Good day and welcome to this DXP Enterprises Incorporated second quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mac McConnell, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

Thank you. This is Mac McConnell, CFO of DXP. Good morning 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 we begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results 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. I will begin with a summary of DXP's second quarter 2015 results. David Little will share his thoughts regarding the quarter. Then we will be happy to answer questions. Sales for the second quarter of 2015 decreased 15.2% to $323.7 million from $381.6 million for the second quarter of 2014. After excluding second quarter 2015 sales of $4.4 million for businesses acquired, sales for the second quarter decreased $62.3 million or 16.3% on a same-store sales basis. This decrease was primarily the result of the declines in sales to customers engaged in the upstream oil and gas industry or manufacturing equipment for the upstream oil and gas industry. The strength of the U.S. dollar contributed to the sales decline. Sales for our Canadian operations were $32.6 million for the second quarter of 2015. The change in the exchange rate reduced sales by approximately $4.1 million. Sales for our service center segment in the second quarter of 2015 decreased $34.7 million or 14% to $214.1 million compared to $248.8 million of sales for the second quarter of 2014. After excluding 2015 service center segment sales of $4.4 million from acquired businesses, service center segment…

Thanks, Mac and thanks to everyone on our conference call today. DXP achieved solid results this quarter in the midst of a cyclical downturn tied to oil and gas. As we all know, oil prices continue to decline and the North American rig count has hit the bottom. With an estimated 20% of DXP's business tied to upstream drilling, development and completion market, we are pleased with our performance relative to how the key energy market indicators have performed. Total DXP revenues of $323.7 million declined 5% sequentially and 15% year-over-year, outperforming the 15% sequential drop in the North American rig count and the 53% decline year-over-year. Organically sales declined 16% with the Tool Supply acquisition positively contributing $4.4 million in sales. Gross profit margins at our initial review were disappointing. However, once we dug in and understood what caused the majority of the decline, we were certain that a lot of the reasons were not reoccurring. Gross profit margins declined 49 basis points sequentially and 89 basis points year-over-year. This was driven by innovative pumping solutions. There are combination of factors that contributed to the decline including product mix, small pump packages versus large pump packages and onshore versus offshore projects, project delays or push outs and competitive pressures as a result of the industry slowdown. We appreciate all the hard work from our DXP people as we work as a team and remain resilient through these tough market conditions. Because DXP serves the cyclical oil and gas market, we focus intently on operational execution, cost control and investing and building DXP for the future. As such, we are focused on what we can control in this challenging environment. From a cost management perspective, we continue to take cost saving measures by reducing our headcount and cutting cost where…

[Operator Instructions]. We will take our first question from Matt Duncan with Stephens.

Good morning, guys.

Good morning, Matt.

So David, just on sales trends that you are seeing the seeing in the service center business, do you feel like that the sales numbers, month-to-month have bottomed there? Or are you still seeing them tick down sequentially at service centers?

No. We feel like that the decline maybe less, but it's still declining.

Still declining a little bit and that's probably, I assume that's just the lag affecting your business versus rig count?

Yes. And I think we are hopeful that people will start gearing up for next year in the fourth quarter but nobody thinks for sure that that will happen, but that's what we are hopeful for.

And are you seeing much in the way of price pressure in that business? Or was price really just flat?

Actually our service center margins were up, back in -- actually sometimes it would be mixed, but I want to answer your question but I am saying that I think they are flat.

Okay. Moving on to IPS. So you had $8 million stuff that pushed out to 2Q in the back half of the year. Is there any way to look at that? And how much, I guess, look to see, how much of that might be subject to further delays? Or do you feel pretty confident that those orders are going to go ahead and come in, in the back half? And as we e look ahead for that business, I would assume given what's going on in the energy markets, it's probably going to continue to see sequential declines until we start to oil prices turn back around. But just what are your thoughts on how we should think about that segment going forward? And how confident are you that those delayed projects are going to come back?

I don't think we are seeing any cancellation of projects. So I think that just means that what people are trying to do is push out her investment to the extent that they can. Well, they won't just do this forever. So it's just something we are going to have to deal with.

Okay. So all things taken into account, then it sounds like there is probably a downtick at service centers, probably a little bit of a downtick in IPS as well. So we should probably expect to see sales down a little bit in the 3Q versus the 2Q? Is that fair?

That's fair.

What about earnings, though? Because it sounds like you have been cutting expense. What are you guys doing on the SG&A cost side to trim back expanse? When you look at the changes you have already made, is there any way to quantify annual savings from those actions? And are you still, at this point, taking cost out of the business to try and protect earnings? If revenues are going to be down sequentially, given the cost-cutting actions, it sounds like maybe the mix ought to be a little better, so maybe gross margins will be up a tiny bit, 3Q versus 2Q? Taking all of that into account, are earnings pretty flat, you think sequentially? Or how should we think about that?

Well, first, the way I look at it is, I thought if it was a perfect world for DXP, given that we can't do anything about sales besides be as aggressive as we can possibly be, that the GP was too low and expenses were too high. So we when we dug into that, there was some reasons why GP was lower that are just part of doing business and that is that we do pricing pressures and there is product mix issues, but then there were some things where we weren't able to recognize revenues or matters and we were incurring the cost but really not the revenue. The fact that this job gets pushed back and we have people that are expecting to work on the job, so our factory overhead applied goes up. So there was some unusual things that we felt wouldn't carry forward. And then on the expense side, we dug in and most of that had to with things that we were spending money on that were investments in the future, whether that's investing in the equipment or investing in IT projects, investing in e-commerce, there were just some things that we will have to do if we were going to position the company for the turnaround and to be as good as everybody else in the market, then there's some things that we need to be doing. So we were certainly doing those things. And then we are also have -- we are always investing in something that we are not going to talk about because we don't want our competition to know, but until we launch some things. But we have some really significant events that we feel really good about that we think will position DXP to win bigger going forward. So that plus just some unusual lawsuits and legal expenses and then severance pay and Canada and some things that are just one time events, the percent 23% SG&A expense is just to high. So I would say that we should, even though we have declining sales and it's hard to cut as fast as sales decline, that percentage should not go up and has a chance to come down. That was a long answer for that question, anyway.

Yes. And there was a lot of detail and I appreciate that, but when you take all of that stuff together, can you at least hold earnings flat? Is that the way we should think about it?

Yes.

Okay. And the last thing for me and I will hop back in queue. Your inventory went down quite as much as I thought it might be in the 2Q versus the 1Q. What are you guys looking at in terms of your inventory balance over the rest of year? There is sort of an edict out to try and the bring inventory level down and get a little more cash of the business. Obviously, you had very good free cash flow in the quarter. But it seems like there is an opportunity to bring even more out over the of course the rest of year bringing that inventory level down. How are you guys looking at that?

We don't have an edict out to reduce inventory, but we have a very sophisticated system that looks at usage and forecast usage and brings it down. But we were really focused on serving our customers and being there for them and so providing decent inventory levels is a way that we do have realized that we already have a turnover rate of probably an industry high of seven, eight, nine times, something like that. So I think it will come down if our sales continue go down, but it's not something we are just trying to chop.

Okay. So at the time the cash if going to come out of AR then? So Mac, do you have a view on what free cash flow should be for this year?

I think free cash flow should continue to be about the same run rate that we had in the first half.

Okay. So what you are talking, maybe $90 million to $100 million for the full year?

Yes, could be. It could be $80 million to $100 million, because it does depend on inventory and receivables.

Okay. Bye. That helps, guys. Thanks.

And we will take our next question from Ryan Merkel with William Blair. Please go ahead.

Thanks. Good morning, everyone.

Good morning, Ryan.

Good morning.

So I think you said that you thought sales would be down sequentially in the third quarter, following on to Matt's question. So maybe just can you help us, what was July? How did July end up for you? What was the decline in sales there?

Sales per day, average sales in April were $5,056,000, in May $5,057,000, June $5,290,000. So sales actually picked up in June, but we sell a lot of big projects and it's not unusual that our sales go up in the last month of a quarter.

And do you have the July number there?

We know July is down because a lot of our revenues are now on percentage of completion. What we have are estimates and not the final umbers.

Okay.

We know July was down from the average day sales in the second quarter.

Got you. And we had the big oil decline in July. Did you notice that in impacting business at all? Is that maybe what explains some of the further deceleration?

I don't think people flinched on that yet.

Okay. And then a couple of quarters ago, you laid out the business in terms of end markets pretty nicely. And I was just wondering if we could revisit that? So you have the oil and gas production and midstream, which was roughly 40% of sales. Initially, I think you thought that could be flattish, but here we are six months into the year, what are you expecting that piece of your business to look like for 2015 at this point?

So oil and gas development, completion drilling is 20% of our business and that's the biggest piece that's really down. And then we go to upstream production which we thought would be flat and we found out that in that number is that we saw Halliburton, Schlumberger and Baker and those OEM people that support the oil field production side, their business is down and then also our safety services business has a component on production and stuff. So the oil field production piece is, for our service centers, has been down and that's continuing. The midstream has been flat and has continued to stay flat and then the downstream is the chemical -- chemical and downstream, I guess people actually call chemical something else, but the refineries are the downstream side, that business is up.

Okay. And then what about the industrial piece?

So we look at mining and it's still down. We look at food and beverage, it's up. We look at chemical, it's way up. We look at general manufacturing and that's kind of flat. I think we have some currency headwinds there. I don't have all those categories in front of me, but I am just trying to remember the ones off the top of my head. You remember the others that -- most of the others are flat to up.

Okay. So, yes, I think that kind of other industrial, food and beverage, chemical, you thought that 40% could be up 5%. It's looking more like, for the year and it's looking more like that might be flattish at this point. Is that fair?

That's fair.

What about the metalworking category? What were sales there year-over-year in the second quarter?

Year-over-year, the second quarter was down 44%.

And what's driving that? Is that back to well hookups and the OEMs related to energy?

Yes. Well, oil field equipment, primarily well head equipment.

Yes.

Really as the number of wells being completed has gone down, their business has gone down and there is some hope that the ultimate customer was ordering in advance and so they were planning to grow drill substantially more wells than they are drilling. So they have ordered equipment. And even if the rig count stays the same, maybe the business will get better.

Right.

Actually, it has been declining starting last year and in June actually it didn't go down and so we thought was a positive and then in July it went down some.

Okay.

So it doesn't mean it doesn't hasn't stabilized, but I was hoping to see it go up.

Okay. And then last question for me. What do you see in Canada? What were sales down year-over-year in the second quarter? And at this point, how long do you think it could stay fairly sluggish in the oil sands, given where the price of crude is today?

Canada sales were down 30% plus from Q2 to Q2 comparison. Interesting things in Canada, their rig count has sort of started going back up.

They are seasonally low.

Yes.

And that decline is mostly the safety services? What else is really declining there?

The pump business somewhat has had headwinds too. The same oil and gas type issues that we have had in the United States.

Okay. All right. Thank you very much.

But there, the safety also has an industrial aspect that's been doing fairly well. But the sales are still down.

I appreciate it. Thanks.

Our next question comes from Joe Mondillo with Sidoti and Company.

Hi guys. Good morning.

Hi Joe.

Good morning, Joe.

So you stated that the midstream oil and gas is fairly flattish. If you add back the $8 million to IPS, which I understand that there is really no upstream in IPS. So if you add back the $8 million to IPS, you are still getting to roughly about a $75 million revenue number and that would be down year-over-year by 17%, 18%. So is volume sort of flattish in all that rest of 17% delta on a pricing standpoint?

Well, first I have to correct something in that theme. Mac, I don't know whoever said that IPS doesn't participate in the upstream.

It operates -- a lot of IPS sales go to what we call the upstream production, not the upstream development, but the production side, into all the gathering systems.

Okay. So when you upstream production, you do have exposure at IPS upstream production?

Yes, substantial. All of it, the LACT units go into, what we call upstream not midstream, upstream production.

Okay.

It does have a big proportion of the midstream too, but it does both, okay.

Great. So in regard to the margin, it seems like you have stressed a couple times and one of the biggest things was cost absorption and I believe at one point in time you sort of stated that you think it's sort of one-time in nature, but you also stated that the back half of the year looks like it's going to can be or at least in third quarter, it's going to be worse than the second quarter. So wouldn't that translate into lower margins, just due to the cost absorption part of it alone?

Well, we can adjust our absorption if we know about it. When we don't know about it and the customer or our vendors surprises us and then deliver product that we are expecting to get to work on or the customer delays a project, then that's when we are going to have under-absorption because our people are expecting to work and et cetera.

Okay. So you have taken measures to adjust to the demand for the third quarter then, which you think will translate?

Right.

Okay.

We think IPS's sales will go down slightly, but we think there is a chance that their profits will go up.

Okay. And is that temporary work that you are just not bringing back for the third quarter? How does that flexibility on the cost side of things work?

Some of it is product mix. There are several things. The jobs that were delayed were higher-margin than that 24.75% that IPS had during the second quarter. And so that's a piece of it. And there were several jobs in the second quarter that were, by our standards, we considered low margin jobs to begin with, from the time they were bid during 2014. We took them for competitive reasons. And we just had a whole series of events. We had some cost overheads. We can't have cost overheads can occur in time, because everything IPS is building is a custom-made package. But we believe it was unusual.

Joe, a point, I mean it is a whole bunch of stuff, but our point is that we don't think we should be forecasting margins based on Q2 results.

Okay. I understand. When did the jobs, the $8 million of work that got delayed, when did that actually happen? Or when did it get delayed within the quarter?

Good question. It actually primarily consists of five, well, six or seven different orders and some of those were delayed and that we are building very sophisticated packages, very custom-made and so we quote on building this package and then you go through the process of actually doing better designs and submitting drawings and all kinds of issues come out which often result in change orders and it takes a while to get those changes worked through because as we are actually making modifications to how this piece of equipment is going to be built and some of them were in this $8 million were delays due to basically designing. So we thought we were going to be building this package during the second quarter and instead we were doing designing. And we didn't get because there were a lot of changes that had to be approved. There were some where vendors didn't us the equipment, so we could not continue to build the package. And then there was one that's really just because the customer no longer is in a hurry for it, so they are slowing it down.

Okay. So largely, the delays were not, except for that one that you just mentioned, were not related to the customer saying to you, that we don't need it immediately. We really needed sort of towards the back half of the year now. It's more so related to sort of production issues or design issues or stuff like that?

That's correct.

Okay. So in that case then, you would probably be pretty confident that that $8 million gets delivered in the back of the year then?

Yes. And delivery is not exactly, it may not be the right word, it's the fact that we will be constructing, fabricating, building this equipment.

Right. Okay. How about placing? You mentioned that as part of the issue in the second quarter was a product mix issue which is probably related to, even you mentioned because of competitive pressures, you having to maybe book lower pricing? How is that translated through the second quarter and into July? Is it still very competitive? Is pricing sort of still on a downward trajectory?

I think as long as oil prices are down and the oil companies are trying to stay in business with the parameters that the revenues are only going to be some number per barrel, there is going to be pricing pressures. And they are looking to us to give them very competitive ways of doing business so that they can make money. And we do that a lot of different ways. We do that by bringing value-added solutions that are maybe more efficient, maybe the equipments cheaper, there is various ways of doing that without necessarily hurting our margins, but sometimes we are also just bidding against somebody else and we are trying to maintain our relationship with that account and so we take the order at margins that we would not normally take them at.

Okay. So I would imagine placing could be bit more pressured in the back half compared to the first half?

I think as long as oil prices are down, yes.

Okay. And then I guess, one of the biggest sort of question marks for me at least, is the midstream part of the business that's even bigger than the upstream part of the business. You are saying it's sort of flattish now. How does your outlook for the back half look like? Are you worried that that part of the sector is going to start to see either project delays or a slowdown to where we maybe start to see declines, if oil prices stay in sort of the low-40s there?

So we have, in the last few months, received very nice significant orders. We have also seen less activity at times too. I think the general trend is that there is still a lot of good business out there. And then there are other people that just don't have projects on the horizon. So I think that realistically what we are being told is that things are getting a little softer in the midstream market, but yet there is still a lot of infrastructure that the midstream guys still need to build. Basically as long as we still have oil being trucked or put on rail and on rail, it's killing people, then there is reasons to have pipelines.

Okay. And then that regarding orders and backlog at IPS. Is the backlog sort of down what we are seeing in revenue? Or is it down even more than that 26% on the revenue side that you saw?

So we are not capable of getting to so many moving parts to IPS, service center, sales, et cetera, that we are really not able to get backlog in an exact science wise, so I just wanted to on record as saying that. My impression is that our backlog is down a little less than our revenues.

Okay. And then I was just wondering, I think you cited some of it in the prepared commentary, but I didn't get it exactly. Mac, can you walk me through any of the one-time items on a cost basis in the quarter, whether it was severance or anything else? What is the total look like?

The $2.3 million that David mentioned in his comments?

Yes. Okay. I think I had that written down. Right. Okay. So it's about $2.3 million of severance and other type one-time items that will won't recur?

No. That isn't what I have said, mostly for months over here. What I have said was, we were spending $2.3 million on things that yes, some of which is one-time occurring, but a lot of it is investing in our future and so we have roughly things that we would just identify as just total one-time cost as probably $600,000 of that number and rest of it is investigating in internal projects that we think ring will help us grow organically going forward.

Okay. I think that does it for me. Thanks a lot.

[Operator Instructions]. And it appears there are no further questions. Ladies and gentlemen, that does conclude today's conference. We do thank you for your participation. You may now disconnect. Have a great rest of your day.