Mac McConnell - CFO David Little - CEO.

Will Steinwart - Stephens.

Good afternoon, my name is Jay, and I will be your conference operator today. At this time, I’d like to welcome everyone to the DXP Enterprises Incorporated First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session.

[Operator Instructions] Thank you. Mac McConnell, Chief Financial Officer, you may begin your conference..

Thank you. Good evening 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 is contained in our SEC filings, but DXP assumes no obligation to update that information.

I will begin with a summary of DXP’s first quarter 2017 results. David Little will share his thoughts regarding the quarter’s results, then we will be happy to answer questions. Sales for the first quarter of 2017 decreased 5.9% to 238.5 million from 253.6 million for the first quarter of 2016.

After excluding first quarter of 2016 sales of 7.1 million for Vertex, which was sold on October 01, 2016, sales for the first quarter decreased 7.2 million or 2.9% on a same-store sales basis.

Sales by our service center segment in the first quarter of 2017 decreased 18.8 million or 11.2% to 148.7 million compared to 167.5 million of sales for the first quarter of 2016.

After excluding 2016 service center segment sales of 7.8 million for Vertex, service center segment sales for the first quarter of 2017 decreased by 11 million or 6.9% from the first quarter of 2016 on a same-store sales basis.

This sales decrease is primarily the result of decreased sales of bearings, pumps, industrial supplies and metalworking products. Sales of safety services increased during the quarter. Sales of innovative pumping solution products increased 1.6 million or 3.4% to 49.1 million compared to 47.4 million for the 2016 first quarter.

This increase was primarily the result of an increase in capital spending by oil and gas producers and related businesses during the first quarter of 2017. Sales for supply chain services increased 2.1 million or 5.5% to 40.7 million compared to 38.6 million for the 2016 first quarter.

The increase in sales is primarily related to increased sales to customers in the oilfield services and oilfield equipment manufacturing industries. When compared to the first quarter of 2016, sales for the first quarter, I'm sorry, when compared to the fourth quarter of 2016, sales for the first quarter of 2017 increased 16.2 million or 7.3%.

This increase is partially the result of the first quarter of 2017 containing three more business days in the fourth quarter of 2016. First quarter of 2017 sales by our service center segment increased 9.1 million or 6.5% compared to the fourth quarter of 2016.

First quarter 2017 sales for supply chain services increased 3.6 million or 9.8% compared to the fourth quarter of 2016. First quarter 2017 sales of innovative pumping solutions products increased 3.5 million or 7.8% compared to the fourth quarter of 2016.

The increased sales for the first quarter compared to the fourth quarter for each of our segments primarily resulted from increased sales to customers related to oil and gas. Gross Profit for the first quarter of 2017 decreased 6.2% from the first quarter of 2016 compared to the 5.9% decrease in sales.

Gross profit as a percentage of sales decreased to 27% in the first quarter of 2017 compared to 27.1% for the first quarter of 2016. On a same-store sales basis, gross profit as a percentage of sales increased approximately 27 basis points.

This increase is primarily the result of approximate 217 basis point increase in the gross profit percentage for our IPS segment and a 15 basis point increase in the gross profit percentage in our service center segments.

The increase in gross profit percentage for the IPS segment is primarily the result of approximately $1.5 million less unabsorbed manufacturing overhead related to the start-up of our ANSI pump manufacturing facilities. Gross profit as a percentage of sales for the first quarter of 2017 decreased to 27% from 27.2% for the fourth quarter of 2016.

The decrease is primarily a result of a 9 basis point increase in the gross profit of our service center segment offset by an approximate 40 basis point decrease in the gross profit percentage of our IPS segment and an approximate 86 basis point decrease in the gross profit percentage in our supply chain segment.

The gross profit percentage for the supply chain segment decreased as a result of increased sales of lower margin products to oil field service related customers. SG&A for the first quarter of 2017 decreased 14.5 million or 20.5% from the first quarter of 2016.

After excluding 2016 first quarter expenses for Vertex of 2.2 million, SG&A decreased by 12.3 million or 18% on a same-store sales basis.

The majority of this decline in SG&A is the result of decreased payroll, incentive compensation, payroll taxes, and 401(k) matching due to headcount reductions and cost reduction measures implemented near the end of the first quarter of 2016.

As a percentage of sales, SG&A decreased to 23.6% for the first quarter of 2017 from 27.9% for the first quarter 2016 as a result of the SG&A decreasing 20.5% while sales declined only 5.9%. SG&A for the first quarter of 2017 increased 3.3 million or 6.2% from the fourth quarter of 2016.

The increase resulted from a $2 million increase in bad debt expense combined with increased payroll taxes and health claims. The increase in bad debt expense in the first quarter of 2017 compared to the fourth quarter is the result of DXP reversing a 2016 over accrual and bad debt of $2 million during the fourth quarter of 2016.

As a percentage of sales SG&A decreased to 23.6% from 23.8% for the fourth quarter of 2016 as a result of sales increasing 7.3% while SG&A increased by only 6.2%. Corporate SG&A for the first quarter of 2017 decreased 2.4 million or 22.6% from the first quarter of 2016 and increased 2 million or 30.9% from the fourth quarter of 2016.

The year-over-year decrease was primarily the result of reduced compensation related costs. The sequential quarter-over-quarter increase was primarily the result of the increased bad debt expense which I just explained and increased health claims and payroll taxes.

Interest expense for the first quarter of 2017 increased 7.2% from the first quarter of 2016 and decreased 5.5% from the fourth quarter of 2016. The year-over-year increase is primarily due to the 300 basis point increase in the interest rate charged on borrowings under our credit facility.

The sequential decline in interest expense is the result of paying down debt during the fourth quarter of 2016. Total debt increased approximately 2.5 million to 228 million during the first quarter of 2017.

The increase in debt during the quarter is primarily a result of normal first quarter payments of property taxes and insurance premiums in the normal first quarter increase and payroll taxes. The March 31, 2017 debt balance is 136.8 million less than the balance at March 31, 2016.

During the first quarter of 2017, the amount to be - the amount available to be borrowed under our credit facility decreased approximately 7.4 million to approximately 29.9 million. This decrease in availability was primarily the result of the revolving line of credit reducing from 205 million at December 31, 2016 to 190 million at March, 2017.

Our bank leverage ratio was 3.1:1 at March 31, 2017. At March 31, our borrowings under the credit facility were at a rate of approximately 6%. Capital expenditures were $601,000 for the quarter.

Cash on the balance sheet at March 31 of 2017 was $995,000, accounts receivable balance was 156,971 and the inventory balance at March 31, 2017 was $84,325,000. Now I'd like to turn the call over to David Little..

Thanks Mac and thanks everyone on our conference call today. We're off to a good start in 2017 and let me thank our DXP stakeholders. In particular our DXP people for their continued hard work and their grit as we turn the corner and momentum against the build in our business.

This is DXP’s first quarter of meaningful sequential increases in total sales and EBITDA after adjusting for the one-time gain on the sale of Vertex. As such, we are encouraged by the improvement in market conditions and remain focused on growing our business in fiscal year 2017.

DXP industrial end markets which is 51% of our business appears to have found some legs and is showing signs of positive upward movement. The ISM PMI manufacturing index which gives us an indication of how DXP’s broad industrial markets will perform continued to expand from January, a 56% rating through March of 57.2% rating.

This trend is above the average over the last 12 months of 53.6% and looks to be a positive indicator for the year should the trend continue. DXP’s North Central and Northeast regions benefited the most from this movement as well as other regions within DXP.

We are excited to see momentum in this side of our business and look forward to the improvement throughout the year. Oil and gas which remains 49% of DXP found a bottom in the third quarter of last year and is showing signs of gradual improvement.

The majority of our business that is oil and gas tends to lag increases in the rig count and is tied closer to actual production or increase in CapEx budgets. Global exploration and production spending is expected to rise on an average of 3% to 5%.

That said there still remains a fair amount of uncertainty with oil continuing to fluctuate between $45 and $54 per barrel. Additionally, the upcoming May OPEC meeting which led to another round of speculation surrounding production cuts.

Our safety service business which is closely tied to rig count has experienced three quarters of sequential increases and is up mid-to-high single digits year over year. Across our business, we feel well positioned to benefit from any upward movement in oil and gas.

Turning to our financial performance, total DXP revenue of 238.5 million for the first quarter was a 7.3% sequential increase over the fourth quarter of 2016. Supply chain service sales increased 9.8% to 40.8 million. While innovative pumping solutions increased 7.8% to 49.1 million and service centers increased 6.5% to 148.7 million.

These sequential increases were primarily driven by increases in our bearing in PT, safety products and safety services divisions followed by rotating equipment. Specifically, supply chain services sales increase was driven by material double-digit increases in safety 17%, bearing in power transmission of 12%.

The service center increases were primary driven by increases in safety service, bearing and PT, and rotating equipment product divisions. Specifically, DXP’s Canadian safety services increased 17% sequentially.

This was driven by the year-over-year quarterly average increase in the rig count of 123 rigs and the up kick and turnaround activity and a normal positive seasonality. However as we move through the fiscal year, Canada's normal seasonal break up which will soften revenue gains in Q2.

Service center increases in bearing and power transmission products were a result of increased activity within our oil field OEM customers. Innovative pumping solution sales increase reflects the growing trend in our backlog as our quarterly average backlog within IPS increased 29% from the fourth quarter to the first quarter.

While sequentially we experienced a 7.8% increase or 3.5 million sales increase, we are more encouraged by the improvement in our backlog, which we continue to grow throughout the year and ultimately impact DXP sales and profitability as CapEx budgets, improvement of our customers - as our customers gain confidence and in spending and taking on new projects.

DXP’s overall gross profit margins for the quarter were 27%.

This reflects DXP continued work through pricing pressure on jobs, unabsorbed manufacturing overhead within the IPS segment, also product mix within supply chain services and an uptick in some of our large volume lower margin contracts impacted gross margins as SCS experienced 86 basis point decline from Q4 to Q1.

This was offset by a small increase in the service center gross profit margins which was driven by a higher margin product mix. SG&A for the first quarter was 56.3 million or 23.6% of sales, a decline of 14.6 million from the first quarter of 2016 and a 3.2 million increase or 6.2% rise from the fourth quarter.

But adjusting for $2 million bad expense pick up in the fourth quarter, SG&A increased only 2.3% or by only 1.2 million. Keep in mind during the first quarter we have seasonally higher payroll taxes and cash outlays.

Moving forward, we will continue to get financial leverage, but also anticipate paying higher commission expense, increased salaries and have a higher headcount. With the anticipation in growth in 2017, DXP should begin to get cost leverage as we move upwards through the cycle.

At the end of the first quarter, DXP had approximately 2,238 full time employees. Again, we appreciate all the DXP employees who are with us. They have done an excellent job of making DXP a success. DXP’s overall operating income margin was 3.5% or 8.2 million, which included corporate experience and amortization.

This is a slight improvement over the fourth quarter and reflects the impact of sequentially lower gross margins, seasonally higher SG&A costs that I previously mentioned.

Service centers’ operating income was 9% and increased 27 basis points driven by a slight improvement in gross profit margins, while IPS and supply chain services operating income margins were 7.2% and 10% respectively. IPS operating income margin improvement was driven by a reduction of SG&A associated with continued improvement at B27 facilities.

Overall, DXP produced EBITDA of 15.5 million versus 14.8 million in the fourth quarter, a sequential increase of 4.6% after adjusting for the one-time gain of sale of Vertex. EBITDA as a percent of sales was 6.5% versus 6.7% in the fourth quarter.

Earnings per diluted share for the first quarter was $0.17 compared to a loss of $0.35 per share in the first quarter of 2016 and earnings per diluted share in the fourth quarter excluding the gain on sale of Vertex was $0.10. In summary, DXP delivered 7% sales growth, 5% EBITDA growth and 70% earnings per diluted share growth.

In addition to delivering profitable growth, we will continue to execute our capital structure strategy focused on debt reduction and positioning DXP for the market upturn. As we move forward, we will pursue both organic and inorganic growth.

We are actively engaged in discussions with acquisitions and look forward to refinancing our capital structure to pursue a more active growth strategy. We expect both organic and acquisition opportunities in the future and we want to be positioned strong with strong liquidity to maximize our growth.

The first quarter was a great start of the year after two years of what I call an oil and gas depression and an industrial recession, it appears our customers in all our end markets have returned to growth. DXP remains well positioned to benefit from the return of this growth.

DXP and all our stakeholders are fired up and excited about winning and growing and we continue to be customer driven partner with great suppliers and take market share by being fast. We believe speed wins.

After two and a half years of intense cost reductions, continued focus on efficiency improvement and purposeful investments we believe DXP will benefit disproportionately through the next cycle. The dedicated employees of DXP have this organization extremely well positioned to capitalize on a recovering market. So with that we’ll now take questions..

[Operator Instructions] Our first question comes from Will Steinwart with Stephens. Your line is open..

David, can you start by discussing the monthly trends in the business through the quarter. On the fourth quarter call you noted that March started off strong but kind of fell off towards the end of the month.

Can you talk about how the trend line progressed out of March and into the 2Q after the quarterly summary?.

Do you want me to go through the sales per month? January sales per day were $3,395,000; it increased in February to $3,826,000, increased a little in March to $3,944,000 a day for an average for the quarter of 3,727,000, our 64 business days in the quarter. April came out at 3,944,000, so coincidentally equal to March.

There were 19 days in the month of April..

David, any commentary about what you saw in March that you might call out or maybe just customer conversations, tones, anything that you're starting to hear that's encouraging from here..

Yeah, I think, I’d say in general that all of our regions are performing better than fourth quarter, and so that covers both industrial, and oil and gas. Our oil and gas customers are increasing their CapEx budgets and certainly in certain oilfield plays like the Permian Basin, but everybody is busy.

Canada, we’re certainly busy, and so we were pleased with that. So I think we don't have any reason to believe that both the industrial and the oil and gas markets are improving..

Then on IPS specifically, David, you spoke about backlog levels there. I was hoping that we could revisit those trends you called out.

Make sure I got those right and hear what kind of growth levels you're expecting in that segment over the course of this year?.

IPS and frankly everybody's backlogs even though as you point out our IPS backlog is a longer term backlog than our daily day to day business.

But everybody's backlogs are trending up, they're continuing to trim up so there's not again any reason why we don't feel that things will improve besides the fact that we deal with all the political mumbo jumbo that happens in Washington and all the politics around the price of oil depending on what Russians, Saudi Arabia are going to do.

But what we're seeing in the field is positive signs of increased activity both industrial and oil and gas. And our backlogs are reflecting that..

And then switching over a little bit to the debt plan, can you give any update on what the structure might look like that you’re hoping to get done and any update on the timing of the new debt structure would be helpful..

Sure. We have a lot of options that's a good thing. I think the one that is shaping up to be the best for us given that we have several conversations going on with acquisitions and acquisitions has been a point of our growth in the past, as we look at other pump distributors and other metalworking distributors to buy other safety distributors.

So the one that I think gives us the best solution and the most flexibility probably is along the lines of a ABL and then either a term loan B or a bond deal. Both the bond and the term loan B have their pluses and minuses. The term loan B is a variable rate and the bonds of fixed rate.

Bond deal starts a little higher, but may not end up higher who knows but we're going to do what's best for DXP and do it at a very competitive rate, we could go to the banks but we're going to end up with them wanting to ratchet us down and so we wouldn't have the kind of dry powder we need to do acquisition, so we don’t really see that as an option..

[Operator Instructions] And there are no further questions at this time. This concludes our DXP enterprises incorporated first quarter conference call. Thank you for joining..

Thanks..