Mac McConnell – Senior Vice President-Finance, Chief Financial Officer and Secretary David Little – Chairman, President and Chief Executive Officer.

Matt Duncan – Stephens Incorporated Ryan Merkel – William Blair Joe Mondillo – Sidoti and Company.

Good day and welcome to the DXP Enterprises Inc. Third Quarter Conference Call. As a reminder, 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..

Thank you. This is Mac McConnell, CFO of DXP. Good afternoon and thank you for joining us. Welcome to DXP’s third 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 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 2016 results. David Little will share his thoughts regarding the quarter’s results. Then we will open the call to answer questions. Sales for the third quarter of 2016 decreased $73.1 million or 24.1%, to $230 million from $303.1 million for the third quarter of 2015.

After excluding July and August 2016 sales of $3 million for Cortech, acquired on September 1, 2015, sales for the third quarter decreased $76 million or 25.1% on a same-store sales basis. This decrease was primarily the result of declines in sales to customers engaged in the upstream and midstream oil and gas markets.

Sales by our Service Center segment in the third quarter of 2016 decreased $47.3 million or 23.7%, to $152 million compared to $199.3 million of sales for the third quarter of 2015.

After excluding July and August 2016 Service Center segment sales of $3 million from Cortech, Service Center segment sales for the third quarter of 2016 decreased $50.3 million or 25.2% from the third quarter of 2015 on a same-store sales basis.

This sales decrease again is primarily the result of decreased sales of bearings, pumps, metalworking products, and safety services to customers engaged in the upstream and midstream oil and gas markets, or manufacturing equipment for the upstream and midstream oil and gas markets.

Sales of Innovative Pumping Solutions products decreased $21.6 million or 35.2% to $39.8 million, compared to $61.5 million for the 2015 third quarter. This decrease was primarily the result of the decline in capital spending by oil and gas producers and related businesses.

Sales for Supply Chain Services decreased $4.1 million or 9.8% to $38.2 million, compared to $42.3 million for the 2015 third quarter. The decrease in sales is primarily related to decreased sales to customers in oilfield services, oilfield equipment manufacturing, and trucking industries.

When compared to the second quarter of 2016, sales for the third quarter of 2016 decreased $26.2 million or 10.2%. This decrease was primarily the result of decreased sales to customers engaged in the upstream and midstream oil and gas and related industries.

Third quarter 2016 sales by our Service Center segment decreased $9.8 million or 6.1% compared to the second quarter of 2016. Third quarter 2016 sales for Supply Chain Services decreased $1.9 million or 4.6% compared to the second quarter of 2016.

Third quarter of 2016 sales of Innovative Pumping Solutions products decreased $14.5 million or 26.7% compared to the second quarter of 2016. Gross profit for the third quarter of 2016 decreased 25.5% from the third quarter of 2015, compared to the 24.1% decrease in sales.

Gross profit as a percentage of sales decreased to 27.7% in the third quarter of 2016 compared to 28.3% for the third quarter of 2015.

This decrease is the net of an approximate 435 basis point decrease in the gross profit percentage in our IPS segment, a 140 basis point increase in the gross profit percentage in our supply chain segment, and a 110 basis point increase in the gross profit percentage in our Service Center segment.

The decrease in the gross profit percentage for the IPS segment is primarily the result of competitive pressures resulting in lower margin jobs and lower sales resulting in more unabsorbed manufacturing and fabrication overhead in the third quarter of 2016 compared to the third quarter of 2015.

The gross profit percentage for the Supply Chain segment increased as a result of decreased sales of lower margin products to oilfield service and trucking related customers. Gross profit as a percent of sales for the third quarter of 2016 decreased to 27.7% from 27.9% for the second quarter of 2016.

This decrease is primarily the net of a 75 basis point increase in the gross profit percentage in our Service Center segment, an approximate 480 basis point decrease in the gross profit percentage in our IPS segment, and an approximate 55 basis point increase in the gross profit percentage in our Supply Chain segment.

The gross profit percentage for the Service Center segment increased because of improved gross profit margin percentages for rotating equipment, bearing and safety product groups.

The gross profit percentage for the IPS segment decreased because of a competitive pressures resulting in lower margin jobs and lower sales resulting in more unabsorbed manufacturing and fabrication overhead in the third quarter compared to the second quarter.

SG&A for the third quarter of 2016 decreased $16.2 million or 21.6% from the third quarter of 2015. After excluding third quarter expenses from Cortech of $1.1 million, SG&A decreased by $17.3 million or 23.1% on a same-store sales basis.

The majority of the decline in same-store sales SG&A is the result of a $12.6 million decrease in payroll, incentive compensation, payroll taxes, and 401(k) matching, due primarily to the 2015 and 2016 headcount and salary reductions.

Additionally, amortization expense declined $900,000 and meals, travel, vehicle and legal expenses declined $2.7 million on a same-store sales basis. As a percentage of sales, SG&A increased to 25.6% for the third quarter of 2016, from 24.8% for the third quarter of 2015, as a result of sales decreasing 24.1% while SG&A declined 21.6%.

SG&A for the third quarter of 2016 decreased $3.9 million or 6.2% from the second quarter of 2016. The majority of the decline in SG&A is the result of a $3.5 million decrease in payroll, incentive compensation, payroll taxes, and 401(k) matching, due primarily to 2016 headcount reductions.

Additionally, training, meals, travel and vehicle expenses declined. As a percentage of sales, SG&A increased to 25.6% from 24.5% for the second quarter of 2016, as a result of sales decreasing 10.2% while SG&A declined by 6.2%.

Corporate SG&A for the third quarter of 2016 decreased $2.6 million or 21.6% from the third quarter of 2015 and an increased $500,000 or 5.9% from the second quarter of 2016. The year-over-year decrease was primarily the result of reduced compensation related expenses and legal expenses.

The increase in corporate expense for the third quarter of 2016 compared to the second quarter of 2016 is the result of a $700,000 increased in health claims. Interest expense for the third quarter of 2016 increased $1.7 million or 65% from the third quarter of 2015 and $400,000 or 9.8% from the second quarter of 2016.

These increases are primarily due to increased interest rates under our credit facility. Total long-term debt at September 30, 2016 was $319,287,000. This is a decrease of approximately $28.4 million during the third quarter of 2016.

The decrease in debt during the quarter is primarily the result of third quarter free cash flow of $23.4 million plus $6.2 million of proceeds from the sale of 238,858 shares in September. DXP continues to generate free cash flow and pay down debt. Our bank leverage ratio was 6.14 to 1 at September 30, 2016.

At September 30, our borrowings under the credit facility were at a rate of approximately 5.65%.

After September 30, DXP used a portion of the $46.2 million of net proceeds from the sale of 2,484,000 shares of common stock completed on October 31, 2016 and the $31 million of net proceeds from the sale of Vertex completed on October 3, 2016 to prepay the $30 million mandatory payment due by December 31, 2016 and the $25 million mandatory payment due March 31.

Additionally, DXP prepaid $12.5 million amortization payment due on December 31, 2016 and prepaid $12 million of the $15.6 million amortization payment due on March 31, 2016. As of this morning, our debt balance had decreased to approximately $236.3 million a decrease of approximately $83 million from the September 30 balance.

Capital expenditures were approximately $900,000 for the quarter. Cash on the balance sheet at September 30, 2016 was $3,429,000. At September 30, 2016 the balance of accounts receivable was $152,952,000 and the balance of inventory was $98,189,000. Now, I would like to turn the call over to David Little..

Thanks, Mac, and thanks everyone on the conference call today. Let me begin by reviewing some of the key headlines from the third quarter and subsequent events, which we will cover in greater detail as the call continues and I am sure we will also cover when we have open questions.

Before we do that however I want to thank all our DXPeople for their hard work and perseverance during the third quarter of 2016.

While uncertainty continues with respect to timing, phase, trajectory around oil and gas and industrial markets, our people have worked hard and remain focus on winning business, serving customers, working with our supplier partners and fighting together as a team.

With respect to our results we are pleased with our free cash flow production as we generated over $23 million in the third quarter, which has allowed us to continue to pay down our debt. As a review historically, our free cash flow has a seasonality low in Q1 and improves during the year.

In Q1, we had usage of $9.4 million driven by unexpected decline in business and working capital working against us. And in Q2, we produced $17.7 million of free cash flow, with year-to-date, we have produced $31.6 million in free cash flow and look to maintain similar performance for the rest of the year.

On August 24, we filed a self registration where by DXP registered shares of common stock via an ATM or what is referred to as at the marketing offer. In September and December DXP issued shares under the ATM, which resulted a net proceeds of approximately $6 million.

Subsequent to the quarter close we sold Vertex a master distributor of fasteners, which was a non-core business, this may compete sounds after a strategic review and the desire to maintain our focus on DXP’s core products and offering. The transaction provided DXP with approximately $31 million in net proceeds.

On October 20, we announced a public offering of stock, which closed on October 25, and resulted in net proceeds of $46.2 million.

Free cash flow productions combined with proceeds from the sale of Vertex and issuance of stock has allowed us to pay down debt by over $77 million since Q2, and as of December – November 10 with an approximate debt balance of $235 million pay down over a $100 million.

These actions are in an effort to begin to work and pivoting towards a more appropriate capital structure and position DXP for the next up cycle. With regard to market and DXP specifically challenges this quarter, we continue to experience challenging macro conditions.

Customers have remain cautious and deliberate in their investment and spending decisions. Reflecting this environment, project delays, rolling, maintenance deferrals, extended timelines from both order placement and delivery acceptance have become norms.

We were particularly surprised in July with a slow phase of business but we believe this was a attributed to the timing of the holidays in temporary facility shutdown. August and September were more in line with averages year-to-date monthly performance, but did not make that for the July aberration.

Total DXP revenue of $230 million for the third quarter was 10.2% decrease sequentially and a 24.1% decline year-over-year. Organic sales declined 25.1% with the Cortech acquisition positively contributing $2.9 million in sales for the quarter.

This reflects monthly sales across all DXP business segments during the month of July, specifically sales for July were $68 million versus $79 million and $83 million respectively for August and September. Service Center sales were $152 million or sequentially declined 6.1%.

Innovative Pumping Solution sales were $39.8 million and sequentially declined 26.7%. And Supply Chain Services sales were $38.2 million as a sequential decline of 4.6%. Service Center sales declined is primarily driven by declines in our OEM and bearing and power transmission product division.

Service Centers operating income increased 5.9% sequentially to $13.3 million from the second quarter. This was primarily driven by our efforts to manage cost, which has had a positive impact on these segments bottom line.

Innovative Pumping Solutions sales decrease was primarily driven by continued softness in our API business and more engineered modular process system, which we call IFS. Our order intake for this year has continued to remain flat with our September backlog declining very slightly on IPS.

A majority of the customers continue to tightly manage budgets, limit project opportunities, and those that are available are competitive, which continue to provide margin pricing.

DXP Supply Chain Services saw the bottom line increase year-over-year sequentially slightly down in the third quarter, while the top line decreased sequentially from the second quarter. This is mainly due to facility shutdowns during in July, but our margins remained strong and unmatched within the integrated supply business.

Specifically we continue to increase our product scope with more value-added solutions for our customers and continue to push operational excellence applying technology in order to drive cost out of Supply Chain.

In terms of gross profit, DXP’s gross profit margins declined 21 basis points sequentially and decreased 54 basis points versus the same period in 2015. The third quarter decline in gross margins was driven by a 478 basis points sequential decline within our Innovative Pumping Solutions segment.

That said Service Centers and Supply Chain Services gross margins increased 75 basis points and 54 basis points, respectively, from the second quarter of 2016. SG&A for the third quarter declined $16.2 million or 21.6% from the third quarter of 2015 and $3.9 million or 6.2% from the second quarter of 2016.

The decline in SG&A is a continued result of actions we’ve taken during the first quarter and reflect our efforts to optimize the business. We continue to benefit from a decrease in payroll with incentive compensation and other expenses moving alongside with headcount and salary reductions.

DXP produced EBITDA of $12.8 million for the third quarter versus $16.3 million for the second quarter. EBITDA as a percent of sales was 5.6% versus 6.4% for the second quarter of 2016.

Earnings per diluted share for the third quarter was $0.02 per share, compared to $0.34 per share in Q2, and a negative $3.64 per share in Q3 of 2015, which included impairment expense in the B27 working capital expense adjustment.

While we do not make a habit of providing quarter our full year guidance our view regarding the fourth quarter is cautious is that learn in our previous prerelease due to the last billing days compared to the third and second quarter as well as the upcoming holiday season.

Going forward we continue to remain encourage with the moderation we have experienced with a decline in market conditions and occasionally, we see early signs of brigid [ph].

It is important to note and remind ourselves that we have successfully navigated previous cycles and are leveraging this experience as we manage our business to the current market environment.

Further I have never been more confident that our current strategic direction and ongoing cost reduction initiatives will position DXP competitively for the next up cycle.

Our strategy has continued to evolve and develop as we have built out our rotating equipment footprint and capabilities, but our goals have remained constant and we will achieve them.

Balance growth that includes organic initiatives, sales alignment, complementary acquisitions will allow us to continue to double our business during the next cycle and provide unmatched capabilities that focus on serving our customers.

DXPeople continue to work hard, remain committed to our vision and mission, are providing the highest quality of customer service through our expertise for products, we distribute and technical services we perform with a team sense of individual pride and DXP spirit.

DXP people thank you for your commitment to be the best for our industrial customer needs.

Despite the headwinds on our end markets constantly changing dynamics in our primary efforts remaining on structurally improving our customer, controlling our cost, and positioning DXP for profitable growth and increasing shareholder and stakeholder value creation in the future.

We are positioning DXP for the eventual improvement in our end markets, which is evidence by our recent actions to begin to position our capital structure for the future. We believe we are moving along the bottom and the churn is coming. So with that, we’re now open for questions..

Thank you. [Operator Instructions] We’ll take our first question from Matt Duncan with Stephens Incorporated..

Hey, good afternoon, guys..

Good afternoon, Matt..

Mac, can you start maybe just by walking through the monthly sales trend through the quarter, I know you guys said July was pretty weak and David I think gave total sales per month. But maybe if we could get sales per selling day by month through the quarter and then here in October and even November maybe add..

Okay, sure, Matt. July had 20 business days and the sales per day all these numbers include deferred tax for the third quarter. So sales per day including Vertex in July were $3,392,000, August was $3,438,000, September was $3,778,000, the sales per day for Vertex during the quarter averaged $109,000.

So if you subtracted Vertex the sales per day during the third quarter would be $3,669,000 per day. October sales – I’d like to say I gave you this September – well, I was trying to give you Q3, the Q3 average sales per day were $3,539,000 and it subtract $109,000 for Vertex sales per day without Vertex of $3,430,000.

October sales obviously excluding Vertex were $3,481,000, up $51,000 per day or approximately 1.5%. And sales per day in November appeared to be up a little 2% from what they were in October..

Okay, that’s helpful. So David with all those numbers in mind, do you feel like you are starting to see demand increase anywhere within your energy customer base as rig counts gone up and activity levels have been a little bit better.

Is that showing up in your business anywhere at this point?.

Yes. The part of the business that is certainly the drilling, which we’ll call upstream, we’re not drillers, but the upstream piece has components that we participate in safety services is one of those components and we see that division doing better we saw profitability from them and even in Canada and sales were going up.

We saw – we see a – we have integrated supply agreements with Halliburton who completes wells. And so we’re hearing and seeing activity increase there. Some of our OEM customers that are have equipment that are only a well site. We’re really not seeing a lot of increase there yet.

We’re seeing some through metalworking and on the pipe, the pipes that are being used in stuff, so that we’re seeing some activity there, but it’s anyway all that’s not tremendous. We’re seeing new products that we have in the midstream market that are catching hold and so we feel good about that.

The only thing the big midstream pipeline stuff that we’ve commented on that where our API 2016 go has been soft throughout the year, but there is a lot of new projects and lot of stuff that’s on the drawing board. So we’re not discouraged by that. And I think that’s about it..

Okay, that helps. So then just helping us sort of bridge the gap over the fourth quarter.

Mac, can you tell us how much revenue and EBITDA you had from Vertex in the 3Q, so we kind of know what the baseline is to start from here?.

Revenues were $7.1 million and EBITDA was $1.1 million..

Okay. So if I’m doing my math right, that’s $223 million in revenue is backing out Vertex and about a $117 million in EBITDA and then David you’ve commented you’re a little cautious into the fourth quarter and I suspect that that really is just beyond known of how your business is going to be impacted by the holidays.

I know that’s always difficult to pin down. So I guess the way we should translate that is the $223 million and $117 million is probably kind of a high end of what maybe you could do in the fourth quarter and realistically you’re down a little bit from there. But I know you’re still taking actions on the cost side.

So am I thinking about that the right way?.

Well, those are certainly my numbers. I think when we look at the fourth quarter, we have had exceptions where we’ve had tremendous fourth quarters, but that’s when the oil and gas business was booming. And so people were trying to spend their money and get ready for next year, that we don’t really see that and then we see business more just normal..

Right..

Normal, so we don’t see a big uptick in the fourth quarter..

Right, but down from those numbers..

Yes. So then you have Supply Chain Services, et cetera, we have a lot of people that will close week at a time for the holidays, et cetera. So we’re just being cautious, we don’t – I think our October things are trending fine, but we think that the fourth quarter has the ability to be soft. And so we wanted to kind of paint that picture I guess..

Okay and that makes sense. And to the last thing that on the cost side, was there any severance included in the SG&A number this quarter and you guys still operating the businesses want to position opens up you’re not filling it, so there is still probably some sequential decline, you obviously going to take out the SG&A associated with Vertex.

But in addition to that, there would still be some decline in the business as you guys managed the cost side, that’s the right way to look at it?.

There was no severance of significance during the third quarter..

Okay. And then just the – progression in SG&A Mac..

There is obviously some we’re still looking at every opportunity, but clearly when – four person locations whey they quit, we’re typically replacing them now and there are probably examples where we’re not..

I mean I think from a philosophical point of view, we’re thinking that 2017 is going to be better and so we’re trying to hold on through our seasoned employees that are going to help us grow this thing forward. And so we don’t really have any kind of deliberate cost cutting initiatives right now..

Okay. All right, that helps. I’ll be back in queue. Thanks, guys..

We will now go to Ryan Merkel with William Blair..

Great, thanks. So first question I had is how successful have you been replacing the Goulds with alternatives.

And maybe just discuss some of the challenges that you face there?.

So the challenges are that Goulds is 100 year plus brand and there is mostly the downstream customers, which they also sell direct to have authorized manufacturer list approved vendors that they do business with and so the challenges are we’re trying to get on those lists and compete with Goulds on a direct basis.

The lesser challenge is that DXP’s been selling Goulds for a long, long time and now we’ve come to them and say, hey, we want you to buy our pump works product, it’s a better product, it’s made in America and we don’t have double markup on the pricing and so the prices good. And so when we measure that, we look at it in this way.

Last year, we were a Goulds distributor, we sold 2,000 anti-pumps and this year we’ll sell over 1,700 anti-pumps of pump works. And so that’s a pretty successful conversion rate. We’re actually tracking on a monthly basis now to do over the 2,000.

So we really feel about – feel very, very good about our success incrementally though I mean 2,000 pumps is more than 1,700. So there has been a kind of a gap there that we would felt, but we feel like the conversion ratio and where we’re headed and where we’re going is outstanding..

Okay. We’ll that’s encouraging news.

Switching to B27, could you just comment on how orders are tracking there? I know there has been pretty ugly recently and is there sign to the bottom or is it still to be determined?.

So we’re two parts of B27, IFS, Innovative Flow Solutions, Integrated Flow Solutions – excuse me, is had some really nice wins here lately very recently and they are not gigantic orders, but their orders nonetheless that we’re kind of pleased with, realize that what they do best is around process and gas.

And so gas has a nice shot in the arm with LNG and et cetera. So there is activity there and we’re very pleased with how they are progressing.

The other piece of it was that B27 was in the API 2016 business, we call that pump work 2016 and that particular part of the business is sold to the big pipelines that they carry product from some part of the world, some part of the United States or North America to a refinery or two or multiple refinery [indiscernible] et cetera.

And that infrastructure is in place and the – we’re not need really a huge amount of additional infrastructure except again gas, gas is kind of making a comeback. And so and our pumps are bigger when we use, when we’re on the gas pipeline versus roll pipeline.

And hopefully, with our new administration there going to be a little more, we’re giving where pipelines go and where they are useful, et cetera. So we actually have a lot of coding activity in most – in a lot of these are crude lab projects, but I wouldn’t say that part of our business is booming..

All right.

And then speaking of the new administration maybe I’ll just ask that question, how are you feeling about potential of the new polices being a tailwind for your business and maybe discard if the Keystone pipeline happens, is that a positive for your business?.

Well, Keystone would be a very positive for our business and I think its impossible politicians can say if they may want to, but I mean be impossible the oil and gas 100% sufficient not have imports and et cetera.

But that said, I think anybody that’s going to be favorable to moving in that direction has to be very, very positive for DXP have an concerns more about domestic versus be in a global international company has to be positive for DXP.

So we’re – we’ll see, I mean it’s like I said the politicians can say what they want to, but then when it comes down to reality and what they can get done, we’ll have to see, but it doesn’t seem to be anything that’s negative..

Right, okay. Very good, thank you. I’ll pass it on..

We’ll now go to Joe Mondillo with Sidoti and Company..

Hi, guys, good afternoon..

Hi, Joe..

So yes, I was just wondering last quarter you guys decided a thing that given all the prospects that you put in place there, you didn’t think that, that segment could flow below sort of an 8% off margin given what you did there obviously for kind of below that 4% here this quarter.

So I’m just wondering A) what sort of happened, I didn’t go to what you sort of saw was it more volume based or product mix and sort of how does that backlog look for the next quarter or two?.

So sales were I guess sort of spotty the API business is down. IFS was doing better and now it’s getting some order. So it was down, but it was – its showing improvement. Canada is doing a whole lot better and making money. So that particular part is good. Our fabrication business is good.

So I really don’t – I’m not too worried about that I think they had a softness in sales. And so we didn’t make our 8%. I forget what it was Mac, like 4%, yes. We also did a lot of consolidations with B27 during the third quarter. And so in doing so, we kind of spend a little money before we saved some money and so I’m not worried about IPS..

Okay.

I guess also on Service Center side of things, the margin was the best list and then I think in a year or so, could you comment on that? Do you think that sustainable type margins, what sort of drove that, what’s your outlook going forward?.

Some of that margin improvement largely comes from a gross profit. I’m looking at Q3 compared to Q2. And most of the margin improvement came from an improvement in gross profit and some of that gross profit improvement came from safety services are doing a little better and that’s a high margin business.

And some of it came from biggest part of the decline in July was selling to OEM’s to manufactures. Those are higher volume sales and are typically at lower margin, so some of the improvement in the margin actually comes from lower sites – and product mix..

Okay.

Do you think that margin is sustainable because it is relatively higher than what we’ve been trending at the last several quarters?.

I guess our answer is the OEM customers stay declined like they were in the third quarter then, yes, the margin would be sustainable. Hopefully that business comes back.

So we make more money, but the margin might – that’s comparing a relatively low quarter to an even lower quarter Q2 to Q3 eventually when the business truly improves than the margins will go up, we would assume..

Yes, okay. And so on the working capital, just wondering what your thoughts are there, so that receivable came down a little bit, inventory was sort of flat on the quarter, but payables were actually up in the quarter. So just wondering what your sort of thoughts are over the next several quarter in the 2017.

How you are thinking about working capital as a source or use of cash?.

So we feel like that working capital be a source of cash in the fourth quarter. We think things are little softer. So receivables will come down and then inventory is always going to lag a little bit. So it will come down.

We actually hope that 2017 that we start investing in working capital, but realize that our investment in working capital is – I think it averages around 10% to 15% of sales. So we’re going to look forward to sales going up and working capital going up a little bit.

So the net result will be, it will actually generate a lot of cash flow, but it will be through EBITDA..

Okay. And then just lastly Mac, if you talk about where the balance sheet is now at quarter, do you anticipate any further refinancing capabilities. I know you have that sort of holiday until next July, I think it was, but you talk about sort of the cost of capital that you are running at here anything that you anticipate..

I think I’ll point out that the July 1, the day when the leverage and fix charge rescheduled to come back doesn’t apply until September 30, which then doesn’t really apply until November when we have to submit a compliance certificate. So we have a fair amount of time to continue to generate cash for everyone pay down debt.

And it maybe pursue other alternatives whether sell another business unit or refinance..

And at these levels relative to where your EBITDA, the interest rate should be fairly similar to what you saw in the third quarter?.

Under our loan agreement the interest rate the margins don’t change, whether our leverage ratio goes up or down under the existing loan agreement, the interest is the same, as LIBOR changes the interest rate could change.

And so yes, that said raises interest rates in December or whenever they suppose to do that presumably LIBOR will go up and so our interest will go up. But as we pay down debt, there is less debt that we’re paying interest on, but the rates only fluctuate really what the market rate..

Okay, great. Thanks a lot..

[Operator Instructions] We’ll now go back to Matt Duncan with Stephens Incorporated..

Hey, guys. So I’m going to piggyback on what Joe was asking about there. So as you look at the balance sheet Mac and David, this is probably for you as much as Mac. How do you guys think about what you may want to or need to do with your current debt structure as we move into next year.

What is the ultimate goal? What is maybe the range of possibility that you are looking at for how you’ll sort of take care of this last step and restructure the debt on your balance sheet, whether that be with the new bank group for some other debt instrument.

How are you guys thinking about that?.

Well, we like to see our EBITDA run rate be $60 million and debt being $200 million. And then we’re definitely very bankable again. And so our focus is right now is to generate as much free cash flow as we can and to increase EBITDA.

And we’ve talked about, we bank in a declining market, we can maintain 6% EBITDA margins around there, which I think we are showing that we can do. So then the question becomes when does – when the sales start picking up.

And when they do we get leverage of the business and our bottom line improves pretty rapidly and we should be able to get run rate around those – around that level.

And so our focus right now is not about selling anything, it’s not really about cutting cost, it’s really about growth in all our initiatives, all our thoughts going into next year are design to not spend money, but growth..

So along that alignment Dave is that mean you are still going to be out of the M&A game for a little while here. I know you guys have historically been very successful with the small bolt-on type acquisition, but obviously the first priority has got be the – to get the balance sheet on a more solid footing.

So does that put you on the side line for a while longer yet or do you maybe consider that instrument that would have less restrictive covenants that maybe would allow you to start doing that against, that’s been a key part of your growth story is about..

Yes, I think we want to participate fully in the upturn that’s coming. So I think that we’re talking to people and we’re trying to do everything we can to make sure that when the turn happens that we could be in a position to do an acquisition.

But if we don’t get a turn or we just stay flat, we’ll then, then you are right, it’s going to be a while before we can start executing on the acquisition front. But if I just want to be in a position to where the things turn like they eventually will someday, sometime, then we’re in a position to participate in that.

And we’re not far off from being able to do that. And so all is we do, all is we needed the little bit of recovery. I don’t need some big B shape recovery or anything I just need things just are headed in a positive way..

Okay, that helps. Appreciate it. Thanks, David..

It appears there are no further questions. That concludes today’s conference call. Thank you for your participation..