Good morning, my name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the DXP Enterprises 2019 First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Kent Yee, Senior Vice President and Chief Financial Officer, you may begin your conference.

Thank you, Heidi. This is Kent Yee and welcome to DXP's Q1 2019 conference call to discuss our financial results for the first quarter ended March 31, 2019. Joining me today is our Chairman and CEO, David Little. Before we get started, I want to remind you that today's call is being webcast and recorded and includes forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. 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. DXP assumes no obligation to update that information as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures, a reconciliation of GAAP to non-GAAP measures is included in our earnings press release. The press release and an accompanying investor presentation are now available on our website at ir.dxpe.com. I will now turn the call over to David to provide his thoughts and a summary of our first quarter financial results.

Thanks Kent and thanks to everyone on our 2019 first quarter conference call. We appreciate you joining us this morning and thank you for your interest in DXE. We are off to another great start for 2019, congratulations to all our stakeholders and a special thanks for our DXPeople you can trust. We continue to drive sales growth and improvement in our business, we are all focused on having strong business relationships by being fast, convenient and customer driven, while investing and growing our DXPeople. After my remarks Kent will take you through the key financial details and we will aim to get all of your questions answered during our prepared comments or in our question and answer portion of the call. After a strong finish in 2018, our customers started the year off cautiously and then activity picked up as we finished out the quarter. We believe this was driven by the volatility in oil prices we experienced towards the back end of Q4 as well as the uncertainty around trade deals with China and overall continued geopolitical noise whether in the United States or Canada. This volatility caused residual demand effects in the beginning of Q1 within our oil and gas and industrial customers end market. You can see this in our average sales per day. As we move through the year, we expect spending levels to rise and we remain focused on growing the top line as well as providing technical expertise, quality and convenience for our customers and all stakeholders. It will be a challenge to repeat the growth we experienced in 2018, but we continue to believe we have strategies and a market approach to meet our 10% growth challenge. We will continue to drive both organic and acquisition sales growth as we move forward.…

Thank you, David, and thank you to everyone for joining us for our review of our first quarter financial results. Q1 shows that we carried our momentum from last year into fiscal 2019. We are growing sales and our balance sheet continues to be poised for us to be a acquisitive. Total sales for the first quarter increased 8.8% year-over-year to $311.2 million. First quarter sales growth was supported by DXP's 3 business segments. First quarter sales growth was led by Supply Chain Services, growing 17.2% year-over-year to $50.3 million. This was followed by Innovative Pumping Solutions, growing 10.5% year-over-year to $74.7 million and Service Centers growing 6.2% to $186.2 million. Average daily sales for the first quarter were $4.9 million per day versus $4.5 million per day in Q1 2018. The growth reflects the execution of our strategy and continued support by our key end market indicators. While we experienced another round of volatility in oil prices in Q4, as we discussed during our Q4 call. During Q1, our indicators showed a deceleration in growth, but overall stability. The ISM, PMI manufacturing index averaged 55.3% for the first quarter compared to 59.2% in the first quarter of 2018. Additionally, the Metal Working business indexed averaged a reading of 53.1% in the first quarter of 2019 versus 58.9% in Q1, 2018. In terms of oil and gas, the average U.S. rig count for Q1 was up 77 rigs versus Q1 2018, but down 30 rigs from the Q4 count. Canada's rig count is down 86 rigs versus Q1, 2018 and up four rigs versus Q4. The sales growth in Supply Chain Services is the result of adding new customer sites as David mentioned within the medical device, aerospace, food and beverage and oil and gas industries. Our IPS segment, which…

[Operator Instructions] And your first question comes from the line of Blake Hirschman with Stephens. Please go ahead.

Yes, good morning guys.

Good morning Blake.

On the quarterly sales, there's been a lot of chatter across the space about weather impact, selling days, timing of Easter. Just trying to look and see if there's anything to note here. And if so, if you guys want to take a stab at trying to quantify any of those [indiscernible].

Yes, Blake, we tend not to focus on those things. That said, what I can read out to you is our sales per business day for the first quarter and going into April. And you'll see there was kind of, I'll call it an acceleration through the quarter and into April. So sales per business day were $4.5 million in January, $5.1 billion in February, $5.3 million in March and another $5.3 million in April.

Got it. Thanks for that. And then just kind of on the cycle, industrial versus the energy side of things, wanted to get the lay of the land between the two sides kind of which one you're more excited about as you look forward from here and what kind of end market expectations you have between the two?

So we're excited about both, they're not as robust as they were in 2018. As I said, we grew 17%, 20% something overall including an acquisition, so they're not, it's not that exciting out there compared to that. But it's still, I'm not losing sight of the fact that, we can grow our business organically 10% and I think they both have leveled out including oil and gas, but I don't see anything that says oil and gas is going down. I just, I don't, in fact I see it going up. And so, [indiscernible] continues to go up in oil prices. I frankly preferred that they're at WTI, as at $60 and because I think when it heads to $70 and $80 that, that causes the industrial market to not perform as well. And at this point, they're both performing pretty stable and I'm happy with that.

Got it. And just lastly on M&A, wanted to get update on the pipeline and trying to gauge your appetite for doing a bigger deal or if you're more focused on smaller kind of bolt-on opportunities. Thanks a lot guys.

No, Blake, this is Kent. On the last one, obviously there's opportunities in the market, we're always focusing on those. Our bread and butter is always average revenue of that $25 million to $35 million. That said, we also, hey, if a nice big one comes along from time to time, we've never been shy in looking at those. And so, bread and butter is the $25 million to $35 million in revenue, but we grow through acquisition. And so, we think the balance sheet and we're positioned for that kind of at this point. So...

And I will just add that, that we're doing acquisitions to add scale and add geography to be a national player and try to compete with the bigger guys out there. So we're going to think in terms of how do we do that and we're perfectly happy to do that through 10 smaller acquisitions or $100 million acquisition. It just doesn't matter a whole lot as long as it facilitates the scale and the growth of geography in our national footprint.

Got it. Makes sense. I will turn it over. Thanks.

And your next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please go ahead.

Hey, good morning guys. How much the supply chain growth came from new locations versus growth from the installed base. And sorry if I missed it, were there any tuck-ins in the acquisitions in the quarter?

To answer the latter, there were no tuck-ins. This quarter was all organic. To answer your question, I mean, the quick answer is, I would have to follow up with you Steve, on the mix of new versus old because some of our implementations in SCS are with existing customers. So it's not as just as easy as just new customers, some of them are existing customers with additional sites. So...

Got it. Yeah. We can talk later. Well, do you think you'll continue to add locations at the same pace in 2Q and into the back half, just based on what you're seeing?

Within the Supply Chain Services segment you're referring to, or...

Correct. Yeah.

They do have some future implementations. I don't know if we'll add them at the pace that we have here more recently. They -- when I looked at their implementation timeline they had some that are on the back half of Q2, but that's all I've seen thus far. So -- and not as many as we can share.

Sure. So if that pace slows down, would you expect to see margins tick back up sequentially as you move through the year in Supply Chain?

Yes, I would say right now we're weighted towards the second half of the year of improving the margins in Supply Chain Services.

Okay. And just thinking about some of the recent trade headlines that we've seen this week. Can you talk about your COGS exposure to China and potential impacts on price costs?

We have a little exposure in our fabrication area. As far as our supplier partners they've already, they've had to have price increases, et cetera, they've already had them and then they've had kind of normal price increases at the beginning of the year. So our supplier partners are really not the issue, and we really don't have much exposure in terms of piping and steel and things like that to go on our fabrication units. So that's, but that is some of the cost that have creeped in a little bit over the last part of last year and into the first quarter, but it's pretty minor and pretty insignificant overall.

Got it. And correct me if I'm wrong, but I think most of your products for IPS are produced domestically as well. Does that give you an advantage on the cost side and have you seen competitors raising price more rapidly?

So again, I don't, I think we're fine on the product. The motor, the pump, the control panel, et cetera all the components were fine on. It's just when you get into the base and the piping and the elbows and things like that, that we're, whether, we didn't really ever get it from China, but the American people took the, the American steel people took the opportunity to raise their prices too. So, but really, we've kind of been through that and that's filtered through most of our historical jobs and through the first quarter. So we don't really see that being an issue going forward.

Okay. And the last one from me. As you think about mix for IPS going forward and you had mentioned this on the call, is this the worst quarter of the year for operating margin and that improves as you go through the year or is that roll off that you talked about persist?

It tends to be the worst that don't have to be, I mean, we could have a really nice job that didn't get shipped at the end of the year and then all of a sudden it slips into the first quarter. And so, we could have really high margins on a particular job. But the jobs, I hate to use this word, but I mean, it's a little bit lumpy on the sense that, in a real competitive environment we don't know the customer that well, we don't have a perfect fit. So we get down and dirty and we lower our margins to maybe get that order versus one where we have a great relationship with the customer and he is, what he is wanting is exactly what we have. And so we make higher margins on that particular job. So you can just sense that when you have a $2 million project, $5 million project or even a $500,000 project, that our margins are a little opportunistic. And so, therefore any given quarter they can bounce around a little bit. But I would say, in general, that our manufacturing cost go up at the first of the year, our supplier partners costs go up the first of years. So we can have a tenancy for the first quarter to be the low watermark and then we pass those prices on throughout the year and margins increase.

Understood. Thanks for the time.

And your next question comes from the line of Brian Lau with Sidoti. Please go ahead.

Good morning everybody. On the call for Joe Mondillo. Just a follow up on those comments on the margins. Do you think we can specifically in IPS get back to 12% or 13% on the operating margin?

Yes, I do. That's a short answer. I know, I am sorry...

Appreciate that.

I'll give you more color than that.

No, that's fine. And I appreciate that.

Yeah. You know, our PMI remanufacturing product which we just had a really low volume quarter, those are 50% gross margins and 20% operating income that we make on reman. And this quarter we lost 100,000. So that's just the magnitude of what's happened here in the first quarter. Now we didn't lose the 100,000 because we had some job blow-up or something on us. We just didn't have this -- for whatever reason they have a very nice backlog, but they just didn't have a lot of product shipped in the first quarter. So you had that, then you had some increased manufacturing cost. We had increased expenses as I'm telling you this new facility is a state-of-the-art facility, it's bigger capacity, it's got more value-added services, we can roll things right into a [indiscernible], roll or ride into a paint booth, I mean, there's just sufficiencies on this property, it's on 50 acres, so we got plenty of room. And yet, we're in our old facility and we're moving to a new facility, you can just imagine that we got double rent, we got double expenses. And so, there's just a lot of things going on in IPS that are going to be awesome for the future. But we're kind of muddling through, trying to make sure that we just take care of our customer. We don't want him to have delivery slide, we don't want to lose our reputation, we don't want to lose the trust that they have in DXP to perform. So we actually started this process at the big -- I guess a little bit of last year...

Back in the last year.

…this year. And it should come to completion in October.

That's helpful. Thanks for that. And then in Supply Chain Services, again do you think we can get back to around 9% or is the cost of adding more revenue going to kind of keep that down the rest of the year?

Once again, they're going to have a few more implementations from what we can see today at the back end of Q2. So that will cause some more cost. And then once again today, he's always out there trying to win new business, JJ and his team. And so, if they have future implementations for us that's, it in some sense is a good problem to have. But when they're in the mode they're in now, their margins get a little bit watered down. But eventually they will start to scale. So...

So, Joe, in '15 and '16 and really just these are long lead-time items to win on order, so '17 sort of got better. So we really just didn't have a lot of implementations for a while. And if you remember correctly, I was all over John Jeffery that, he better start growing them. Grow the business or he may be need to find a new job, but we won't go into those details, but I'm just telling you that, that he wasn't growing the business. But he was growing the bottom line and it was just because he was efficient -- he was efficient. So he hit 9% during those times where he just had no growth going on. So, if he has growth going on, which he needs to do and will do, then we're not going to hit 9%. We're going to be 8.5%, we're going to be somewhere around there.

All right. Thanks for that.

[Operator Instructions] And as there are no further questions. Oh! As I say that, someone's queued up. You have a follow-up from the line of Steve Barger with KeyBanc Capital Markets. Please go ahead.

Thanks. Free cash flow in the quarter obviously negative, working capital ticked up, just curious how we should think about free cash flow generation for the remainder of the year?

Yeah, Steve, this is Kent, I would think of it similar to last year. In my comments, my prepared comments, you heard me mention that we invested on the project side of our business, i.e., IPS and that used up a fair amount of cash, usually typically in the first quarter. And then as we move through the year, we typically turn free cash flow positive. If we shipped similar to like we did last year, have a heavy shipment in Q4, our free cash flow, we also collect those progress billings, et cetera. And so, our free cash flow conversion last year I would think was around 27%. I think you can expect something similar if maybe not a little bit higher this year, just once again depending upon the cadence of those jobs in the absolute level. But...

Got it. And then one last one, just any more color on the Canadian market. Some of the other PVF distributors were talking about political headwinds and takeaway constraints and just really expecting a slowdown up there. Is that consistent with your view?

It is. Their drilling activity is down, activity period is down. And I'm talking about Calgary and Edmonton in Alberta and that particular part of the world. We're really actually doing quite nicely in Toronto and Montreal and in places where we're dealing with water and not oil and gas and other industrial products. So overall, Canada is going to be okay. We're going to make, will make money in Canada. Even our safety services business there, the drilling activity is down so that particular part is down, our safety, people that are on-site is going to be down, but turnarounds are okay, hospital, staffing stuff that we do for these remote medical centers is okay. So there is business there, it's not growing. So we're dealing with the volume that we have and we get. And so, let's, and then I guess everybody politically is talking about how Alberta got a new, I'll call him a governor, I'm sure that's wrong, maybe wherever he is. And then of course nobody likes the head guy. But we, they got rid of a liberal lady that looks over Alberta. And they now have a businessman in there who is pro oil and gas. So we'll see, but he still has to fight the Prime Minister guy. And so, there things could improve, but it's going to take a little while.

Understood. Thank you.

And with that, there are no further questions, so like to thank you all for participating. And this concludes today's conference call. You may now disconnect.

Thank you.