Good day and welcome to the DXP Enterprises Incorporated First Quarter Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mac McConnell, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

Thank you, James. This is Mac McConnell, CFO of DXP. Good morning and thank you for joining us. Welcome to DXP’s first quarter results conference call. David Little, our CEO will 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 are contained in our SEC filings, but DXP assumes no obligation to update that information. I will begin with the summary of DXP’s first quarter 2016 results; David Little will share his thoughts regarding quarter’s results; then, we will be happy to answer questions. Sales for the first quarter of 2016 decreased 25.8% to $253.6 million from $341.6 million for the first quarter of 2015. After excluding first quarter 2016 sales of $5.8 million for Cortech and Tool Supply businesses acquired on September 1, 2015 and April 1, 2015, respectively, sales for the first quarter decreased $93.8 million or 27.5% on a same-store sales basis. This decrease is primarily the result of declines in sales to customers engaged in the upstream oil and gas markets. Sales by our Service Centers segment in the first quarter of 2016 decreased $58.3 million or 25.8% to $167.5 million compared to $225.8 million of sales for the first quarter of 2016. After excluding 2016 Service Centers segment sales of $5.8 million from Cortech and Tool Supply, Service Centers’ segment sales for the first quarter of 2016 decreased $64.1 million or 28.4% from the first quarter of 2015 on a same-store sales basis. Again, this sales decrease is primarily the result…

Thanks Mac. Thanks to everyone on our conference call today. I would like to personally thank all of our DX people for their continued efforts. Additionally, our thoughts and prayers are with our employees impacted by the forest fires, in Fort McMurray, Alberta, Canada. We are grateful to all the emergency responders, volunteers, citizens and employees of DXP for their support during these fires. Let me begin with a review of market conditions and then summarize our performance in today’s environment and provide direction for DXP going forward. Then, we will open the call up for questions. As expected, the market remained difficult in the first quarter and was a story of two halves. During the first half of the quarter, oil prices continued to decline, reaching what would appear to be a bottom around the mid-20s in early February. This resulted in further declines in our customers’ operating and capital spending decisions as they focused on preserving and managing cash. The same low oil prices along with the relative strong U.S. dollar and its negative impact on export demand continued to be a drag on manufacturing activity, impacting the industrial side of DXP. During the second half of the first quarter, oil prices began to rise, removing concerns of an outright collapse with prices well above the lows reached earlier in February. That said, oil and gas, which is 40% of DXP’s business today is attempting to find that bottom, as the clients are decreasing. DXP’s industrial and other end markets outside of oil and gas is 60% of our business today, which appears to have bottomed and shows signs of positive upward business. Improving U.S. economic data, specifically the ISM and MBI showed improvement through February and March. Along with these two macro movements, DXP experienced a slight…

Thank you, Mr. Little. [Operator Instructions] And we will take our first quarter today from Matt Duncan with Stephens Inc.

Hey, good morning guys. This is Will [ph] on the call for Matt. David, I appreciate the detail on how the first half of the quarter traded versus back half. So, wondering how your customer dialogue changed over the last few months versus where it was and what had April and May trends look like compared to those first quarter results?

I think our people feel like our customers in the industrial sector are feeling better; of course there is good and bad spots still. But overall, we feel like the trend is up. January was such a big drop and then -- that was bad, and then the good news I guess is that everything on a day sales basis even through April has been increasing. Our oil and gas customers are still -- they are still just doing the minimal amount to get buy. It looks -- we’re seeing signs of service work, I mean literally things were broke, and they would just go too bad, we’re going to save our money to pay debt down or do whatever they have to do to survive. But now that oil is up, again not where it needs to be to stimulate a robust activity, but we see them fixing things that were broke and spending a little money. So, we’ll take some good out of that I guess.

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

That’s helpful. Thanks Mac. And I guess sticking with that trend, and I know it’s difficult, given the market uncertainty with the industrial backdrop and rig count continuing to decline through the first part of the year, but how much should we reasonably expect your sales to be down this year? And given that market setup, and I think it would be helpful if you could possibly address it on a segment-by-segment basis and what do you see it reaching going forward from here?

Yes. You started off, that was a very hard question and I think it is extremely hard to answer. We would like to feel that our first quarter would be the bottom, we’re prepared for the first quarter to not be the bottom, but we feel like that there isn’t really any reason why what we’re seeing that sales shouldn’t be -- if they move down it’s going to be 1%, 2% or 3%, it’s not going to be another 10% or 8% or something that’s pretty drastic. So, we find comfort in that. And then, as far as each segment is concerned, we expect Supply Chain ultimately in the year in positive growth and then like John said that if we get any kind of recovery in terms of Halliburton spending more money and other companies spending more money versus spending less money, then he should be up pretty nicely. It seems he’s adding new sites, and yet more is following out the bottom, those customers are buying less. And so that’s what’s been keeping its growth from being 10% where we would like it to be, and it’s only been plus one or minus one kind of deal. But he’s actually growing sites, growing new customers and doing a really nice job. The IPS, the capital expense side is not dead. We have business and we feel like we can right size that. A business we feel like we can look at, take in some capacity of fabrication out of the picture. So, we still think that’s trending down, again slightly down. Their backlog seems to be stabilizing. So, there’s hope they won’t be any further down. But again, I’m not sure I can plan on that. So, I think it will be slightly down. Realize that Canada is one of our biggest source spots, we’ll call it a source spot, and that they’re also kind of in a breakup season right now, or kind of maybe passed it; they’ve had an early breakup this year, which I think is solely responsible for the buyers that they’re having and et cetera. But nonetheless that business is struggling and that’s both in pumps and in safety services. And then the wildcard is our Service Centers. They continue to be trending down. That 11%, it’s for the quarter is really a big number. And so, again, we’re hopeful that we’ve seen the worst of it. And we’re pretty sure that again it’s only going to be maybe the 1% or 2% or 3% further decline, max.

Very helpful. Last thing from and I’ll hop back in the queue. How much of the cost reduction actions that you talked about, maybe just in the first quarter are from cost of sales versus SG&A? And just kind of following onto that going forward do you guys feel gross margin [ph] has bottomed here, do you expect that to improve throughout the year?

$2.1 million is all that’s. And what really -- some expenses we would take out going further is IPS’s margins are down from where they normally would be, even though I told you all in the fourth quarter, they wouldn’t; there were some unusual things in there that made it exceptionally down. And so, I don’t use that number and show, sure enough first quarter they’re back up couple of hundred basis points. But their margins are under pressure for two reasons, one is just number of people hungry for work and so they’re bidding them cheaper but also somewhat of a overcapacity problem. And so, we’ll be addressing the overcapacity problem, which is going to help maintain margins, but it won’t -- it really won’t have the effect of -- well, I guess it will because when we kill capacity we also kill SG&A at the same time. So, we’ll kill SG&A and some -- and then just force more work through smaller capacity, which will help maintain our margins. So, I guess we’re okay with what the margins are at with IPS. And then Service Centers, that’s just a day-to-day deal, they’re selling thousands of orders. And so they have pressure of course they’re going to lose any of them. So that’s how the business still has some margin pressures. Not quite sure where they would go but there’s pressure there.

Next we’ll hear from Joe Mondillo with Sidoti & Company.

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

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

You don’t have to quantify but…

I got it, Joe. I am just kidding.

I got you.

I did find that that was interesting that Modern Distribution’s supposed to be a magazine for distributors and here they are, kind of put us down. But anyway, I am going back up and start over. In ‘15, we had normal attrition and we counted on the fact that we have a lot of incentives and so the incentives went down, so our payroll went down and we had normal attrition and that’s pretty much all we did. We didn’t really try to reorganize the Company per se because -- we didn’t really; I think we needed to. This time, we -- when January happened, we were like, okay, normal cost cutting is not going to get it done. And so, we embarked upon a program to take our headcount down significantly to reduce expenses where we could. And our goal was to get to $25 million and we got to $26 million.

During 2015, most of the headcount reductions were cost of sales, I mean as the safety service business went down, safety those consultants went away; IPS went down, the people working in the shop, went away. [Ph] These more recent headcount are more geared towards SG&A. And I probably misspoke a little bit earlier on 2.1 million. There is some number, some small portion of that is the cost of sales numbers….

I think the point is that we really -- we just ended up without any choice but to right size the Company. I mean not making a profit is not acceptable to me. So, we had to -- we still have $1 billion plus sales. And so, let’s right size the Company to make money at $1 billion. And so that’s what we did. We accomplished our adjective.

And I guess the last part of my question was, is it mostly headcount? And if not, are there other things that you are doing, if it’s significant or substantial?

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

The discretionary spending?

Here we go, supplies, so it’s -- everybody understands that their goal is to make a 10% contributed margin or greater. And we are doing a good job of working to get that.

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

Yes, IPS’s biggest problem is in Canada but literally don’t have very much work and there may just not be any work in Canada for a while. So, that’s started loss [ph] out there. The other is they have a pretty talented seasoned group of people. So, we’ve been reluctant to try to take too much cost out of there. And we probably not right sized that thing as quickly as we could have. But all those things are changing. And so, IPS shouldn’t -- our goal is to have at least 6% EBITDA margins in a down climate; in an up climate, 10%, so -- in this down climate. So, there is really not any reason why IPS can’t get to 5% or 6%.

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

Under the agreement, we’re at the highest interest rate levels of 3.7% that I quoted is the highest level under the agreement.

So, at the end of the second quarter, I believe you’re probably going to be hire than 5.6, you’d still be staying a 3.7% rate though?

Yes. I guess you’re talking about, what, 5.6 points leverage.

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

Right, right.

All right. so the interest is going to be somewhat stable then?

It’s going to be stable already in the second quarter. Yes.

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

That doesn’t expire; it goes back to the existing facility.

That’s what I meant. Okay. So, you do -- sort of, I mean it goes back to what you -- it sort of does expire, I guess maybe I’m not using the right word…

Yes, the amendments were as of certain dates and basically it amended the covenants to change them at a point in time and then as I said there, the covenants are the same as will be in the future, the same as they are, have been in the agreement.

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

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

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

The use of cash and I’m trying to look into this, $11.7 million use of cash.

Okay, $11.7 million?

I mean that’s what net cash provided by operating activities. I don’t have the exact number.

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

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

Well, you are going to be down year-over-year, so -- I’m sorry, pretty looks that you are going to be down….

Year-over-year, it doesn’t have any impact. What happens during each quarter, the sales go up, if sales goes up, generally that requires working capital; as sales go down, it generates working capital. I mean we think that -- I know our aging is -- as of the end of April, it already improved a little. So that should mean we should be collecting a little more cash from receivables. Inventory, I mean my belief is the way -- we buy inventory to sell to customers and when the business slows down, the customers don’t by the inventory that we bought for them to buy, therefore it’s takes a little longer, so inventory works down over time and catches up. So, in general, my answer is yes, I think we are going to generate cash from working capital. On the other side of that, if our sales start growing, my answer would be the opposite. If they stay flat, I think we will generate some; if sales go up, then we’re going to use cash and that would be a wonderful time.

Okay. Alright, that’s it from me. I appreciate it. Thanks a lot.

Thank you, Joe.

[Operator Instructions] We’ll hear from Ryan Cieslak from Keybanc Capital Markets.

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

It’s this year.

Okay. So, then, how should we perceive I guess the amendment at the end of the day, is it, it gives you time to figure out what you need to do with the balance sheet post July 31st, do you feel like you’ve done enough on the cost side to when the new agreement comes back in, your situation where you’re not bumping up against the covenants? Just provide some more detail how you guys are thinking about the balance sheet post July 31st.

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

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

Sure. I mean first of all, everybody feels the necessity to drive towards a 10% contributed margin. So, to the extent that they have flexibility -- I mean we’re not down to a location with two people or something, then they are going to continue to sort of right size the business or whatever sales volume that they’re able to generate. And I don’t know how to quantify that, it’s to say that if sales do go down 1% or 2% more, then we’ll be doing things to drop cost down to correct for that. Then, on a bigger note, there is some opportunities to take some capacity out of IPS. And when we do that and to consolidate some things, so I think the appropriate word might be shutter, to shutter a facility and then not hurt the sales effort to do those jobs somewhere else. We have -- we’re fortunate that we have multiple locations that IPS fabricates out of. And so, we can close 1 or 2 or whatever and move those jobs to a shop that would make us more efficient. To quantify those dollars, they’re not like $2 million a month; they are more like $2 million a year kind of type savings. So, those are things like that that we’re looking at. And the continuum -- one more point, there’s just a continued -- we’re not buying new companies, so we’re getting caught up on our integration of companies we have bought, so just taking administrative cost out of those when we get them integrated.

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

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

Anything that is going proportion to service centers or 70% of our business, so 70% that all came out of here, watching the smallest and they’ve really [indiscernible] quite as much as everybody else would have.

I think that’s not quite right. I think that the Service Centers had a disproportionally higher amount come out of them.

Okay, that’s…

So, maybe we can give you some better answer to that today or tomorrow.

No. That’s actually -- that’s what I was looking for just directionally. That makes sense. And the last question I have then is we’re looking at the operating margins at Service Centers this quarter relative to how it was trending in 2015, it seemed like it was a pretty big step down sequentially. I’d just be curious to know what’s changed -- obviously the sales continued to be pressured, but is it that pricing has gotten a lot weaker or is there were something incremental from a cost stand point or am I might just reading a little too much into it?

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

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

We tried to let incentive plans correct themselves and then when we had 15% drop in January of this year, then it was just -- it was obvious at that point that that wasn’t going to be enough. And so, we embarked upon a project to literally take $25 million off the business. So, and then, we weren’t trying to -- the first way was we were not picking on any particular group from corporate, even SES, which is part of the team, we took cost out of everything. And then now, we’re looking at taking costs that are more specific, and I’ve said this right up, more specific to a segment or more specific to a location that’s simply not performing. But, the reason why the margins go down, I mean we just -- a drop of a 15% from December to January is pretty catastrophic after we’ve already had a year where it’s dropped pretty significant already. So, we had to get on top of it. And I want to congratulate everybody in their efforts to thank that we didn’t get financials till mid February and really realized what we needed to do; and to get all that done and have it effective and by the middle of April is pretty fast. And I really congratulate everybody on doing what needed to get done.

I mean directionally, in the first quarter, Service Centers had the biggest decline in sales, so therefore they had the biggest reduction in their margin. Does that help.

Fair enough. I appreciate all the color. And I’ll drop off. Best of luck, guys.

We’ll hear from David Mandell with William Blair.

Hi. On the last conference call, you guys said that about $50 million in EBITDA might be achievable in 2016, are you able to update that number?

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

All right, and then how do you guys -- how’s that private label initiative going so far?

Great.

Yes, it’s going great. We’re having great acceptance, both on our own products, PumpWorks products and some of the other pumps that we are having private labeled, it’s going good. Our foundry is really busy, our manufacturing facilities are really busy. So, we are pretty excited about that. The existing API 610 business, which market was to midstream has gotten soft. We are still getting some orders but not at same run rate. But, we have also moved our attention along with the marketing side of DXP to look at the downstream side of the business to help sure up some things. So, that’s looking okay. So, we are pretty pleased with our PumpWorks.

At this time, there are no further questions. That will conclude today’s conference call. Thank you for your participation. You may now disconnect.