DXP Enterprises, Inc. (DXPE) Q3 2014 Earnings Report, Transcript and Summary

Thank you. This is Mac McConnell, CFO of DXP. Good evening and thank you for joining us. Welcome to DXP's third quarter conference call. David Little, our CEO, will also speak to you and answer your questions. Before I begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results could differ materially. A detailed discussion of the many factors that we believe might have a material effect on our business on an ongoing basis is contained in our SEC filings, but DXP assumes no obligation to update that information. I will begin with a summary of DXP's third quarter 2014 results. David Little will share his thoughts regarding the quarter's results, and we will be happy to answer questions. Sales for the third quarter increased $57.3 million or 17.4% to $387.1 million from the third quarter of 2013. After excluding third quarter 2014 sales of $46.4 million for businesses acquired, sales for the third quarter increased $11 million or a 3.3% on a same-store sales basis. This sales increase is primarily the result of increases in our service center and supply chain services segments of $5.8 million and $7.3 million, respectively, on a same-store sales basis. These increases were partially offset by a decrease within our IPS segment of $2.2 million on a same-store sales basis. Sales of Innovative Pumping Solution products increased $27.5 million or 45% to $88.6 million, compared to $61.1 million for the 2013 third quarter. After excluding 2014, IPS segment sales of $29.7 million for B27, which was acquired in January, IPS segment sales for the third quarter of 2014 decreased $2.2 million or 3.5% from the prior corresponding period on a same-store sales basis. We believe that the decline in sales is a result of the timing of orders and not a trend. Sales by our Service Center segment increased by $22.5 million or 9.7% to $255 million, compared to $232.5 million of sales for the third quarter of 2013. After excluding 2014 service center segment sales of $16.7 million for businesses acquired, service center segment sales for the third quarter of 2014 increased $5.8 million or 2.5% from the third quarter of 2013 on a same-store sales basis. This sales increase is primarily the result of increased sales of rotating equipment to oil and gas related customers. We believe our oil and gas related customers increased purchases of rotating equipment primarily because of increased oil production in the U.S. Sales for Supply Chain Services increased by $7.3 million or 20.2% to $43.4 million, compared to $36.1 million for the 2013 third quarter. Approximately $4.2 million of this increase in sales is related to increased sales to five customers in the gas turbine, oil and gas, and trucking industries. The remainder of the increase is primarily the result of obtaining a new customer in the oil and gas industry, as well as increased sales in the food and beverage industry. When compared to the second quarter of 2014, sales for the third quarter of 2014 increased $5.5 million or 1.4%. After excluding third quarter 2014 sales of $3.3 million from an acquired business, sales for the third quarter increased $2.2 million or 0.6% on a same-store sales basis. Compared to the second quarter of 2014, third quarter 2014 sales of Innovative Pumping Solution products decreased $2 million or 2.2%. Again, we believe this decline in sales is the result of timing of orders and not of trend. Compared to the second quarter of 2014, third quarter 2014 sales by our Service Center segment increased $6.2 million or 2.5%. After excluding third quarter 2014 sales of $3.3 million from an acquired business, Service Center segment sales for the third quarter increased $2.9 million or 1.2% on a same-store sales basis. This increase is consistent with the third quarter containing one more business day than the second quarter. Compared to the second quarter of 2014, third quarter 2014 sales for Supply Chain Services increased $1.2 million or 2.9%. This increase is the result of increased sales to a variety of customers. Gross profit as a percentage of sales for the three months ended September 30, 2014 decreased approximately 20 basis points from the prior corresponding period in total and on a same-store sales basis. Declines in gross profit as a percentage of sales for the Service Center and Supply Chain segments were partially offset by an increase in the gross profit percentage for the IPS segment. Compared to second quarter of 2014, gross profit as a percentage of sales for the third quarter of 2014 slightly increased to 29.3% from 29.1% for the second quarter of 2014. The gross profit percentage increased slightly in all three quarters on a sequential basis. SG&A for the third quarter of 2014 increased $11.4 million or 16.2% from the third quarter of 2013 compared to the 17.4% sales increase. Excluding expenses from businesses acquired, on a same-store sales basis, SG&A increased by $3.3 million or 4.7%. This increase is primarily related to a $1.1 million increase in healthcare claims. Excluding the increased healthcare claims, the 3.1% increase in SG&A on a same-store sales basis is consistent with the 3.3% increase in sales on a same-store sales basis. As a percentage of sales, the third quarter 2014 expense decreased approximately 20 basis points to 21.1% from 21.3% for the prior corresponding period, primarily as a result of B27 and other businesses acquired having lower SG&A as a percentage of sales than the rest of DXP. Compared to the second quarter of 2014, SG&A for the third quarter of 2014 decreased $1 million or 1.3%. Expenses of an acquired business on a same-store sales basis accounted for a $500,000 increase which was offset by a $1.6 million decrease for the remainder of DXP. This decline in SG&A is primarily the result of headcount and cost reductions in our Canadian operations. As a percentage of sales, SG&A decreased approximately 60 basis points from the second quarter of 2014 as a result of sales increasing 1.4% and SG&A decreasing 1.3%. Operating income for the third quarter of 2014 increased $4.9 million or 18.2% from the third quarter of 2013. This increase in operating income is primarily the result of the 17.4% increase in sales. Operating income for businesses acquired accounted for $5.6 million of this increase. Excluding operating income from businesses acquired, on a same-store sales basis, operating income decreased $700,000 or 2.6% from the prior corresponding period. This decline is primarily related to the increased SG&A expenses discussed above. Operating income for the IPS segment increased $5.9 million or 65.4%, primarily as a result of the 45% increase in sales. Excluding operating income from acquired businesses of $5.8 million, operating income increased $100,000 on a same-store sales basis. Operating income for the Service Center segment increased $1.9 million or 6.9%. Excluding third quarter Service Center segment operating income from acquired businesses of $1.4 million, Service Center segment operating income for the third quarter of 2014 increased by $500,000 or 1.8%, primarily as a result of the increase in sales. Operating income for the SCS -- for the Supply Chain Services segment increased $500,000 or 16.2%, primarily as a result of the 20.2% increase in sales within the segment. Interest expense for the third quarter of 2014 increased to 104% from the third quarter of 2013, primarily due to increased borrowings to fund our January 2014 acquisition of B27 and our May 2014 acquisition of Machinery Tooling and Supply. The increased borrowings for acquisitions also increased the interest rate on our borrowings. Interest expense for the third quarter increased 3.8% from the second quarter to $3.3 million. This increase is primarily the result of higher interest rates in the third quarter due to the company's leverage ratio increasing to 3.1 to 1 as of June 30, from the 2.99 to 1 that was as of March 31. Total long-term debt decreased approximately $42.2 million during the third quarter of 2014. During the third quarter of 2014, the amount available to be borrowed under our credit facility increased approximately $4.3 million to approximately $77.4 million. This increase was primarily the result of reducing debt. Our bank leverage ratio was 2.9 to 1 at September 30, 2014. At September 30, our borrowings under the credit facility were at an average rate of approximately 2.41%. Capital expenditures were approximately $3.4 million for the quarter. Cash on our balance sheet at September 30, 2014 was $9.9 million. Accounts receivable and inventory balances were $269.5 million and $117.1 million respectively at September 30, 2014. Now I would like to turn the call over to David Little.

Thanks, Mac, and thanks to all our assistants on our call today. Special thanks to our solid execution by our DX people. DXP posted strong results for the third quarter of 2014. The DXP team continues to improve throughout the year and executed well in an inconsistent market environment. We continue to see progress in Natpro and B27. We have improved operating income margins, delivered better-than-expected earnings, and generated strong cash flow for the third quarter. We experienced 17.4% year-over-year sales growth. With most of our markets flat and 0% inflation, I am pleased with our efforts to take market share away from our competitors. Our organic growth rate of 3.3% is okay, and we are challenging ourselves to improve existing sales strategies and use our expertise and technology to better serve our customers and to create new sales growth opportunities. Profitable growth remains a primary focus, including M&A opportunities and organic initiatives as we position DXP to deliver and drive increased shareholder value. DXP serves all industrial markets, but our largest market is oil and gas, and with prices declining, the question is: how will this affect DXP? So in my opinion, first, the decline in prices is all about supply and demand and the value of the dollar. The U.S. has plenty of demand, and it can be -- because it can replace imports. But the prices are set by global demand and the strength of the dollar. Second, the oil and gas industry has three parts: upstream, midstream and downstream. It is all about cash flow in my opinion. If an oil company's upstream business has less cash flow because of lower prices, then he cuts drilling and he does everything possible to increase production with less cash flow. The exception is long-term projects in companies with big balance sheets that can use low prices as an opportunity to take market share. Midstream falls into the long-term capital investment and if a downturn is long enough and reduces production and the flow of oil, then they also stop sending money. Downstream benefits from lower prices and so does the consumer. They have more free cash flow and demand goes up and they spend to grow. In a perfect world, the price of a barrel of oil would allow the upstream guys to make money, but low enough that other industries make money and the consumer has more disposable income to buy things. I'm not sure where that value is, but it would be nice for everyone to be there and to be great. This is a very simple look at a complex industry, and the point is, how does this affect DXP? We believe that the other 60% of our business will simply do better with lower oil and gas prices. Production is cash and DXP is heavily weighted on the production side versus the drilling side. Long-term capital projects continue to move forward unless the price decline duration is over several years, which we simply don't see happening. Our customers are telling us business is normal and long-term projects are still moving forward. Oil companies have to increase reserves or they decline in value, and the world needs cheap energy. So when supply and demand are out of sync, then there is a correction that is usually short in duration to bring supply and demand in balance, and we have prices that provide cash flow for everyone. We are simply in the seat of financial results of our third quarter profits. Our diluted earnings per share increased 7% and increased sequentially 14%. EBITDA margins improved 39 basis points to 10.28% and sequentially 85 basis points. Our leverage ratio improved at 2.92 to 1 compared to 3.1 to 1 because of $42.2 million in debt reduction and increased EBITDA. These results were because of gross margin sequential growth to 29.3%, expense control which reduced SG&A sequentially 58 basis points quarter to quarter, and 22 basis points as a percent of sales. Our after-tax return on invested capital improved to 29% for the quarter. I would now like to talk about our segments. We are excited to report year-over-year Service Center segment sales increased 9.7%. Operating income increased 8.09%. Organic growth was 2.9% while organic operating income increased 7.98%. Sequentially, organic sales increased 2.5% and organic operating income increased 17.87%. We were pleased with our year-over-year growth which is primarily driven by market share gains and acquisition. The slight decrease in margins is driven by gross margin softness and sequential year-over-year increase is driven by continued improvement in our non-oil and gas MRO sales, gross margins, and decreases in SG&A from the beginning of the year until the end of the third quarter. We are expecting our oil and gas customers' behavior to remain steady in the fourth quarter, with upstream land-based drilling to be flat, midstream and downstream activity trend slightly up. We're seeing positive movement in food and beverage, aerospace and medical, while the general industrial market remains mixed. Our mission is to provide the highest quality of customer service through our expertise of the products we distribute and the technical services we perform with a sense of individual product and company spirit. This commitment to being customer-driven experts in MROP solutions requires us to make ongoing investments in our employees. Our latest commercial training target at our existing sales force involves successfully implementing the IMPACT sales process across 60% of North American sales channel. The IMPACT selling system covers the entire sales process from prospecting to retention. We strive to make investments that benefit our DX people as well as our customers to further enforce our expertise and cross-selling efforts. When our sales professionals are trained in providing solutions and not transactions, the end-results are mutually advantageous. We are also thrilled to announce the creation of two SuperCenters -- San Antonio, Texas and Cedar Rapids, Iowa. We would like to recognize our employees, customers and suppliers in the San Antonio and Cedar Rapids markets for their dedication and support in gaining our latest SuperCenters. We move into the fourth quarter with a network of 40 SuperCenters and a goal to deliver two additional SuperCenters by December 31. In summary, our customer-driven strategy continues to create value for industrial customers seeking to consolidate their vendor base without sacrificing local inventory and expertise. During the final quarter of the fiscal year, we intend to complete -- compete and win, as our focus will remain on further strengthening our North American Service Center platform through the creation of SuperRegions and SuperCenters that will provide sustainable benefits to the industrial customers looking to improve their overall production and financial performance. A little bit of data here; we have presently at the end of Q3 143 service centers, 34 service centers in -- and those were U.S., 143 U.S. locations -- 34 Canadian locations, one location in Dubai, for total service centers of 178; SuperCenters, 40; SuperCenters in progress, 6; distribution centers, 8; fabrication centers, 12. We're in 34 states. The reduction, if you've been keeping track, the reduction in Service Center count is minus one due to consolidation of Tool-Tech and San Antonio pump locations, in San Antonio, to create a SuperCenter, San Antonio and Cedar Rapids, Iowa, convergence at SuperCenters resulted in a reduction in progress but added to the SuperCenter count. Supply Chain Services. Supply Chain Services had a great third quarter with organic revenue increase of 20.23% and operating income increase of 16.17%. There was modest growth in existing accounts, as well as new organic growth based on winning new deals. In the third quarter of 2014, DXP Supply Chain Services saw an increase from 29 on-sites to 72 on-sites, and from 99 off-sites to 100 off-site facilities, which contributed an increase to the top line and bottom line versus the second quarter. During Q3 and Q4, the SCS team completed three on-site locations and one off-site, which will increase revenue growth over the next two quarters. These industries are comprised of aircraft and general manufacturing, keeping a well-balanced customer mix in the Supply Chain segment. Implementations completed in Q3 and Q4 will result in three additional on-site locations coming online by mid-Q4. The ramp-up time and pro forma revenue is usually six months and growth is anticipated in Q1 and Q2 of 2015. SCS continues to use technology to differentiate, to gain market share, establish the business segment as experts, and automating the supply channel. Maximized B2B, e-commerce ordering platform, were developed and tested in Q2 and Q3, allowing customers to purchase authorized and standardized products online, as well as providing additional channel to pure product. The SCS management team began the development sustainability initiative with several customers in 2014 to integrate the use of green products, recycling products, and energy conversion. These initiatives have not only benefited the environment, but also allowed for a creative opportunity for joint cost savings. IPS. Sales were down a little in the third quarter on an organic basis. We contribute this to timing of shipments, not a trend. When we look at upstream oil and gas and mining sector, activity in the land-based sector continues to be strong. We expect to have a good fourth quarter and 2015 looks like business as usual. Mining, we have seen a pull-back in U.S. copper mining projects and feel this pull-back is due to copper prices. Midstream and upstream, this sector continues to be one of our top-performing sectors as it relates to quote activity, orders received and future order potential. The Eagle Ford, the Permian, the Bakken Shale plays continue to provide the majority of these opportunities. The majority of the products being quoted and sold in the Bakken are associated with our measurement equipment packages, known as LACT units. We continue to see activity in the saltwater injection market. We're supplying equipment from the terminal loading and offloading facilities utilizing our centrifugal packages that are being fabricated in 529 Houston and Golden, Colorado locations. The Eagle Ford and the Permian Shale play activity continues to have a large component associated with our horizontal pumping equipment. The horizontal pump equipment is being utilized in the measurement, equipment process, pipeline, gathering station, booster stations, and saltwater disposal applications. Our centrifugal equipment continues to be utilized in gathering system locations, truck loading and offloading systems, as well as booster systems for the horizontal pump applications. Our high-energy, multi-stage re-manufactured equipment and re-rate business continues to be robust. The equipment is being utilized in the midstream sector, gathering stations and booster station applications. This application for this equipment is crude oil and LNG applications. Our teams continue to provide a delivery proposition for our horizontal pump and centrifugal pump equipment and our re-manufactured high-energy equipment with lead times that allows us to outperform our competition when delivery is a major factor. B27 API 610 product, the market continues -- opportunities for this product domestically are good. The international seems to be slowing towards the end of the Q3, which we contribute to the unrest in that part of the world. We do not feel we have lost any opportunities, rather a slowness of releasing of orders. This product is primarily used in midstream and upstream markets. Quote activity remains strong. The delivery proposition, quality and price point we provide is very attractive to the customers with requirements for new equipment in this product line. We are very optimistic our U.S. midstream and upstream opportunities will remain strong through Q4 and into 2015. Gulf of Mexico, we are currently active with four upcoming new platform projects that have started issuing orders for equipment in Q4. We are extreme -- we were recently awarded an order of $5.5 million for equipment on one of the projects. We are optimistic regarding the remaining opportunities, and orders for this equipment will be in 2015 and 2016 delivery. Canadian markets, municipal. Municipal markets in Eastern Canada still has not rebounded. Oil and gas, this sector continues to be sluggish. Major players are slow to place equipment orders, yet quote activity and order potential remains strong for us. Due to the seasonality in open quotes for viable projects, we are optimistic for Q4. Latin America and the Caribbean. In oil and gas, we experienced some increases in orders placed for modular equipment in this sector in Q3, and are optimistic about Q4 and next year. IFS continues to be optimistic about the upcoming opportunities for modular equipment in Central America. We have been successful in the region with the companies associated with these upcoming opportunities. Mideast and Dubai. We continue to perform on plan with our API product line equipment and our service and repair propositions. The modular packaging opportunities have not developed as we have expected thus far. We remain focused on the region and all opportunities. Our quote activity remains consistent. The current state of unrest in the region continues to create a negative effect on the project opportunities moving forward. We are optimistic Q4 will remain robust, and with our products and services supporting major U.S. oil and gas shale plays in the upstream end-markets, along with Central, South America and Mexico mining markets. We are confident that Central and South American oil and gas markets will provide greater order opportunities in the upcoming months. We are encouraged with the existing Gulf of Mexico opportunities we are actively with and remain poised and ready to respond quickly to support our customers that operate in this market. We have solid relationships and a history with these companies that work in the Gulf that should weigh in our favor for equipment needs for the current and upcoming project opportunities. In summary, we continue to make progress sequentially quarter to quarter. We continue to grow with acquisitions and take market share from the fragmented smaller distributors. We continue to increase shareholder value, financial performance by leveraging our size. We continue to manage our working capital. We continue to make acquisitions to grow our divisions and increase our footprint, and I look forward to our future success in achieving our visions and goals. We are now open for questions.

Thank you. [Operator Instructions] We'll hear first from Matt Duncan with Stephens. Matt Duncan – Stephens: Hey, guys.

Matt.

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

All right. The B27's revenues during the third quarter were $35.4 million, and the accretion was between $0.12 and $0.13 per share. Matt Duncan – Stephens: So that's a little less revenue, I think, than what you guys have thought it might do. I think it was $43 million last quarter, and the thought was that it would stay around there. But building on the plus side, I guess probably more importantly, the earnings accretion is up there. So what's happening that's driven the profitability up while the sales number is down a little bit? And what's the outlook like at this point for B27, David?

Well, we're -- I don't, first, ever remember us forecasting earnings sales too much on a call. But that said, the -- we're just really happy, I guess, that IFS has performed in an improving manner. It's not performing like it did the year before we bought them, but in an improving manner to that effect. I believe I'm right about this, that they had $10 million worth of orders they received in the first six months, and to date they've already received, in the second half of the year $20 million with several potential orders still to come. So we're pretty pleased with the progress that IFS has made. There's also in Central America, several very large projects and jobs that we've been successful with in the past, that are slated for the first of the year to receive orders on. So we're pleased with their operating results, too. They had some things that we cleaned up from an accounting point of view in the first quarter and continued in the second quarter. And so, on performance and the EBITDA, even IFS I believe with lower sales, is going to generate something like 14% EBITDA margins. So that's pretty outstanding considering how far off their sales are. And so, I'm pleased with the management of that group, I'm pleased with the improvement, and I'm certainly getting happier with the accretions over there. Matt Duncan – Stephens: Yeah. So, David, on the improvement in bookings there, is any of that coming from International markets? Or is that really at this point still pretty domestically focused? I know there were some larger international orders you guys have been hopeful about there. Just give an update on that.

Yeah. It's more domestic, but it's not in the -- I wish I could, I'm drawing a blank right now, but it was in an unusual area that, it was in Utilities I believe, that they got the -- some really pretty nice orders from. And so, the International stuff is doing well as it relates to the API 610 product. But as we stated in our conference call, the modular systems have not done well, but there's some really nice stuff that's -- looks like is going to happen, and pretty sizable stuff that's going to happen, that we think we have a really good chance of getting. So, but the International market has continued to be soft. Matt Duncan – Stephens: Okay. Fair enough. So moving on then to your own Innovative Pumping Solutions business, I know you still see a pretty good outlook for that business. There's been a couple quarters in a row here where it's been down a little bit on an organic basis, and it sounds like that's probably more a function of timing. I know you guys don't typically report a backlog number for that business, but if you could just give us a general feel for what you're seeing in terms of bid activity, quote activity, and then actual orders into your backlog. What does the trend line look like for that segment?

Well, IPS is having a good year. They're not growing 20% or anything, but they're having a good year, they're having a really nice profitable year. They're -- they are going to have a better fourth quarter than the second and third, so they should end up the year with some -- with positive growth. They feel good about these orders that are starting to come out of the Gulf of Mexico, they feel good about the continuation of the business they've been getting on these shale plays out of the Bakken, Eagle Ford and the Permian Basin. So the expansion of IPS into some International markets has not happened. The expansion of IFS going forward looks like it is going to happen, so we -- again, I think we feel good about the fourth quarter, and we feel good about 2015. Matt Duncan – Stephens: Okay. Last thing for me just on M&A pipeline. What's that looking like at this point, and do you expect that we might see anything get closed by the end of the year here?

No -- well, yeah, there was just one small deal probably, but I would think we -- we're working on some mid-size, mid being $30 million, type deals that I think you'll see more like in the first quarter next year. Matt Duncan – Stephens: Okay.

We're getting awful close to Thanksgiving and Christmas. Matt Duncan – Stephens: Sure. Sure. Understood. Thanks for the update, David.

All right.

Thank you. Our next question comes from Ryan Merkel with William Blair. Ryan Merkel – William Blair: Hey. Good afternoon, everyone.

Hey, Ryan.

Ryan. Ryan Merkel – William Blair: So I want to start with IPS as well. Again, it sounds like you're attributing some of the sales softness to timing. I'm just wondering what causes or caused the timing delays, and then why are we confident that you're going to book some of these projects in the fourth quarter?

What causes timing is the manufacturers that are supplying us major components on the job, because that's what triggers -- that and labor triggers percentage completion. And so, we use percentage completion to try to smooth things out, but those two things can cause percentage completion not to be smooth, to be a little more lumpy. So it's always a little bit lumpy. It also typically has, if you go back and look at the historic numbers of DXP, there's an awful lot of IPS-type stuff that always gets shipped in the fourth quarter. And so, they work on -- they get ordered this time of year, and they take a year to build, and they get shipped by the end of the year, and it's just kind of how the cycle goes. But again, we use percentage completion to -- I mean, one year we missed sales by $14 million because two jobs didn't ship, and so that was, we were on a completed contract basis and said, well, that's a -- that wasn't pretty, so nobody liked that. That was back when we were much smaller. And then we have relationships with customers. We're noted as being a preferred vendor for Chevron and some major accounts. And so, we just typically feel really, really good about our chances on certain types of equipment and certain types of -- and certain customers, as far as why we feel good about getting orders. Ryan Merkel – William Blair: And so you have visibility then -- I know you've delayed manufacturing components -- you're going to be able to ship the projects in the fourth quarter?

Are we going to at least get -- we'll at least get the major components so that if something rolls over into 2015, it'll only be 5% or 10%, it won't be 85% or 95%. Ryan Merkel – William Blair: Got it. Okay. And then I was thinking the Service Center organic growth to be a little better than 2.5%. And I guess, does this just broadly speak to the mixed industrial end-markets, David, that you mentioned?

Well, I guess. I don't know what [indiscernible]. We're, you know, our markets to us have been pretty flat all year. And we've had flat markets and we've had flat inflation, and so to us, to garnish three month 3% organic growth, which would have been a little higher if IPS maybe shipped everything, or had everything shipped to them, is just a function of our ability to take market share away from other people. And so we try to do that responsibly where we're not trying to cut our price, and just sell things to be selling them. So it's been tough. Ryan Merkel – William Blair: Okay. Last one for me. Nice to see the EBIT margin recovering from the first quarter. I'm just wondering is this level sustainable in your view? And then second part of that question, should we expect the cost control to continue?

Just my opinion. I'm happy with 10% EBITDA margins. And I'm not quite happy with where we are expense wise. I believe we're kind of, it's kind of like when you're at an awkward size and that happens whether you're $50 million or $100 million or $200 million. And we have a lot of division people, we have a lot of in-house counsel, we have a huge IT staff. I think we're designed to be a little bigger than we are. And so our expenses as a percent of sales is about 1% higher than I would personally think that if we were running at optimum levels where we would be that. Ryan Merkel – William Blair: Okay. Thank you.

Does that make sense? Ryan Merkel – William Blair: Yes, it makes sense. Thank you.

Thank you. Our next question comes from Joe Mondillo with Sidoti & Company. Joe Mondillo – Sidoti & Co.: Hi, guys.

Hi, Joe.

Hi, Joe. Joe Mondillo – Sidoti & Co.: My first question, IPS as well, and I guess one of the questions that I have just have is that, your organic growth has been trending, the trend of growth has been trending, organically anyway, downward for several quarters now, over a course of six, seven quarters. And now we've seen negative for the last two quarters. Can you talk about the competitive environment, and pricing as well?

You know, we do have competitors, so I think that's a fair question. I don't think though that we're pricing ourselves out of the market. I don't feel like we're not getting our fair share. We track quotes. You know, we have $100 million $200 million quotes out there all the time. We track hit rate. And I don't -- I just don't believe that - I'd have to really double check I haven't really looked at that number in a while but I believe David Vinson said that our hit rate was pretty strong. So I don't think we're having a competitive issue. I think what we're having is we have a little bit of oil prices going down and people looking over their shoulder. Again, I don't think that affects long term projects and I don't think it affects mid-market and certainly, it benefits downstream petrochemical plants, but upstream I have to believe that things are just really, really flat whereas a number of years ago when we first discovered fracking, and everything went crazy, it was nothing for us not to have 16% organic growth. So we're just at a point where we're reaching a peak of activity but we are certainly going to reach a peak of activity with oil prices going down. And so I don't know, I'm thinking that our growth rate -- Joe Mondillo – Sidoti & Co.: So the market maybe a bit saturated after the huge increase that we have had over the last three, four years and then potentially with oil prices there is potential risk of more of a plateauing effect?

And I like your term plateauing, because I don't really -- we don't really see it declining. We don't see it declining. We just don't see it increasing in any great extent either, and certainly if Saudi Arabia wants to take out all of the non-profitable producers, they can do so. So I think we're kind of at a place where we are kind of holding our own. I don't know how to describe it any better than that really. Joe Mondillo – Sidoti & Co.: Compared to the revenue growth organically that you've seen, how has the order trend growth-wise, aare you seeing a contraction in orders as well like you've seen in organic revenue at IPS?

No. We're -- both on the MRO side and the capital side, including our service centers and our IPS, we're seeing -- frankly we're seeing order sizes get bigger. But we are also not seeing our backlog really substantially increase. It's going up that one or two or three percent. And so there is nothing really driving growth based on what we are doing today, except to take market share away from the little small ma and pops, so that's exactly what we are doing. We are trying to build supercenters, we are out there with more sales men, more professionally trained salesmen. And with expertise and et cetera. And so we're picking on -- well we are just taking market share, and of course, we are not trying to target W.W. Granger or MSC or somebody like that. We are trying to -- we're just picking on the thousands and thousands of little distributors that we should be able to beat in the game. Joe Mondillo – Sidoti & Co.: Okay. And then moving to my second question which is related to the Service Center segment. Just wondering with sales -- you're organic sales have been trending not too bad compared to some of your competitors, it's been sort of flat to up. I'm just wondering in terms of the margins, year-over-year the last few quarters, including the one that you just recorded, you've been seeing some margin contraction pressures. I'm just wondering what's going on there?

Well, the Service Center margins -- gross margin as well -- and bottom line margins, both grew sequentially. So maybe year-over-year we had a different product mix or different makeup of our company, but as far as Q2, Q3 we made improvement. Joe Mondillo – Sidoti & Co.: Okay. And then it looks like you have a pretty tough comp on the fourth quarter. There is nothing seasonally that's going to drive a pretty big sequential increase in the fourth quarter that you expect. Is there?

No. No. Joe Mondillo – Sidoti & Co.: Okay. And then just lastly, I know one of the past callers asked about M&A. I'm just wondering your viewpoint given the volatility in the markets right now and how fast and hard oil prices have come down and being below $80 now, how does that affect your outlook in terms of M&A? And in terms of pricing, how is that affecting pricing out there? Are acquisitions maybe a bit pricey at this point in time? And do you want to take a step back and maybe see how things play out? Or how do you look at the M&A just given the volatility that we've seen here?

Well, it's always -- it's our goal to cover more geography and hopefully in doing so have the oil and gas segment decrease. And actually I believe we were doing that until we jumped off and bought B27 which was strictly an oil and gas play, and a sizeable one. I truly believe that if you get anything out of this conference call, there is the perfect price of oil and that price is enough for the oil companies to make money and for the rest of the world to do good at the same time. And we're always trying to seek that equilibrium. I went on Fox Business and oil was at $140 and this guy was trying to set me up because he thought I was an oilfield supply company only and so he asked me about oil. And I said, well, to start off with, I think it's too high. And he's like, I can't believe you said that. But anyway, there's a point where it's too high, there's a point where it's too low, and there's a point where everybody can be happy at the same time. It never gets there but it gets close to there. And so -- Joe Mondillo – Sidoti & Co.: Do you have a sense of where that, you know, where oil...

No. I really don't. I really don't. Joe Mondillo – Sidoti & Co.: I only asked because I hear it all the time and I'm just wondering if you have a better sense of it.

I think we'd all be happy at $85 probably. It's just my own opinion of it. Joe Mondillo – Sidoti & Co.: Right. Okay. Well, that does it for me. Thanks a lot.

All right. Thanks, Joe.

[Operator Instructions] We'll take a follow-up from Matt Duncan. Matt Duncan – Stephens: Hey guys. Just back on the service centers and supply chain services for a minute. We've seen some of your peers who have seen an increasing growth rate I think really in the month of October and it sounds like things have picked up a little bit potentially on the industrial side. I'm curious, as you look at that slice of your customer base just what you guys are seeing out in the market, what you're hearing from your customers? David, you characterized it as mix. Are there any signs that, that's perhaps improving?

Well, let me refer to when spots and services has grown with existing customers that means that the marketplace and our customers are doing better. And they don't typically have -- well they might have an oilfield service company but they don't really have oil companies that they're doing integrated supply with. I think we've -- I personally think 2015 is going to be really a strong catalyst for other industrial people from automotive to plastics to petrochemical, chemical to the consumer. If oil prices stay at $80 I think we'll still have plenty of oilfield shale plays type of stuff going on and plenty of mid-stream and I think people will be wanting to generate cash flow. I look at it all as cash flow and so on the production. And at the same time people will be paying less at the pump et cetera. But I think 40% of our business isn't going at all suddenly increase 10% next year because there's not going to be a huge incentive. But on the other hand if oil went to $140 well that business might increase 20% but then the rest of the world does bad. So we're in a good spot where we can grow our business unless something catastrophic happens. Now, if oil goes to 60 and it stays there for two years then DXP is probably not going to do that well. But as long as it's a decent price where they can still make money and still produce, then, and the rest of the world does better because oil prices and products and all of that are less, and you kind of have a win-win. Matt Duncan – Stephens: Sure. Last thing, just going back to the Supply Chain business for a minute, that -- as a business, you've seen a very nice improving growth trend in -- I don't know if there's any way to look at that and sort of break it out between improvement in the market versus DXP serving its customers better, adding new locations. I know that's a segment you guys have put a lot of blood, sweat and tears into improving, and it looks like it's starting to pay off. And so, I'm trying to understand how much of that is improving market versus you guys' actions to improve that business.

And we're talking about Supply Chain? I'm sorry. Matt Duncan – Stephens: Correct. Yeah.

Yes. Well, we've improved the business a lot, but we've also had -- there was a time when we were getting some new accounts and growing the business, but our customers were just simply buying less. And by design, Supply Chain is supposed to take and reduce the customer spend. So you're only fighting against yourself. But we had -- we're having an increased spend, and we're landing new deals. And the increased spend has been modest, and the new deals have been most of the growth. Matt Duncan – Stephens: Okay. So a lot of this is competitive wins, you guys doing a good job targeting growth, and winning?

Right. Matt Duncan – Stephens: Okay. All right. Very helpful. Thanks.

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

Are we done?

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

All right. Thank you.

Thank you.