DXP Enterprises Inc (DXPE) 2017 Q2 法說會逐字稿

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the DXP Enterprises Inc. Second Quarter Conference Call. (Operator Instructions)

I will now turn the call over to Mac McConnell, Senior Vice President and Chief Accounting Officer. You may begin your conference.

This is Mac McConnell. Good evening, and thank you for joining us. Welcome to DXP's Second Quarter Results Conference Call. David Little, our CEO; and Kent Yee, CFO, will also speak to you and answer your questions.

Before I begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings, but DXP assumes no obligation to update that information.

Now, I will turn the call over to Kent.

Thanks, Mac, and good evening to everyone on our call today. We will begin with a summary of our key financial information and then Mac will go into more detail regarding our sequential and year-over-year performance. David will conclude with comments about DXP and our financial results.

So let's jump right to it. Total sales for the second quarter were $250.7 million. Total DXP sales grew sequentially 5.1%. Average daily sales for the quarter were up 6.8% over Q1 or were $4 million per day in Q2 versus $3.7 million per day in Q1. This was predominantly driven by our Service Centers segment which experienced 10.8% growth or an average of $2.6 million per day during Q2. Additional drivers of this growth include our Rotating Equipment and Safety Product divisions. Canada also experienced stronger-than-normal growth during this time of the year with its third consecutive quarter of sequential increases.

Our Service Centers segment, which year-to-date is 64% of total DXP sales, experienced its second quarter of sequential growth along with total DXP results.

The increases in the quarter, we believe, are supported by an improving macro backdrop. The key indicators that support our business point to the results year-to-date, specifically the increase in the U.S. rig count, increases in the U.S. oil production, the improving PMI and the strength in the NVI. In addition and more importantly, the feedback that we are also getting from our regional leaders remains favorable and upbeat as we head into the second half of the year.

Turning to gross margins. Gross margins improved 45 basis points from 27.1% in Q1 to 27.5% in the second quarter. Again, Service Centers was a big driver here as they improved gross margins 143 basis points from the first quarter. Product and customer mix were key drivers for the improvement during the quarter. While gross margins still have room to improve and reflect the pricing environment we are competing in, we are pleased with the direction.

Second quarter EBITDA was $16.9 million, up 9.5% from the first quarter. Our EBITDA margin improved 27 basis points from the first quarter. This reflects the improvement in gross margins and the strong operational discipline we have been operating at in the past 2 years.

In terms of working capital, we were comfortable with where the numbers came out. Working capital as a percentage of last 12 months sales were 16.%. This is slightly above our more recent average of 15.4%, but within our targeted ranges. Receivables were up 2.2% in the second quarter versus Q1 and inventory was up 7.6%. The increase in inventory was primarily driven to support service levels, invest in our pump inventory and support customers within Supply Chain Services. Payables were also up, increasing 12.2%. While we believe there is improvement still to come in terms of working capital, again, we are comfortable with where we were at in the cycle.

In terms of CapEx, CapEx in the second quarter was $517,000, down 14% sequentially and 58% year-over-year. This reflects the minimal maintenance CapEx that our business needs and our ability to control investments.

Turning to free cash flow, which is a hallmark and strength of DXP, came in as expected in the second quarter. Our free cash flow for the quarter and year-to-date were $9.5 million and $6.7 million, respectively. As we move into the second half of the year, this should accelerate as we move past the softer portion of the year in terms of our free cash flow generation. Return on invested capital or ROIC remains stable and strong at 19% and continues to be above our cost of capital.

Our flexible and balanced capital structure, cash flow generation and improved operational execution allow us to continue to take distinct actions to further strengthen DXP, increasing the long-term attractiveness of our business model. As we have highlighted in the 2 previous earnings calls, we are exploring capital structure alternatives, including an ABL, and an institutional debt structure, and we look forward to positioning DXP for what appears to be a moderate gradual uptick in turning the cycle. Going forward, we will continue to operate with discipline and consistently deliver on our commitments.

Now, I will turn the call over to Mac.

Thank you, Kent.

Sales for the second quarter of 2017 decreased 2.2% to $250.7 million from $256.2 million for the second quarter of 2016. After excluding second quarter 2016 sales of $7.8 million for Vertex, which was sold on October 1, 2016, sales for the second quarter increased $2.3 million or 0.9% on a same-store sales basis.

Sales by our Service Centers segment in the second quarter of 2017 increased $2.9 million or 1.8% to $164.7 million compared to $161.8 million of sales for the second quarter of 2016. After excluding 2016 Service Centers segment sales of $7.8 million for Vertex, Service Centers segment sales for the second quarter of 2017 increased $10.7 million or 7% from the second quarter of 2016 on a same-store sales basis. This sales increase is primarily the result of increased sales of pumps, Safety Services, industrial supplies and bearings to oil and gas and industrial customers.

Sales of Innovative Pumping Solution products decreased $9.9 million or 18.2% to $44.5 million compared to $54.3 million for the 2016 second quarter. This decrease was primarily the result of the lumpy nature of IPS sales combined with the decline in capital spending by our oil and gas customers during the first half of 2016 when many of the jobs recognized as sales during the second quarter of 2017 were ordered. In connection with the increased capital spending in 2017 by our oil and gas customers, our IPS backlog has been steadily increasing since December of 2016.

Sales for Supply Chain Services increased $1.4 million or 3.6% to $41.5 million compared to $40 million for the 2016 second quarter. The increase in sales is primarily related to increased sales to customers in oil field services and the oil field equipment manufacturing industries.

When compared to the first quarter of 2017, sales for the second quarter of 2017 increased $12.2 million or 5.1%. The second quarter of 2017 contained one less business day than the first quarter of 2017. Sales per business day increased 6.8% over the first quarter of 2017.

Second quarter of 2017 sales by our Service Centers segment increased $16 million or 10.8% compared to the first quarter of 2017. Second quarter of 2017 sales for Supply Chain Services increased $700,000 or 1.8% compared to the first quarter of 2017. Second quarter of 2017 sales of Innovative Pumping Solutions products decreased $4.6 million or 9.4% compared to the first quarter of 2017.

The increased sales in the second quarter compared to the first quarter for our Service Center and Supply Chain segments primarily resulted from increased sales to customers related to oil and gas. The decline in sales of Innovative Pumping Solutions products were primarily due to the poor oil and gas market conditions during the first half of 2016 combined with the lumpy nature of IPS sales.

Gross profit for the second quarter of 2017 decreased 3.7% from the second quarter of 2016 compared to the 2.1% decrease in sales. Gross profit as a percentage of sales decreased to 27.5% in the second quarter of 2017 compared to 27.9% for the second quarter of 2016.

On a same-store sales basis, gross profit as a percentage of sales decreased 12 basis points. This decrease is primarily the result of an 88 basis point decrease in the gross profit percentage in our Supply Chain Services segment, a 585 basis point decrease in the gross profit percentage in our IPS segment, which were partially offset by a 153 basis point increase in the gross profit percentage in our Service Centers segment.

The gross profit percentage for the Supply Chain segment decreased as a result of increased sales of lower margin products to oil field equipment service-related customers. The decrease in gross profit percentage for the IPS segment is primarily the result of competitive pricing pressures. Additionally, the second quarter of 2017 results include a $2.7 million job with breakeven gross profit. The increase in the gross profit percentage for the Service Centers segment is primarily the result of increased margins on sales of Safety Services and bearings.

Gross profit as a percentage of sales for the second quarter of 2017 increased to 27.5% from 20.7% for the first quarter of 2017. This increase is primarily the result of a 124 basis point increase in the gross profit percentage in our Service Centers segment, offset by an approximate 281 basis point decrease in the gross profit percentage in our IPS segment and an approximate 30 basis point decrease in the gross profit percentage in our Supply Chain segment.

The gross profit percentage for the Supply Chain segment decreased as a result of increased sales of lower margin products to oil field service-related customers. The decrease in the gross profit percentage for the IPS segment is primarily the result of competitive pricing pressures. Additionally, the second quarter of 2017 results include a $2.7 million job with a breakeven gross profit. The increase in the gross profit percentage for safe -- for Service Centers segment is primarily the result of increased margins on sales of Safety Services and bearings.

SG&A for the second quarter of 2017 decreased $4.1 million or 6.5% from the second quarter of 2016. After excluding 2016 second quarter SG&A from Vertex of $2 million, SG&A decreased by $2.1 million or 3.4% on a same-store sales basis. The majority of the decline in SG&A is the result of decreased payroll, decreased incentive compensation, payroll taxes and 401(k) matching due primarily to headcount reductions and cost reduction measures implemented during 2016. As a percent of sales, SG&A decreased to 23.4% for the second quarter of 2017 from 24.5% for the second quarter of 2016 as the result of SG&A decreasing 6.5% while sales declined only 2.1%.

SG&A for the second quarter of 2017 increased $2.4 million or 4.3% from the first quarter of 2017. The increase primarily resulted from increased sales commissions, salary expense, insurance expense and health claims. As a percentage of sales, SG&A decreased to 23.4% from 23.6% for the first quarter of 2017 as a result of sales increasing 5.1% while SG&A increased by only 4.3%.

Corporate SG&A for the second quarter of 2017 increased $400,000 or 4.6% from the second quarter of 2016 and increased $1 million or 11.8% from the first quarter of 2017. The year-over-year increase was primarily the result of increased incentive compensation-related costs. The sequential quarter-over-quarter increase was primarily the result of increased health claims, insurance expense and salary expense.

Interest expense for the second quarter of 2017 increased 1% from the second quarter of 2016 and increased 9.3% from the first quarter of 2017. The year-over-year increase is the net result of the approximate 300 basis point increase in the interest rate charged on borrowings under our credit facility and the $126.7 million reduction in debt from June 30, 2016 to June 30, 2017. The sequential increase in interest expense is primarily the result of the increase in interest rates for the second quarter compared to the first quarter.

Tax expense for the first 6 months of 2017 was reduced by approximately $250,000 of discrete items. Without the benefit of these discrete items, the tax rate would have been 39.1% versus the 36.8% effective rate reported for the first 6 months of 2017.

We reduced debt by approximately $7 million during the second quarter of 2017. During the second quarter of 2017, the amount available to be borrowed under our credit facility decreased by approximately $9 million to approximately $20.9 million. Our bank leverage ratio was 3.16:1 at June 30, 2017. At June 30, our borrowings under the credit facility were at a rate of approximately 6.2%.

Capital expenditures were $517,000 for the quarter. Cash on the balance sheet at June 30, 2017 was $2,479,000. The accounts receivable balance at June 30, 2017 was $16,370,000. The inventory balance at June 30, 2017 was $90,697,000.

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

Thanks, Kent, and thanks, Mac, and thanks to everyone on our second quarter conference call today.

Before I jump into our results, I would like to make some general comments directed at our DXPeople. Let me thank all of you for your continued hard work and grit as we turn the corner and momentum begins to build in our business. We have worked as a team to meet the challenges of the past 2.5 years and I could not have asked more or be prouder of each of you as your positive attitude, customer service excellence and winning culture has served all of us very well.

Now, in this time -- now -- excuse me -- now is the time to benefit from our efforts by having fun growing again, being customer-driven experts in MROP solutions, bringing the solution and being the solution and leveraging all of our DXP capabilities across our product divisions. I would like -- I look forward to everyone finishing the year strong and building a path to an even better 2018.

Additionally, some of our DXP people have heard me more recently talk about being fast and convenient for our customers. DXP has to continue to improve at being easy to do business with. As we move forward, speed must be a fabric of our culture, both internally and externally. Speed is not just DXP's competitive advantage. It is a guiding principle. Customers will choose companies to do business with that not only keep a promise, but follow through and make convenience a priority, not just a transaction. These qualities will be essential as we move forward and continue to build DXP.

Moving to our results, this is DXP's second quarter of sequential increases in total sales and EBITDA. As such, we are encouraged by the improvement in market conditions and remain focused on growing our business in fiscal year 2017.

The ISM PMI manufacturing indexes, which give us an indication of how DXP's broad industrial markets will perform, expanded from April at 54.8% reading through June of 57.8% reading. This trend continues to be above average over the last 12 months of 54.3%. This supports the strength we have experienced in sequential sales growth within our Service Centers as we experienced growth in broad -- in some of the broader industrial regions, including the South Atlantic. We remain excited to see this momentum on the industrial side of DXP.

That said, oil continues to fluctuate between $45 and $53 per barrel as it did in the first quarter. Across our business, we feel well-positioned to benefit from upward movement in oil and gas and the volatility year-to-date has not negatively impacted DXP's business in any material fashion.

Total DXP revenues of $250.7 million for the second quarter was a 5.1% sequential increase over the first quarter of 2017. Service Centers increased 10.8% to $164.7 million, while Supply Chain Services sales increased 1.8% to $41.5 million. Innovative Pumping Solutions decreased 9.4% to $44.5 million, reflecting the overall lumpy nature of our project business, but as bookings and backlogs have continued to build within IPS.

The sequential increase were primarily driven by increases in our Safety and Safety Services and Rotating Equipment divisions followed by Bearings and Power Transmission. Specifically, Service Centers' sales increase was driven by material increases in Rotating Equipment and Safety.

Canada's Safety Services increased 11% and experienced a second quarter of year-over-year sales growth. DXP's Rotating Equipment strength was driven by an increase in pump assemblies. Supply Chain Services' increase was primarily driven by increases in Rotating Equipment, Bearings and Power Transmission and Safety Product divisions. Innovative Pumping Solutions' sales reflect the lumpy nature of projects. Sequentially, IPS experienced a 9.4% decrease or $4.6 million sales decline.

We are encouraged by the improvement in our backlog, which should continue to grow through the year and ultimately impact DXP's sales and profitability in future quarters. As customers' CapEx budgets improve and our customers gain confidence in spending and taking on project, trends in our backlog show IPS' quarterly average backlog increased 20-plus percent from the first quarter to the second quarter.

DXP's overall gross profit margins for the quarter were 27.5%, a 45 basis point improvement. DXP continues to work through pricing pressures on jobs and unabsorbed manufacturing overhead within the IPS segment, but we are pleased with the trend and outlook. Also, product mix within Supply Chain Services and an uptick in some of our large volume, lower margin contracts impacted gross margins as SCS experienced a 30 basis point decline from Q1 to Q2. This was offset by 120 basis point increase in Service Centers' gross profit margins, which was driven by higher margin product mix.

SG&A for the second quarter was $58.7 million or 23.4% of sales, a decline of $4.1 million from the second quarter of 2016 and a $2.4 million increase or 4.3% rise from the first quarter.

At the end of the second quarter, DXP had approximately 2,241 full-time employees. We appreciate all the DXP people who are with us and they have done a great job of making DXP a success.

DXP's overall operating income margin was 4.1% or $10.3 million, which includes corporate expenses and amortization. This reflects a 64 basis point improvement in margins over the first quarter and reflects the impact of sequentially higher gross margins and lower SG&A cost as a percent of sales.

Service Centers' operating income was 11.2% or an increase of 221 basis points, driven by the improvement in gross profit margins previously mentioned and lower SG&A as a percent of sales. While IPS and Supply Chain Services' operating income margins were 4% and 9%, respectively, IPS operating income margins were impacted by fixed cost absorption and utilization rates.

Overall, DXP produced EBITDA of $16.9 million versus $15.5 million in the first quarter, a sequential increase of 9.5%. EBITDA as a percent of sales was 6.8% versus 6.5% for the first quarter of 2017.

Earnings per diluted share for the first quarter was $0.23 compared to $0.17 per share in the first quarter, a sequential increase of 35%.

In summary, DXP delivered 5% sales growth, 9% EBITDA growth and 35% earnings per share growth. In addition to delivering profitable growth, we will continue to execute our capital structure strategy focused on debt reduction and positioning DXP for the market upturn.

Moving forward, we will pursue both organic and inorganic growth. We are actively engaged in discussions around acquisitions and look forward to refinancing our capital structure to pursue a more proactive growth strategy. We expect both organic and acquisition opportunities in the future and we want to be positioned with strong liquidity to maximize our growth.

It is great to see the first half of 2017 build momentum. After 2 quarters of sequential increases, our customers in all our end markets have returned to growth and we look forward to this trend moving forward. DXP and all of our stakeholders are fired up and excited about winning and growing as we continue to be customer-driven, partner with great suppliers and take market share by being fast and easy to do business with.

I would like to thank our entire team for their hard work, commitment and dedication to our plan and, most importantly, our customers.

So with that, we'll now take questions.

(Operator Instructions) Your first question is from Matt Duncan from Stephens.

Congrats on a good quarter. To start off, can you just talk about the sales trend you saw month-to-month through the quarter? Was it through your typical build of revenue on a monthly basis?

Yes, it was. April sales per day were $3,986,000; May sales per day were $3,682,000; June sales per day were $4,270,000 for the quarter average to be 6 -- $3,979,000.

Okay. And then as you're talking to customers right now with oil sort of bouncing around in this range, rig count seems to be kind of topping out a little bit, are you sensing any kind of change in customer tone or demand pattern at all? Or is it still marching forward?

No, we're looking for that because, as you know, oil prices have had a lot of volatility to them, and volatility is not very easy to count on so -- I mean it's difficult to plan for it. But we're really not seeing projects canceled or projects put on hold. We're -- of course, our daily business through our Service Centers is pretty robust, and a lot of that is because of pent-up demand on maintenance and things that were deferred. And so we see our aftermarket growing pretty nicely. And really, on capital projects, they're out there. We actually see our backlogs continue to build. So we're not -- again, we're not -- I can't emphasize this enough. I mean, we're not seeing some hockey stick recovery and things are just shooting off the table here, but it seems like nice, steady growth. And I mean, the 2 weeks we've had of down rig count, I believe they were 1 or 2 rigs apiece. So it's not like you're seeing a big decline.

Okay. So as you look out to the third quarter then, typical seasonal pattern would be for the revenues to be up a little bit. You had a really, really strong sequential improvement in Service Centers. Is there anything there that may not be repeatable? And then on the flipside, it sounds like you're seeing great growth in the backlog with the IPS business, so would it be safe to assume that the back half of the year, your revenues there ought to be better than the first half?

Again, I think that's correct. But I do think that it's -- I think when we look at this month, which isn't necessarily indicative of the whole quarter. But I think our sales have grown 1.6%, and so that's not that robust. But at this point, we'll take that, and we'll take the leverage that, that brings with us to improve the bottom line and keep moving forward.

But David, is the IPS increase in backlog, is that turning into customers who are ready to actually have you get to work on those projects and take delivery? Is that a good leading indicator, I guess, is what I'm getting at for what we should see happen on a sequential basis with those revenues?

Right. Both -- so to be perfectly clear about things, I want to make sure -- it's hard to give some of this in a script, but we -- the quarter that we just had was things that we sold back in the first half or in kind of the middle of 2016. So 2 things were happening. One is, that was a buyer's market so our margins were lower. We just needed the business to keep our shops busy and full, et cetera. And so we see some pluses around the fact that the fabrication jobs are still very competitive but they're not as extreme. We're not having to be as extreme as we were a year ago. And then I think that the projects have built, starting in probably the third quarter of 2016, projects started coming about. And then they just -- each quarter, those projects and number of things we're quoting, booking and then now producing are all growing.

Okay. That's all very helpful. Then last thing for me and I'll hop back in the queue. On the PumpWorks line, your own pump that you guys are making, can you talk about how that's doing, what's your annual revenue run rate up to at this point? And how is the product being received by customers? Is your quicker delivery time, shorter lead time, however you want to put that, is that helping you with oil and gas customers as their businesses get busier?

So when we think about PumpWorks, we think about 2 different pieces of it. We think of PumpWorks being our, for DXP, it's our private label, centrifugal pump line that competes with Sulzer, Goulds and Flowserve. And so when we take that line, we think of API-610, those are more sophisticated bigger pumps, et cetera, and pretty much most of the first half of '16, we were living off of our backlog. As we turned the corner, started probably in the fourth quarter of '16, our backlog started building in that particular arena and has continued to build. And really it got to a level that wasn't all that comfortable, but we always did have a backlog and we always were getting some orders. But now that's building in a bigger way, those pumps are typically going to be on pipelines and are so -- and refineries so that -- that business is doing much, much better and will continue to improve.

The other piece of our business is what we design, and that was more of a commercial pump. And that part of the pump is the part where we kind of started from scratch 2 or 3 years ago, I think 2 years ago. That -- and that was to replace the fact that Goulds went one way and we went a different way. That has been wildly successful. We're doing every bit as much PWA, PWHs, which are really kind of the low end of API. But we're doing -- we're really doing fantastic in those areas. I would say we're selling as many pumps or more than we did when we were the Goulds distributor.

What's not quite up to speed and is not as big a number as when we had Goulds so we're kind of net negative is the aftermarket, the parts business. And even though a lot of our parts are interchangeable with Goulds, customers tend to go back to the OEM. So as we sell more and more of these PumpWorks pumps, and it's our pumps out in the field, we will begin to see a lift around parts. That lift is important because you make a whole lot more money on parts than you do on new pumps.

That's very helpful, David. Last thing, if I can on the margin that you're getting on the pump that you're selling, that you're manufacturing versus the Goulds pump, are you getting a better price or really not a better price, a better margin percentage than you were on the Goulds? I know that's something you anticipated hopefully having happened, is that actually happening?

So it depends, to be perfectly clear, it's -- if we're going against Goulds direct, then the margins can get pretty skinny, and it's because Goulds' only way of combating us is with price. We actually make a better pump than they do. So -- and there's not anybody out there that, frankly, doesn't appreciate that, probably except for Goulds, they don't appreciate it. But a lot of -- so a lot of the margin on the direct accounts was going to be in the parts area, but again we don't have the population of pumps out there. So it's -- so that piece of it is just us trying to gain market share, and they're trying to keep their market share. So things are pretty skinny in that arena.

Where we do really quite well and sell at much higher margins than we did before is when we're competing against another distributor. And that's because we'll have 2 markups. Goulds is still trying to make some money on their product and then the distributor is trying to make some money on the product, and so there's a double markup. And that's where we really shine. We really shine in terms of being fast and quick and getting the customer what he needs, and then we shine because if that's the case and speed is important, well, then we make nice profit margins.

(Operator Instructions) The next question is from Steve Barger from KeyBanc Capital Markets.

This is Ryan Mills on the call for Steve. Congrats on the quarter. Yes, my first question is if we continue to see the cycle improve, how should we think about incremental margins going forward, more so into 2018 rather than the back half of '17?

I really -- I feel very strongly about this, that we are going to make improvements on our EBITDA margins to the point of ultimately 10%, and maybe Kent wants to argue that because we have our own private label pumps and et cetera, that our margins on that piece of the business will be better, so maybe we'll do better than 10%. Your question is an appropriate one where we went from 6.5% to 6.7%, I guess, did I get that right? I'm trying to remember, I think that's right, I think that's what we said. I think that's what I said. But anyway, I was reading that. So anyway, so we're going to -- we would like to see us -- we would like to see 7% possibly by the end of this year, not across the whole year but at least, maybe in the fourth quarter, hit that 7%. And then as we go to the next year, we'd like to see again at least 1% increase in that and then another percent.

It took us a long time to get there, but we know we can get there. There's leverage in this business. As you know, sales go up 5%, then the bottom line is going to go up 15% or 20%. And I think a lot different -- I guess this particular case, we get more leverage in the early stages where we went from -- we had 5% and we went up 35%, I think. So anyway, we will get there. What concerns me a little bit, and I really don't want to make sort of this mistake again, is that I think there's an appropriate percentage for our business. And really, we hit 10% during the last upcycle. I think we hit 11%. Everybody wanted to know if we're going to go to 12% and 13%, and I think that's just pushing the envelope too much. I think this deserves to be a 10% EBITDA business. So does that explain your -- does that answer your question?

Yes, yes. And then my next question, just thinking about IPS in the third quarter, it's going up against an easier comp and considering the growth you're seeing in the backlog and maybe what you're hearing from customers so far, is it out of the realm to assume you might return to positive year-over-year growth in IPS in the third quarter again?

Yes. And really, I'd like to comment. I think we made this point, but I'm going to make it again. We divested ourselves of a fastener master distributor that bought product from China. And as a master distributor, that didn't really fit our model. So we sold that. And if you really -- if you back that out, and I think somebody has some numbers of what that is, then we've already turned the quarter and have year-over-year growth. And so we're pretty proud of that, and we'll continue to do so.

Okay. And then I believe in your prepared remarks, you highlighted positive strength in Canada. Just kind of curious, was the seasonal breakup in Canada this year have less of an impact compared to your expectations on what you've seen in previous years?

Yes -- no, that's correct. I mean, Q2 was a surprise for us. Usually have the breakup and they have their normal, call it, warm season starting -- it didn't start necessarily any earlier, but it started as expected. But Canada became a surprise for us in Q2. We, frankly, probably expected it'd be a little softer than what it was. So 3 quarters of sequential increases will be hard to repeat as we move forward until we get to Q4 so.

The next question is from Matt Duncan from Stephens.

Kent, you made a comment on the refinancing in the balance sheet in your prepared comments. Just wondered if you're in a position to be able to expand on that and where are you in the process of getting the debt refinanced? I don't know if this is more for you or David, but which way are you guys leaning in terms of what kind of debt structure you think you're going to have? And is there a timeline for when you would like to have this completed?

Good question, Matt. I mean, hey, I mean, I think the comments are still the same. The evolution of our capital structure and the way we've thought about it has been an ABL plus call it, some institutional debt piece in terms of our capital structure. And as you probably know, those things take time, and particularly when you go to that institutional debt market because you've got to do things like get a rating, et cetera. And so we're exploring all those things. I don't think we have -- are in a position to communicate a leaning, if you will, but obviously, we get -- we need to be cognizant of the dilution and/or accretion, frankly, from a cost of capital perspective. And so we're just trying to be sure we get to the right structure for DXP going forward, that creates flexibility and that is cost effective as well, so.

Yes, I think -- I'll just add to that, that we're not in a giant hurry, but we're not in a slowdown mode either. We're pushing forward to get the best deal we can for DXP. If we could get something that would be better than cost neutral, that would be just unbelievable. I think everybody would pat me on the back. If we can get something a little more costly, I think that's going to be okay, too. So we're pushing forward, but we're not going to do something dumb.

David, is a convertible note something that's on the table or do you not want anything that's going to dilute the common holders? And we're really talking more some kind of institutional bond plus an ABL, it's just a question of size and time?

That's not -- a convertible debt piece is not in the cards.

Okay, just wanted to make sure on that. And then from a timeline perspective, I appreciate that there's obviously some things here that are out of your guys control. Remind us when you need to have this done. I think my recollection is the current bank debt matures at the end of March of next year. Is that correct?

That's correct.

That's correct.

So is the goal to have it finished by the end of the calendar year or could it stretch into early next year? Just how quickly would you like to have it done? Obviously, David, the key here is that you want to get free of covenants so that you'll be able to get back to sort of the bread and butter of DXP, which is these nice small bolt-on acquisitions you guys have done so well in the past. The sooner you get that done, the better. So just maybe a little thoughts on the timeline.

Well, I think you said it well. And so the answer to your question is, yes, yes, yes, yes. But we're going to -- what we'll have -- we'll get something done before the end of the year. We're not going to push ourselves right up to the back of March 30, 2018. That's not going to happen so.

Have you started conversations with acquisition targets and maybe you just never really stopped, but are you lining some stuff up so that once you've got the new debt structure in place you'll be able to move forward?

I mean, Matt, we always keep dialogues going. I mean, in theory we never stop. But we may take pause internally because we never want to catch a falling knife, per se. But we're always keeping dialogues open and free so.

Are you talking about acquisitions?

Yes, acquisitions, yes.

Was that your question, Matt?

Yes, exactly, yes.

Okay, yes, yes. Oh, yeah.

The next question is from Patrick Murchison from Coker Palmer.

I just had a -- I just want to follow-up on the M&A front as well. With the cycle kind of starting to turn and the markets improving, I mean does that present any challenges in trying to find attractively priced acquisitions?

No. I mean, hey, we're a regular acquirer, present market excluded, and I think we're able to find guys at reasonable multiples and fair multiples. So we don't see it a challenge right now. Obviously, we always compete with other strategics and private equity buyers, but those tend to be on the larger transactions.

Okay. And then I guess as far as the acquisition market, I mean, are you all seeing any particular geographies or product categories that look more attractive than others?

No. I mean, hey, the great thing about our model, at least from our perspective, is that we have the 5 key product divisions, and we're able to look at acquisitions across all those. But more recently, obviously, it's been weighted towards Rotating Equipment and metalworking, but there's -- we can't time geographies and/or product divisions, frankly speaking. And so we keep the dialogues fresh and that's why we keep them fresh across all those product divisions and in all geographies. Obviously, as we like to call it, holes in our map, but we can't time when those will become available. We just keep the dialogues fresh.

There are no further questions at this time. I will turn the call back over to the presenters.

We're done unless Kent or Mac have something to say. Thank you, everybody.

This concludes today's conference call. You may now disconnect.