP's business today, is attempting to find a bottom as declines are decreasing. DXP's industrial and other end markets outside of oil and gas is 60% of our business today, which appears to have bottomed and shows signs of positive upward movement. Improving US economic data, specifically the ISM and the MBI, showed improvement through February and March. Along with these two macro movements, DXP experienced a slight improvement in sales per day from January through March. So overall, demand is lackluster, but there is a sense that DXP's key end markets and the overall industrial economy may be stabilizing.

With respect to pricing, the environment is soft due to a lack of inflation and competitive pressures on the project side of DXP.

Looking at our financial performance, I am pleased with the collective effort to win new business and aggressively cut costs without hurting DXP's sales efforts and customer service.

January sales were down 15% from December. From January, we have sequentially increased daily sales. The 15% sequential decline in January sales moved us into a restructuring program to reduce DXP's costs by $26 million or $2.1 million per month. We achieved this goal by mid-April. We have additional projects which are tied to sales volume by business segment and in individual locations that will reduce expenses further unless sales start increasing.

Today, DXP's revenue of $253.6 million for the first quarter was down 9% sequentially and 25.8% year over year. Organic sales declined 27.5% with Cortech and Tool Supply acquisitions positively contributing $5.8 million in sales.

Service Center sales were $167.5 million or a sequential decline of 11%. Innovative Pumping Solutions sales were $47.4 million, a sequential decline of 9%, and Supply Chain Services sales were $38.6 million or a sequential decline of 1%.

The continued sequential declines within DXP's business segments reflect the ongoing challenges in oil and gas and the mining markets and the associated cut in spending and activity by these customers. These declines were mitigated by stability in the food and beverage and downstream side of oil and gas.

Service Center sales declines were primarily driven by softness within our rotating equipment and safety service product divisions, focused on servicing customers engaged in upstream oil and gas markets.

Typically we would anticipate spending on service and repair to help balance a loss in product sales. However, we saw a delay in Q1 in service work within DXP's rotating equipment offering as customers were focused on preserving cash. However, the service and maintenance deferral environment we experienced in Q1 provides opportunities going forward.

Innovative Pumping Solutions continued have softness in capital spending by oil and gas producers, and related business stems from the future drop in oil prices experienced in Q1. A majority of the customers continued to tightly manage budgets and limit project opportunities, and those that are available are competitive. DXP's backlog and IPS seems to be stabilizing, and we will right-size this business accordingly.

DXP's Supply Chain Services saw the bottom line increase year over year sequentially in the first quarter. This is mainly due to margin enhancement through increasing our product scope with more value-added solutions for our customers and provides push for operational excellence, supply technology, in order to drive costs out of the supply chain.

The first quarter was slightly down in growth based on the slowing economy, holidays, and plants shuttering. The SES team still feels confident with the addition of new sites in Q4 and Q1 that we should remain relatively flat in the first two quarters, despite the impact of slowdown in industrial markets in oil and gas. SES will continue its organic growth strategy around gaining market share in slow times by implementing four new sites in Q2. The loss of a couple of sites that were affected by the slowdown in oil and gas has affected our top line. We are in a great spot to really take off when the economy turns around.

As it pertains to PumpWorks, which is composed of four distinct groups -- PumpWorks Industrial, PumpWorks 610, PumpWorks Reman, PumpWorks Castings. We have seen continuing market activity for our newly launched PumpWorks Industrial pump brand. These products are being widely accepted by our customers, and sales are significantly better-than-expected in this climate.

Customers are excited about our products that are made in the US, cost competitive, and provide solutions to some of the most common maintenance and reliable challenges. PumpWorks Industrial will be an engine for DXP's growth model going forward.

PumpWorks Castings is now operating at full capacity while distinguishing DXP as a provider of fast aftermarket services. Our ability to produce one-off castings for customers sample in less than one week positions us as to one of the premier customer casting supplies in the pump industry.

The PumpWorks 610 API business has been challenged by the oil and gas downturn, but the realignment of this group to downstream has provided some recent wins. Leveraging DXP's Service Center network is enhancing our market exposure and ensuring that we have a shot at as many API opportunities as possible. Our plant backlogs are holding steady, and we intend to focus intently on winning market share from our competition.

In terms of gross profit, DXP's gross profit margins decreased 0.5 basis point sequentially and 156 basis points versus the same period of 2015. This was driven by the 156 basis points reduction within the Service Center from Q4 to Q1.

We continued pressure on margins within Innovative Pumping Solutions. That said, Innovative Pumping Solutions increased gross profit margins 279 basis points from the fourth quarter. Additionally Supply Chain Services improved gross profit margins 90 basis points from Q4 and over 207 basis points from Q1 2015.

SG&A for the first quarter declined $9.1 million from the first quarter of 2015 and $662,000 from the fourth quarter of 2015. The overall decline in SG&A as a result of a decrease in payroll, incentive compensation, including both commissions and bonuses, related taxes and 401(k) expense due to headcount and salary reductions.

That said, in such a prolonged and difficult environment, we are taking other steps to reorganize DXP without hurting our sales efforts and the ability to capitalize on the eventual turnaround of the oil and gas and other markets.

From a cost management perspective, we have taken cost saving measures by reducing headcount further and cutting costs where practical without impacting customer service.

So going forward, DXP anticipates saving $2.1 million per month starting in mid-April, reflecting the reductions in headcount, facility rationalization, and other reduction measures.

DXP produced an adjusted EBITDA of $6.8 million for the first quarter versus $14.7 million for the fourth quarter. Adjusted EBITDA as a percent of sales was 2.7% versus 5.3% for the fourth quarter of 2015.

Historically, our free cash flow has a seasonal low in the first quarter, and this year is no exception. However, combined with the continued decline during the first quarter and our working capital moving against us, we have a usage of $13.4 million. Working capital as a percentage of quarterly sales increased by 989 basis points versus Q4 to Q1.

Specifically, Accounts Receivable days were stretched by our customers by 2.9 days versus Q4. If DXP had collected on a same day basis, cash inflows would have been higher by over $9.2 billion.

In the same respect, inventory days increased 3.8 days between Q1 and Q4. Again, had DXP turned or managed inventory on a same day basis, cash flow inflows would have been higher by over $8.9 million. Together, this is over $18 million outflow that worked against DXP, alongside the normal unique items you have in the first quarter such as increased payroll taxes, property taxes, and insurance premiums.

As an update, since the end of Q1, as of Wednesday, March 10, debt has declined $11.3 million from the first quarter.

Going forward, we are encouraged by the modernization we have experienced within the decline in market conditions. More specifically, from Q4 to Q1, we saw the number of end markets move from what we would classify as accelerating decline to decelerating decline, which is a good sign. We will continue to monitor additional data points in the coming months to help solidify our interpretation of the direction of the macroeconomic trends. We will provide you an update on our next call.

We anticipate the continued hard work -- we appreciate the continued hard work, perseverance, and sacrifices from our DX people as we work through the prolonged oil and gas downturn in industrial softness. Should conditions improve, the combination of strong early feedback on DXP's pump offering and a gradual return of project work and continued improvements to our cost structure will result in strong earnings growth. We will maintain strong focus on these areas that we control, continuing to right-size and align our business and optimize our cost structures. We remain steadfast in our ability to manage through the current cycle, maintaining our customer focus while creating long-term shareholder value.

Now are now open for questions.

(Operator Instructions) Matt Duncan, Stephens Inc.

Hey. Good morning, guys. This is Will on the call for Matt.

Good morning, Will.

Hi, Will.

David, I appreciate the detail on how the first half of the quarter trended versus the back half, so I'm wondering how your customer dialogue has changed over the last few months versus where it was, and what has April and May trends looked like compared to those first-quarter results?

You know I think -- our people feel like our customers in the industrial sector are feeling better -- of course, there is good and bad spots still, but overall we feel like that trend is up. January was such a big drop of -- and then that was bad. And then the good news I guess is that everything on a day sales basis, even through April, have been increasing.

Our oil and gas customers are still -- they are still just doing the minimal amount to get by. It looks -- we are seeing signs of service work -- literally things were broke, and they would just go, oh, too bad. We will save our money to either pay debt down or do whatever they have to do to survive. And but now that oil is up again not where it needs to be to stimulate robust activity, but we see them fixing things over broke and spending a little money. So we will take some good out of that, I guess.

If you are interested in the trend of sales per day, I can give that to you. (multiple speakers) January sales per day were $3,968,000 a day, February was up a little at $3,980,000 a day, March was $4,119,000, and April was $4,176,000. So April was up 3.6% over the average sales per day for the first quarter and up 1.4% over the March sales per day.

That's helpful. Thank you, Mac. And I guess just sticking with that trend, and I know it has been difficult given the market uncertainty - with the industrial backdrop and breakout continuing to decline during the first part of the year, but how much should we reasonably expect your sales to be down this year, and given that market setup, I think it would be helpful if you could possibly address it on a segment by segment basis and what you see in each going forward from here?

Yes, I -- well, you started off with that was a very hard question, and I think it is and it's an extremely hard answer.

We would like to feel that we have -- that our first quarter would be the bottom. We are prepared for the first quarter to not be the bottom, but we feel like that there isn't really any reason why what we are seeing, that sales shouldn't be -- if they move down, it's going to be 1%, 2%, or 3%. It's not going to be another 10% or 8% or something that is pretty drastic. So we find comfort in that.

And then as far as each segment is concerned, we expect supply chain to ultimately end the year in positive growth.

And then like John said, that if we get any kind of recovery in terms of Halliburton spending more money and other companies spending more money versus spending less money, then he should be up pretty nicely. You see he's adding new sites, and yet more is falling out the bottom as customers are buying less. So that's what's been keeping this growth from being 10% where we would like for it to be, and it's only been plus [1] or minus [1] kind of deal. But he is actually growing sites, growing new customers, and doing a really nice job.

The IPS -- the capital expense side is not dead. We had business, and we feel like we can right-size that business. We feel like we can look at taking some capacity of fabrication out of the picture, so we still think that is trending down again. Slightly down. Their backlog seems to be stabilizing, so there's hope they won't be any further down. But, again, I'm not sure I can plan on that. So I think it will be slightly down.

Realize that Canada is one of our biggest sore spots -- we will call it a sore spot -- and that they are also in a breakout season right now or kind of maybe past it. They've added an early breakout this year, which I think is solely responsible for the fires that they are having, etc. But nonetheless, that business is struggling, and that's both in the pumps and in the safety services.

And then the wildcard is our service centers. They continue to be trending down. That 11% for the quarter is really big number. And so, again, we are hopeful that we've seen the worst of it. But -- and we are pretty sure that, again, it is only going to be maybe the 1% or 2% or 3% other decline max.

Very helpful. Last one from me and I will hop back in queue. How much of the cost reduction action that you are talking about and that you took in the first quarter are from cost of sales versus SG&A?

And just kind of following onto that, going forward, you guys feel like gross margin has found a bottom here. Do you expect that to improve throughout the rest of the year?

$2.1 million is all.

Okay.

And what really -- some expenses we would take out a bit further is IPS's margins are down from where they normally would be, even though I've told you all in the fourth quarter they wouldn't. There were some unusual things in there that made it exceptionally down, and so I don't use that number. And so sure enough, first quarter, they are back up a couple of hundred basis points.

But their margins are under pressure for two reasons. One is just number of people hungry for work. And so they are bidding them cheaper, but also somewhat of a overcapacity problem. And so we will be addressing the overcapacity problem which is going to help maintain margins, but it won't -- it really won't have the effect of -- well, yes, it will.

So when we kill capacity, we also kill SG&A at the same time. So we will kill some SG&A and some -- and then just pour some more work through smaller capacity, which will help maintain our margins. So I guess we are okay with what the margins are at with IPS, and then the service centers -- that's just a day-to-day deal. They are selling thousands of orders, and so they have pressure. Of course, they are not trying to lose any of them. So that side of the business still has a margin pressures and not quite sure where they would go, but there's pressure there.

I appreciate it, guys. Have good day.

Joe Mondillo, Sidoti & Company.

I was wondering if you could give us a little perspective on this cost-cutting effort relative to maybe what you did in 2015. It looks like your headcount fell 15% in 2015. So, if you could give us a little perspective on that, and in addition, how much of that $6 million of savings a quarter is related to headcount, and what are you doing outside of headcount?

So we are not going to -- last time I gave somebody some headcount, I showed up in Modern Distribution as DXP's whacked 300 people. So I'm not going to give you any headcount numbers.

You don't have to quantify it, but are you (laughing)?

I get it, Joe. I'm just kidding.

I got you. Okay.

I just find that that was interesting that they -- Modern Distribution is supposed to be a magazine for distributors, and here they are putting us down. But anyway, I want to back up and start over.

In 2015, we had normal attrition, and we counted on the fact that we have a lot of incentives, and so the incentives went down. So our payroll went down, and we had normal attrition, and that is pretty much all we did. We didn't really try to reorganize the Company per se because we didn't really think we needed to.

This time, when January happened, we were like, okay, normal cost-cutting is not going to get it done. And so we embarked upon a program to take our headcount down significantly to reduce expenses where we could, and our goal was to get to $25 million, and we got to $26 million.

During 2015, most of the headcount reductions were cost of sales employees. As the safety service business went down, the safety consultants went away. If IPS went down, the people working in the shop went away. These more recent headcounts are more geared towards SG&A, and I probably misspoke a little bit earlier on the $2.1 million. There are some number -- some of the -- some small portion of that is of cost of sales numbers for those people.

But I think the point is that we really -- we just ended up with not any choice but to right-size the Company. I mean not making a profit is not acceptable to me.

So we had to -- we still have $1 billion plus sales, and so let's right-size the Company to make money at $1 billion plus. And so that's what we did. We accomplished our objective. And --

And I guess the last part of my question was, is it mostly headcount? And if not, are there other things that you are doing? If it's significant (multiple speakers)

I think that's right. It's mostly headcount because that's where most of our cost is. Yes, there are facilities being consolidated. So some rent goes away and utility bills go away, and there's lots of costs associated with people that go away. We took -- we closed about four stores that we didn't see any way that they were going to have a contributed margin -- a positive contributed margin. We probably still have a couple stores that falls in that category, but they are hoping they can fix them. And so we did that. We took -- we just stopped spending money on things that need to have like -- you want to drill down into football tickets and entertainment and travel --

Discretionary spending.

Here we go. Supplies. So it's -- we are -- everybody understands that their goal is to make a 10% contributed margin or greater, and they are doing a good job of working to get there.

Okay. In terms of the IPS segment, so you have said again like the fourth quarter or the first quarter really not maybe a good starting point or really sort of a normalized margin, even in the environment that we are in. Can you provide any more color regarding that and why you think that and if there is any more of a guidance or outlook of where sort of a normalized operating margin is at that segment, after the cost cuts, and assuming normalized margin of projects or -- and whatnot? Anything you could provide, that would be helpful.

Yes, IPS's biggest problem is in Canada. They literally don't have very much work, and there may just not be any work in Canada for a while. So that is -- for starters, I will start there.

The other is they have a pretty talented seasoned group of people, so we've been reluctant to try to take too much cost out of there, so, and we probably not right-sized that thing as quickly as we could have. So -- but all those things are changing. And so IPS shouldn't -- our goal is to have at least 6% EBITDA margins in a down climate -- in an up climate, 10%. So -- and in this down climate. So there's really not any reason why IPS can't get to 5% to 6%.

Okay. And then also, Mac, in terms of the new credit agreement, I was wondering if we get to -- what are the incremental increases to the interest rate every 0.5 points of leverage? I guess what it was in the past. What is that?

Under the agreement, we are at the highest interest rate level. So the 3.7% that I floated is the highest level under the agreement.

Okay. So, at the end of the second quarter, I believe you're probably going to be higher than 5.6. You would still be paying a 3.7% rate though?

Yes. I guess you are talking about 5.6 times leverage?

Yes. That's what you said it was right as of May 12, I think?

Right, right, right, right.

Okay. All right. So the interest rate is going to be somewhat stable than?

It's going to be stable all during the second quarter.

Okay. And then what happens when we -- I think you said this is sort of an amendment that expires at the end of next July, is that correct?

It doesn't expire. It goes back to the existing facility.

That is what I meant. So you do -- sort of -- it goes back to what you -- is sort of does expire. I guess maybe I'm not using the right word but --

In general terms, the amendments were as of certain dates, and basically it amended the covenants to change them at a point in time and -- other than as I said there, the covenants are the same as will be in the future the same as they are -- have been in the agreement in the past.

Okay. And then one last question. In regard to working capital, your working capital was a source of cash of about $38 million. Could you give me what it was in the first quarter, again? I know you went through those business numbers, but I missed it. And then what do you anticipate the year to be? Is it going to be a large source again like we saw in 2015 or --?

Working capital in the first quarter was not a source of cash.

Yes, I think you said maybe $18 million, is that we you said?

But the use of cash -- and I'm trying to -- just looking at this whether it's -- $11.7 million use of cash or --

Okay. $11.7 million?

I mean that's what net cash provided by operating activities is. I would have to add up -- I don't have that exact number because I haven't --

Okay. That's fine. I guess, so in terms of the year, though, are you anticipating that to be a source of cash again? And so is it going to be anywhere as close to the magnitude that we saw in 2015?

The answer to that question all depends on if we grow or shrink. Our --

Well, you're going to be down year over year, so odds are pretty good that you are going to be down --

Year over year doesn't have any impact. It is -- what happens during each quarter. If sales go up and sales go up generally, that requires working capital. If sales go down, it generates working capital.

Now -- we think that -- I know our agings, as of the end of April, have already improved a little. So that should mean we should be collecting a little more cash for receivables. Inventory -- my belief is the way we buy inventory to sell to customers and when the business slows down, the customers don't buy the inventory that we bought for them to buy. Therefore, it takes a little longer, so inventory works down over time and catches up.

So, in general, my answer is yes, I think we are going to generate cash from working capital.

On the other side of that, if our sales start growing, it would be -- my answer would be the opposite. If they stay flat, I think we would generate some. As sales go up, then we are going to use cash, and that would be a wonderful thing.

Okay. All right. That's it for me. Appreciate it. Thanks a lot.

(Operator Instructions) Ryan Cieslak, KeyBanc Capital Markets.

I wanted to clarify, on the amendment for the credit agreement, if I heard your right, I thought you said it was through July 31 of this year, or was it next year? I just want to make sure I was clear on that.

It's this year.

Okay. So then how should we perceive, I guess, the amendment at the end of the day? It gives you time to figure out what you need to do with the balance sheet post July 31. Do you feel like you've done enough on the call side to win if the new agreement comes back in? You are in a situation where you are not bumping up against the covenants? So just maybe provide some more detail on how you guys are thinking about the balance sheet post July 31.

We're going to -- very briefly, our expectation is that we need to amend this loan agreement or find something else, which our expectation is we are going to amend this agreement. The bank would like to see that we really did reduce costs by $2.1 million a month. And so they would like to see some more information, so then the plan would be that we would get a much longer term.

Okay. And then with regard to the cost actions, David, I thought I heard you say that there was maybe some additional opportunities you're looking at within IPS with regard to some capacity takeout or facility takeout. Did I hear that correctly? And if I did, can we -- is there a way of thinking about maybe what the incremental cost opportunity might be there relative to the $2.1 million per month you guys already highlighted?

Sure. We are -- I mean, first of all, everybody feels the necessity to drive towards a 10% contributed margin. So to the extent that they have flexibility, we are not down to a location with two people or something. Then they are going to continue to right-size the business for whatever sales volume that they are able to generate.

So -- and I don't know how to quantify that except to say that if sales do go down 1% or 2% more, well, then we'll be doing things to drive costs down to correct for that.

Then on a bigger note, there are some opportunities to take some capacity out of IPS and when we do that and to consolidate some things, so I think the appropriate word might be shutter -- to shutter a facility and then not hurt the sales effort to do those jobs somewhere else. We have -- we are fortunate that we have multiple locations that IPS fabricates out of. So we can close one or two or whatever and move those jobs to a shop that would make us more efficient.

To quantify those dollars, they are not like $2 million a month, they are more like $2 million a year type savings. So there's just things like that we are looking at.

And -- one more point. Just to continue, we are not buying new companies. So we are getting caught up on our integration of companies we have bought. And so we're just taking administrative costs out of those when we get them integrated.

Okay. That's really good color. I appreciate it. And then when we think about the $2.1 million curling that you highlighted in the cost actions or the $26 million or so annually, is there a way of thinking about buckets per segment? Meaning is there a portion -- where was the greatest cost action taken at, or is it just directionally how you would think about it just based off the size of each segment?

Yes, they were -- for starters, we took out 10% of our payroll costs across the board. So that would -- for starters, you could reduce every segment's cost by that amount. Then there was additional things that were more specific. In other words, we didn't take out any other costs out of Supply Chain Services because they are really doing well and doing fine. So then it kind of gets into more specific things. So I don't know how to give you an exact number.

Mac, would you --

Well, the easy answer is probably go on proportion to -- service centers are 70% of our business. That's all that came out of there. Supply chain is the smallest, and they didn't have quite as much as everybody else would have had.

I think that's not quite right. I think that the service centers had a disproportionately higher amount come out of them.

Okay. That's -- and so maybe we can give you some better answer to that today or tomorrow.

No. That's actually -- that's sort of what I was looking for just directionally. That makes sense.

And the last question I have then is just, when looking at the operating margin, debt service centers this quarter, relative to how it was trending in 2015, it seemed like it was a pretty big step down sequentially. And I would just be curious to know maybe what has changed -- obviously the sales continue to be pressured, but is it that pricing has gotten a lot weaker, or was it something incremental from a cost standpoint, or maybe I am just reading a little bit too much into it?

I'm not quite sure I understand the question. I'm sorry. I didn't pick up the first part. Can you restate that?

Yes, sure. So when you look at the operating margin in service centers, 5.7% or so this quarter versus the 9% or so in the back half of last year and the way it trended pretty much all through the year, it was a pretty big step down sequentially from the fourth to the first, and I just would be curious to know what sort of changed going into this year that really drove that at the end of the day, and obviously it goes back to what you just said because you are obviously maybe doing more of the cost-cutting in service centers relative to other segments.

We try to let incentive plans correct themselves, and then when we had 15% drop in January of this year, it was obvious at that point that that wasn't going to be enough. And so we embarked upon a project to literally take $25 million out of the business.

So -- and then we weren't trying to -- the first way was we were not picking on any particular group from corporate to even SES, which is just part of the team. We took costs out of everything.

And then now, we are looking at taking costs that are more specific, and I said this in my write-up, was more specific to a segment or more specific to a location that is simply not performing. And -- but the reason why the margins go down, we just -- we -- our drop of 15% from December to January is pretty catastrophic after we've already had a year where it has dropped pretty significantly already.

So we had to -- we just had to get on top of it, and I'm going to congratulate everybody in their efforts to think that we didn't get financials until mid-February and really realized what we need to do. And to get all that done and have it effective and by the middle of April is pretty fast. And I really congratulate everybody on their -- on doing what needed to get done.

Directionally, in the first quarter, our service centers had the biggest decline in sales, so therefore they had the biggest reduction in their margin. But that helps.

Fair enough. No, I appreciate all the color, and I will drop off. Best of luck, guys.

David Mandell, William Blair.

Hi. On the last conference call, you guys said that about [$60] million of EBITDA might be achievable in 2015. Are you able to update that number?

Well, I guess it's our goal to go from $6.8 million to -- we just added $6 million to it or $6 million something, so our goal is to do [$13] million a quarter for at least the next three quarters. So I guess -- what does that add up to?

All right. And then how is your guys -- how is the private label initiative going so far?

Great. It's going great. We are having great acceptance, both on our own products, PumpWorks products and some of the other pumps that we are having private labeled. It's going good. Our foundry is really busy. Our manufacturing facilities are really busy. So it's -- we are pretty excited about that.

The existing API 610 business, which the market was to midstream, has gotten -- is soft. We are still getting some orders, but not at the same run rate. But we have also moved our attention, along with the marketing side of DXP, to look at the downstream side of the business to help shore up some things. So that's looking okay. So we are pretty pleased with PumpWorks.

Thanks for taking my question.

At this time, there are no further questions. That will conclude today's conference call. Thank you for your participation.