Good afternoon, ladies and gentlemen. Thank you for standing-by. Welcome to the DXP Enterprises Incorporated 2012 Second Quarter Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) I would now like to turn the conference over to Mac McConnell, Senior Vice President of Finance and CFO. Please go ahead.

Thank you. This is Mac McConnell, CFO of DXP. Good evening and thank you for joining us. Welcome to DXP’s second quarter conference call. David Little, our CEO, will also speak to you and answer your questions. Before 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 that DXP assumes no obligation to update that information. I will begin with a summary of DXP’s second quarter 2012 results. David Little will share his thoughts regarding the quarter’s results then we will be happy to answer your question. Sales for the second quarter increased 32.5% to $261.9 million from the second quarter of 2011. After excluding second quarter 2012 sales of $39 million for businesses acquired in 2011 and 2012, sales for the second quarter increased 12.8% on a same-store sales basis. Sales for Supply Chain Services increased 17.2% to $42.6 million, compared to $36.4 million for the 2011 second quarter. Excluding second quarter 2012 SCS segment sales of $4.4 million for acquired businesses SCS segment sales for the second quarter 2012 increased to 5% from 2011 on a same-store sales basis. Sales of Innovative Pumping Solutions products increased 61.3% to $35.2 million compared to $21.8 million for the 2011 second quarter. Sales by our Service Centers segment increased $44.6 million to $184.1 million compared to $139.5 million of sales for the second quarter of 2011. After excluding 2012 Service Centers segment sales of $34.5 million for businesses acquired in 2011 and 2012, Service Centers segment sales for the second…

Thanks, Mac, and thank you to all our participants on our conference call today. While given the headwinds of Europe, our own dysfunctional government, the presidential election, high unemployment and world economic slowdown, DXP’s performance continues to be outstanding. Our DXP people’s execution of our strong strategic growth strategy is taking market share and improving our bottom-line performance. We have now produced 10 straight quarters of sequential quarter-over-quarter growth in both the top line and bottom-line. Our organic sales grew 12.8% and total sales grew 32.5%, our sequential quarter-over-quarter organic sales growth of over 1% reaching $261.9 million. We continue to grow our EBITDA margins up from 8.1% in 2011 to 9.1% in the first quarter and 9.4% in our second quarter. Our goal of 10% EBITDA margins by 2013 certainly looks achievable. Our Q2 2012 pro forma return on invested capital was 31% after tax. This was one of the highest returns of working capital plus successes in our industry. Being customer-driven experts in MROP solutions continues to be a win-win both for DXP and our customers. I would like to give a special thanks to our DXP family including the new members of our family for their efforts and belief and being customer-driven experts across a large breadth of products and services. All of our product divisions, rotating equipment, bearings and power transmission, safety services and products, metal working, industrial supplies, are growing and doing a fantastic job of supporting our super center program and our 12 regions – helping our 12 regions to capture new market share. Our acquisition program is alive and well. In the second quarter of 2012 we completed three acquisitions for a total transaction consideration of $36.9 million or six times acquisition EBITDA of $6.2 million. Note, total transaction consideration includes working capital…

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) our first question is from the line of Matt Duncan with Stephens. Please go ahead. Matt Duncan – Stephens: Afternoon guys.

Hi, Matt. Matt Duncan – Stephens: The first question I’ve got, David, I appreciate all the details that you gave us there. That’s very helpful sort of thinking through the back half of the year. To put it all into perspective do you still feel like in the current environment DXP can grow 10% organic plus that 10% plus from acquisitions that you guys have talked about or is the 10% growth bogey going to be a little tougher in the current environment, just – how do you think about overall organic growth with what’s your seeing right now in the business?

Well, we started the – July seems to be a really good month for us and I think you said it right, I think it’s tougher but I think it’s achievable. Matt Duncan – Stephens: So that still is your goal is to grow at 10% organic and then add the acquisitions on top of them?

Absolutely. Matt Duncan – Stephens: Okay, looking at the business and sort of some pieces here, you said July had started off strong. What sort of sales trends did you see through the quarter, Mac?

Days sales, I guess, in the first quarter, per business day we average $3,942,000 a day. April was $3,983,000. May was $4,104,000. And June was $4,573,000. Matt Duncan – Stephens: And in July it sounds like you – it’s probably following a normal pattern or the month may be down from the June month is always – you have a hot month at the end of a quarter, but year-over-year growth in July sounds they got started off pretty good though?

Yes, yes. Matt Duncan – Stephens: All right. David, at IPS, is backlog no longer growing there given that you’re starting to see some customers, I guess, who are acting like maybe they’re going to wait a little bit while trying to push out deliveries a little bit. Well, what’s going on with your backlog and quoting activity in that business?

Well, people, okay, two different questions. But we’re maintaining our backlog I would say it’s not particularly growing, but it’s not declining either. And then as far as quoting activity a lot of the quotes are people aren’t – their quoting things, there’s projects out there, but they look like they’re being delayed. And the only read we can get on that is what I’ve said and that is that the marketplace, there’s a lot of uncertainties out there, a lot of headwinds, people don’t know the direction of where we’re headed and so they look like to me they’re – they have lot of projects they’re just putting them off for a while. Matt Duncan – Stephens: Okay, are you seeing sort of that across the energy business in general or is that really just more tied to the capital spend stuff?

It’s tied to capital spend. Matt Duncan – Stephens: So how is the rest of your energy customer base doing? Are you still seeing pretty good demand trends from those customers?

Oh, yes. I mean, we’re – yes, I don’t want to give the impression that we feel like things are declining. We actually feel really good about our business and in most of our – in most people’s, I think, out of 12 regions, only three of them reported flat down a little bit. Everybody else reported up. It’s just that we had to recognize what we’re reading in the paper and what’s happening in the marketplace. And so and what PMI is doing and what ISM is doing, et cetera. So we’re watching those things. They don’t appear to be affecting us that bad, but they could and I’m just a really strong believer. There’s nothing out there that’s going to cause to fall off some cliff, but it’s just not going to happen. There’s – but I think there is uncertainty in the market so people are kind of being a little more conservative. Matt Duncan – Stephens: Okay, David on HSE, the revenue and EBITDA level that that business had for the 12 months ending May is quite a bit above the 12 months ending December. Can you talk a bit about what drove that and sort of how that business is doing right now, I guess, the breakout in Canada typically is down in the second quarter, you’ve got the spring breakup period. But how is that HSE business doing now that if you’ve taken it over?

It’s doing really well. It’s doing better than we expected. The first part of the year they did have a fire, a big blow out on a drilling rig. So they had some additional business there. What we don’t know is how much did that pulled away from other normal business that we have. Alberta doesn’t have an unemployment problem. They have an employment problem. And so the amount of people that we have is – we’re trying to fly people in, et cetera, so business is really, really good there and I don’t – I know we have the fall out and so the drilling rig count in Canada goes down, but I believe on a year-over-year basis it’s actually up. Matt Duncan – Stephens: Okay and then last thing I’ve got and I’ll hop back in queue. The gross margin that you had this quarter was very strong, it was up 100 basis points from the first quarter. It sounds like some of that is tied to the stuff you saw at IPS that you talked about. Is there anything else going on? I know you are a little bit disappointed in that 1Q gross margin. So is the go forward gross margin somewhere between those two quarters and how should we think about that in our models?

Well, yes, we did have two large orders taken at lower margins that had some effect. Now, that’s – we’re only talking about $8 million worth of business. So that’s going to be pretty watered down by the time you look at it across $261 million. So I don’t think that accounts for all of it. Likewise, I don’t account – I know we have talked about P2 and I hate to – I hate to even have to be discussing it now because we have talked about it so much in the past but P2s – our pricing deal looks at velocity pricing and charges more for slower moving items, et cetera. We have implemented that in a couple of regions and I will say, and I didn’t want to, but I will is we’re having some nice success with that product. Again, because it’s only two regions out of 12, I don’t think we can attribute it to that. And so at the same time I know SCS has increased their margins, of course, IPS did mostly because of those two large jobs and the service centers, they have increased their margins. So we always have a pressure on our guys to increase their margins and it’s – in every quarterly meeting we discuss it. So I’m just going to give them a pat on the back and say they’re doing a nice job. Matt Duncan – Stephens: Okay, thanks.

Thank you (Operator Instructions) Our next question is from the line of Holden Lewis with BB&T Capital Markets. Please go ahead. Holden Lewis – BB&T Capital Markets: Thanks, good afternoon. The EBITDA, you commented in your prepared remarks that based on the improvement you see on the EBITDA margin so far, you feel like 10% is pretty well in sight for 2013, but really talking about Q1 is at 9.1%, Q2 is at 9.4% – you’re talking about maybe you’re 70 basis point you’re so shy of that 10% level. You sound pretty confident in it. I assume you’re talking organically maybe you’re just blending in the acquisition as we get there but can you talk to me is this organic about what the bridge is from maybe 9.2%, 9.3% right now to 10%.

So, I mean, in a matter of two months we’ve seen the two regions on P2 see margin enhancement of 1% to 2%. Holden Lewis – BB&T Capital Markets: Down.

That kind of answer your question I think. Holden Lewis – BB&T Capital Markets: Okay you’re sort of envisioning that. So, if it’s in two of the 12 regions now how quickly would you anticipate rolling it out to the other 10?

It’s the – people have sharpened it a bit to be mixed. So, I mean, we’re talking about over the next six months or so. Holden Lewis – BB&T Capital Markets: Okay, so you think that over the next six months you think you roll it out to the next 10 so you’ve got a few; the first two were sort of beta, they’re working well and it’s software after all; rolling it out to the rest is relatively easier. Is there heavy training involved how do we sort of look at that?

Well, there is training but there is more convincing. We still allow the people to adjust the price and now we track. So like in one region we have a 40% acceptance of the price meaning that they use the price suggested or even a higher price 40% at a time. The other region is at 25%. Now the 25% region has had about a 70 basis point improvement where as the 40% guys had 1.5% improvement. So the better acceptance we have – so it’s a matter of rolling it out, gaining people’s confidence. We’ve made adjustments to like I think people felt like we were – we went a little too far the first 12 rounds so they adjusted that. I mean, we’re trying to gain these people’s confidence and it’s been a – it’s going to require now – and by the way we think we ultimately drive 80% compliance. Holden Lewis – BB&T Capital Markets: Okay. And how long as it taken you, on either site one or site two to get to where you are today? I mean, how long does it taken you from the time that you put it in place to the time that you get to these types of numbers?

They implemented it two months ago. So we’ve had two full months, not counting July. We are not counting July; we are actually backed May and June. Holden Lewis – BB&T Capital Markets: That’s pretty quick.

Well that’s, yes, exactly. No, I mean, it took us – well, that’s the part I didn’t want to talk about, but, I mean, it took us a year to basically to massage the data, get all the data, get it programmed in, do all the things I’ve been talking about this for a while. Holden Lewis – BB&T Capital Markets: Right.

So I’d say in May 1 was the go-live date for those two locations. Now, by the way, the go-live date and you saw – so you said, well, it was going to take a year to do the next one. No. We’ve already populated the suggested price into all the regions, but they’re not being trained to use it and they’re not being expected to use it at this point. So then, everything will go quicker now is my point. Holden Lewis – BB&T Capital Markets: Okay, so that alone it sounds like it can drive those gross – continue to drive those gross margins up at a decent clip. That’s how you’re kind of initially getting there. Okay.

Absolutely. Holden Lewis – BB&T Capital Markets: I’m sorry.

Absolutely. Holden Lewis – BB&T Capital Markets: Okay, and then I just want to make sure I truly got the tone corrected of your business. So IPS I think we got it, you’re clearly seeing some slowing, people have – so staying a bit more cautious, it seems like that’s just sort of the nature of the capital spending type world. So IPS, you’re kind of looking at revenues kind of sticking kind of where they are maybe margins being at or slightly below current levels. I think I got that. SCS, I just want to make sure I got that it sounds like you’re – because you’re implementing existing and new packages, it sounds like you’re pretty confident that your revenues will continue climbing there. Is that the right message.

Yes. Holden Lewis – BB&T Capital Markets: Or economically are you seeing maybe some of this exiting work coming off a little bit or slowing?

No, that’s the right message. We’re – that segment is growing, something drastic that happened which we just did not see. I mean, I think we may have a little slowness here or there. And so, there will be some amount of business that – some amount of existing business that we think will stay levered, but let’s say it goes down a little bit. But I do believe we’re putting more into the top of the funnel and we should see it grow. Holden Lewis – BB&T Capital Markets: Okay, now the margin in SCS, for a long time it kind of ran between 5% and 6%, now in the last three quarters, we found it gone to 6.2% to 7.5%, 9.2%, I mean, you’ve seen big improvements in that business and quite frankly I think you’re achieving margins that has been rarely seen in integrated supplies. Again, what’s kind of the story there? What specifically is driving those margins that this is sustainable?

Well, as an example, we – there was a rather large contract out there for Xerox. And at the end of the day we just simply passed. I think in the past we were chasing the elephants and now we’re chasing the smaller plants that frankly value our level of more technical products. And so, therefore, we’re able to charge a little more than just the really, really big guy that beats you up on price and so that’s been our strategy. That was DXP strategy way back 15 years ago. Precision had a much more chase the elephant strategy and so while they were running it, they stayed with that strategy and now that we have John Jeffery who comes from DXP back in the fall, we are just being more selective on the kind of accounts that value – the value proposition that we bring in and then we see real large acceptance of that. So when people value rotating equipment, when they value things that have a higher level of expertise to it, we win every time. Holden Lewis – BB&T Capital Markets: Okay and so, I mean, does it has the margin been achieved because, you have gotten rid of the lower margin business? Or is that done as the margin has been achieved because you have been formatting and getting a larger share of new jobs that you bid at higher margins?

Well, first of all, as you know in all distribution there is leverage. So if sales are going up bottom line goes up greater. So we have the same amount of management over an increasing top line. So we’re getting margin enhancement there. I would say we have not lost any business in a long time. So we have the existing accounts. Now we may have done a better job of getting price increases through and, et cetera. But, it’s partly the leverage of increasing sales, same personnel, and then also John’s like he said, he is been focused on freight and he’s been focused on some productivity things and frankly they’ve just done a really nice job of growing the business and growing the bottom line. Holden Lewis – BB&T Capital Markets: Got it. Great. Thanks. I’ll jump back in.

Okay

(Operator Instructions) our next question is a follow up from the line of Matt Duncan. Please go ahead. Matt Duncan – Stephens: Hey, guys, just want to get back in and, David, maybe talk a bit more about end markets. We talked some about energy earlier, what are you seeing from other end markets and you mentioned some softness, where are you seeing the softness and what stands out as still being the strong?

Well, oil and gas is still strong as you know we’re kind of after the product and services except for safety services is all – after the drilling completion. So drilling has -the drilling rig count has declined not significantly by the way I might add but it’s declining and we see that most being the non-horizontal stuff, the none new technology stuff and the stuff related to gas which is sort of having an effect because gas is starting to go up some. We might blame that on the weather. So we don’t see any – we see the oil and gas market as being very, very strong and then we see midstream being even stronger because we’ve poked all these holes in the ground for the last couple of years. And now they’re starting to address how they move the product from the field to refineries, to chemical plants to export places; so how do we move product around, and so mid streams growing and they’re putting in a lot of new pipelines. And then still, our chemical markets are doing really, really well with gas prices still being relatively cheap. We’re seeing some rubber products that are very active. We see – we do see a little bit of maintaining the status quo, which is okay around mining. Some commodities have gone down so nobody has any $100 million expansion projects. We see general manufacturing as it relates to the oil and gas industry as it’s CW Rod, and their cutting tool business they’ve had a blow-out year. They’ve been a great acquisition and the Metal Working Group is doing just fantastic. So manufacturing around products that support the oil and gas industry are doing really, really well. We see there’s some drought conditions in the middle of the states. So ag has been slow. And that’s been a good market because corn prices and stuff like that are up but, but the farmers have suffered through the drought. Matt Duncan – Stephens: Okay, that helps. That color is helpful. Turning to the balance sheet for a minute, Mac, the leverage you said is pro forma, I guess, around 2.3 times. Remind us what’s your comfort level is with that leverage ratio, and I get the impression from what you said David that your M&A strategy at this point is probably focused on smaller bolt-on type acquisitions as opposed to the bigger ones. Is that fair?

Well, you asked several questions and I’ll answer them all. First of all our bank – our banks lets us go to 3.5. It used to be 4 but it’s a syndicated loan, they’ve let us go to 3.5. I’m comfortable at 3 and below. So, again, I think we weathered – I’ll just reiterate the fact that in 2009 we weathered a 31% I call that a cliff by the way our sales were down 31%. We were able to generate free cash flow and pay down debt and deal with that. So we feel like our business accommodates a good amount of leverage. And so then when we look at acquisitions, we do have a lot of bolt-on type stuff that’s available to us again where we keep it within our parameters of six times EBITDA or less. Businesses that are growing businesses that help our regions be at least super regions if not SuperCenters and so the activity is, there is activity there. Matt Duncan – Stephens: Okay and a last thing for me on, Mac, on quarterly interest expense going forward, if I heard everything you said correctly in your prepared comments, it sounds like your current debt level is around $250 million, that your current rate is probably 2% to 2.25% on that debt. So that gets you to kind of $1.4 million of an underlying interest expense per quarter and then you said you’ve got $650,000 or so of a one-time cost flowing through that line into 3Q. Are there any sort of unused commitment fees that are flowing through there as well? Just what is that quarterly interest expense line going to look like at this debt level going forward?

I mean, the increase in our amortization, we’re writing off the old debt issuance costs and now we have $3 million of new debt issuance cost that we’re going to be amortizing and the increase in that is $70,000 a quarter. Sorry, I guess, amortization is about, $187,000 a quarter. Matt Duncan – Stephens: Okay. So you add that.

And there is an unused... Matt Duncan – Stephens: And you’ve got $1.6 million per quarter at that $250 million debt level is that right?

I’m sorry say that again. Matt Duncan – Stephens: So if you add in the debt amortization cost, and like I said, am I right as to the rate – I think you said it – you were at 1.5% for the June quarter but you had an increase with the new facility of 50 to 75 bps. So it’s probably 2%, 2.25% would be the interest rate now, is that right?

Yes, there’s a $100 million term loan. So it’s a 2.25% and then the rest of the debt at a 100 and then – I’m sorry a 200 basis points. We have a little bit of other debt that are in a variety of interest rates, but it’s a small amount of debt. Then we’d have $187,000, $190,000 a quarter of amortization cost. And then these unused line fee I think is 25 – or it’s 20 basis point, so that’s 20 basis points on the $75 million that’s not used. Matt Duncan – Stephens: Okay. All right, so putting all that together then, I’m getting about $1.6 million a quarter of interest expense and then for the 3Q specifically we’ve got to add in that $655,000 as a one-time write off of that amortization correct?

Yes. Matt Duncan – Stephens: All right, I just want to make sure I had that line item. Thanks, guys.

I mean, there is always a little bit borrowed at prime, which is much higher, 3.5%. So there’s a few other little extra expense that hit. Matt Duncan – Stephens: Okay, all right. That’s helpful, Mac. Thank you.

Sure.

Thank you. Our next question is a follow-up from the line of Holden Lewis. Please go ahead. Holden Lewis – BB&T Capital Markets: Great, thank you. I just want to confirm, where does the $1.5 million – I guess, the $0.8 million that you incurred for acquisitions in Q2 and I think you said $1.5 million for HSE in Q3 is going to flow through. You always are doing acquisitions. So I assume there’s always a charge of some sort or a cost of some sort, but can you give us some perspective of how unique the $0.8 million, the $1.5 million is. Is that kind of a normal level or is that way above the norm? What’s kind of the normal level of M&A stuff in your world?

Well, these are all way above what we’ve been running. Buying CW Rod in Houston, Texas and KC in New York, we were using one attorney and things were simpler. We’ve bought two – in the second quarter we bought two companies that were in Canada. We that Canadian counsel, we had US counsel. HSE has investment banking fees in that $1.5 million. So the amount that we’ve spent in the first quarter and the fourth quarter and we didn’t – the only acquisitions we had in 2011 were in the fourth quarter and so these numbers are much higher. They were $100,000 a quarter or something for, which we’ve seen a big ramp up as we’ve – in this second quarter and third quarter. Holden Lewis – BB&T Capital Markets: So, presumably as you go back to obviously you’re still comfortable doing deals but probably not big ones, probably more of the smaller bolt-on ones. You would expect that after Q3 these costs would sort of slip back into that nominal range rather than where they are today.

Yes, definitely. Holden Lewis – BB&T Capital Markets: Okay. And then in the quarter, your intangible amortization actually ticked up, given that that’s related to acquisitions, correct me if I’m wrong, but if I’m right, can you give me a sense of what does HSE going to do with that line item in the P&L?

Right, thinking we came up with, I’ve got that. I’ve $3 million a year on amortization for HSE was just kind of our estimate. Holden Lewis – BB&T Capital Markets: Okay. So that’s...

That’s off the top of my head. Holden Lewis – BB&T Capital Markets: Okay. So it’s about $700,000 per quarter, is that 2.6 from Q2 of intangibles and probably become something like 3.4, that’s the way to look at it?

But what was your question? Holden Lewis – BB&T Capital Markets: The intangible amortization was 2.6 in Q2, we would expect that to step up with HSE and it sounds like a 3.4 level is about going?

And also, I mean, we did known – we did three acquisitions in the second quarter; they weren’t there for the entire quarters. So the – if we didn’t even buy HSE, the third quarter amortization would be a little bit higher than the second quarter. Holden Lewis – BB&T Capital Markets: Got it. Okay.

And you have intangible, and our – the times when we’ve talked about accretion and all we’ve used – we were using an estimate of $3.3 million for annual amortization of intangibles for HSE. But we haven’t done the appraisals yet so we don’t know what the real number is. Holden Lewis – BB&T Capital Markets: Sure. Okay. Excellent, thank you.

Thank you.

And ladies and gentlemen, this does conclude our conference today. We’d like to thank you for your participation and you may now disconnect.