Kent Yee - SVP & CFO David Little - Chairman, President & CEO.

Joseph Mondillo - Sidoti & Company Charles Duncan - Stephens Inc. Ryan Mills - KeyBanc Capital Markets.

Good morning, my name is Sarah, and I'll be your conference operator today. At this time, I would like to welcome everyone to the DXP Enterprises 2017 Fourth Quarter and Fiscal Year 2017 Conference Call. [Operator Instructions]. It is now my pleasure to turn the call over to Mr. Kent Yee, Chief Financial Officer. Please go ahead, sir..

Thank you, Sarah. This is Kent Yee, and welcome to DXP's Q4 conference call to discuss the results of our fourth quarter and our full year fiscal 2017 results. 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, but 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 the accompanying investor presentation are now available on our website at ir.dxpe.com. Now turning to the fourth quarter and fiscal 2017 year-end results. Q4 was a strong quarter for DXP and a great end to the year.

The Q4 financial results reflect continued sales growth since Q4 of 2016 and consistent improvement in year-over-year EBITDA. The fourth quarter performance was broadly in line with all of our key financial metrics and expectations. Total sales for the fourth quarter increased 19.5% year-over-year to $265.6 million.

Total DXP sales for fiscal 2017 grew 7.2% to $1.0 billion after adjusting for the sale of Vertex in October of fiscal 2016 over $22.7 million in sales. Average daily sales for the fourth quarter were up 8.9% over Q3 or were $4.4 million per day in Q4 versus $4 million per day in Q3.

Average daily sales for fiscal 2017 were $4.0 million per day versus $3.7 million per day in fiscal 2016 or an increase of 8.1%. During fiscal 2017, we experienced a rebound in both our industrial and oil and gas end markets.

Regions within our Service Center segment, which experienced meaningful sales growth or rebound include the South Central, Southwest, Canada and the Texas Gulf Coast. The overall growth reflects what we were seeing in some of our key end market indicators throughout the year, including the U.S. and Canadian rig count, U.S.

oil and gas production and completions, the metalworking business index and the PMI.

In terms of our business segments, all 3 experienced sales growth year-over-year with IPS showing the greatest improvement, increasing 9%, followed by our service centers, which experienced 7.2% growth, again, after adjusting for the sale of Vertex and Supply Chain Services with 4.9% growth. Turning to our gross margins.

Gross margins declined 55 basis points from 27.52% in fiscal 2016 to 26.98% in fiscal 2017. This was disappointing given the sales growth we experienced in fiscal 2017. But as we discussed during the third quarter, our gross margins reflected a mixture of anticipated and unanticipated softness.

However, subsequent to Q3, our Q4 gross margins improved 21 basis points from Q3 and in line with our comments on our Q3 conference call.

As discussed in Q3, the 2 businesses that have put pressure on our gross margins include Integrated Flow Solutions, or what we call IFS within the IPS business segment, and Canadian Safety Services within the Service Centers. Both businesses showed improvement in Q4, but remained below our historical averages.

Sequentially, our IPS segment experienced a 93 basis point improvement from Q3. This partially was a result of improvements within IFS and an additional focus on pure fabrication versus only highly-engineered solutions. In terms of DXP's Canadian Safety Service business, we experienced 163 basis point improvement in gross margins from Q3 to Q4.

We continue to work through wage inflation and pressures that have outpaced our ability to pass on corresponding price increases. As we move forward, expect further improvements in gross margins.

That said, we are currently in the summer or breakup period in Canada, so we will likely not see the full impact of our efforts until Q4 of this year as it pertains to Canadian Safety Services. In terms of operating income, combined all 3 business segments improved 137 basis points in year-over-year segment operating margins versus 2016.

Total DXP operating income increased 73% versus 2016 to $33.5 million. Service Centers had the greatest uptick, improving operating income margins 219 basis points to $63.3 million in operating income, followed by IPS with a 33 basis point improvement to $11.4 million.

Improvement within Service Centers and IPS primarily came from reduced SG&A expense. Supply Chain Services operating income margin declined 46 basis points year-over-year, driven by a 61 basis point decline in gross margins.

The decline in Supply Chain Services is a result of the contractual nature of this segment and a lag or repressed ability to pass on cost in our price increases to our customers. Turning to EBITDA. Fiscal 2017 EBITDA was $61.7 million, up 32.3% from fiscal 2016. Again, adjusting for the sale of Vertex.

Our EBITDA margin expanded 116 basis points from fiscal 2016. This represents operating leverage of 4.5x despite the gross margin slippage we experienced in Q3. The improvement in EBITDA reflects the $5.2 million reduction in SG&A expense versus 2016 alongside the 7.2% sales growth year-over-year.

As we move to this cycle, we should experience continued operating leverage as long as we continue to drive organic growth. For fiscal 2017, our diluted earnings per share was $0.93 versus $0.49 per share in 2016 or an increase of 90%. Our fiscal 2017 includes a $1.3 million provisional benefit or $0.07 per diluted share related to U.S.

tax reform and another one-time $2.2 million benefit or $0.12 per share impact due to a true-up of deferred tax liabilities related to acquisitions in Canada. Excluding these impacts, fiscal 2017 diluted earnings per share would've been $0.74 and fourth quarter earnings per share would've been $0.17 per share.

Going forward, we currently anticipate a combined federal and state effective state tax rate of approximately 28% to 30% for 2018. Obviously, we are still reviewing and monitoring the new tax reform legislation. And over the course of the year, we will update as we see appropriate. Turning to the balance sheet.

Working capital as a percentage of the last 12 months sales for the fourth quarter was 16.9%. This is above our historical average of approximately 15.4%, but remains within our targeted range. The main driver of the increase in working capital as a percentage of sales is accounts payable.

Specifically, this reflects the accounting treatment of outstanding checks at the end of the quarter. We first discussed this accounting rule in Q3 as a result of our refinancing.

Essentially, DXP's gross cash position of $42.6 million was net of $17.1 million in outstanding checks, which prior to our refinancing, was included in our accounts payable balance. This effective working capital as a percentage of sales by 170 basis points.

Adjusting for the impact, working capital as a percent of sales would've been 15.2%, or within our historical ranges. In terms of cash, we had $25.6 million in cash on the balance sheet at December 31. Receivables were up 12.3% to $167.3 million versus 2016, and inventory was up 9.2% to $91.4 million versus year-end 2016.

Our increase in inventory reflects investments within the business and an effort to continue to meet customer needs as we experienced growth. In terms of CapEx. CapEx at fiscal 2017 was $2.8 million or 0.3% of fiscal 2017 sales. Compared to fiscal 2016, CapEx dollars are down $2.1 million or 42.3%.

The decrease reflects the minimal investors needed within our core distribution business and our ability to manage cash. That said, DXP is making investments in various areas, including software, to enhance our sales and operations efforts, facilities and improvements to future supercenters and our corporate operations. Turning to free cash flow.

Free cash flow for fiscal 2017 was $9.7 million or 16% of EBITDA. Again, adjusting for the $17 million reclassification of outstanding checks that created the reduction in accounts payable, our adjusted free cash flow would have been $26.8 million or 43% of EBITDA.

Return on invested capital, or what we call ROIC, remains stable and strong at 18% and continues to be above our cost of capital, but it does reflect our dampened profitability levels, and we expect this to improve as margins grow.

On August 29, we closed on a new debt structure and announced a new $85 million ABL credit facility and $250 million Term Loan B, as you all know. As we have discussed, putting in place our new debt structure was a significant step of many that occurred prior to the refinancing.

DXP has already been able to leverage the increased borrowing capacity and flexibility by announcing the acquisition of Application Specialties, a leading metalworking distributor located outside of Seattle, Washington. We had 2 main financial covenants under the ABL and Term Loan B, including the fixed charge coverage and the secured leverage ratio.

At December 31, our fixed charge coverage ratio was 3.7:1 and our secured leverage ratio was 3.6:1. So as we close out our fiscal 2017, we are pleased with our ability to have 4 sequential quarters of sales increases and our fiscal year was 7.2% sales growth year-over-year.

EBITDA grew 32% and reflects the operating leverage we expect to experience as we move forward.

With a refreshed flexible capital structure and improving end market dynamics, we believe this will allow us to continue to take distinct actions to further strengthen DXP, increasing the attractiveness of our long-term business while creating shareholder value and driving both organic and acquisition-driven growth.

I will now turn the call over to David..

Thanks, Kent, and thanks to everyone on our fourth quarter conference call today. Overall, I am pleased with our fourth quarter 2017 and the progress we made throughout the past fiscal year. As we look forward into 2018, we believe our end markets have turned positive, which will provide us with the foundation we need to drive profitable growth.

Our near-term focus and priority is to ensure that DXP has a smart recovery. We define this as growing the top line and the bottom line as well as providing speed, quality and convenience to our customers.

DXP has more potential than it has ever had, and we are committed to unlocking this through our collaborative efforts of our sales, operations and corporate functions working together to serve our customers in a collaborative and an inclusive fashion while providing a differentiating value in the marketplace.

We touched on some of this last year, but our sales objectives remain the same, continue to cross sell product divisions and capabilities, increase geographic reach and industry presence and growth; capture additional fabrication work on capital projects; target upstream, midstream, downstream, food and beverage, manufacturing and other industrial opportunities; and continue to aggressively sell existing and hunt for new customers to capture more market share.

Our operational objective is summed up in one word, speed, fast delivery and first to serve; easy to do business with internally and externally; and quality products and services. As we move forward, speed becomes a fabric of our culture, both internally and externally.

As we discussed in early 2017, speed is not just DXP's competitive advantage, but is a guiding principle. Our corporate department's objectives are the same, support our customer-facing operations with customer service orientation. DXP sales and operations are our customers.

We want to build a collaborative and engaging environment with happy customers, find efficiencies and drive speed and accuracy within the back-office operations; be easy to do business with without compromising back-office discipline; and maintain a positive attitude when interacting with external and other DXPeople.

During the first half of 2017, oil prices moved approximately from $52 to $46 per barrel by the end of June. This relative tight band showed overall improvement versus the back-end of fiscal 2016. However, our customer's cautiously optimistic as the year started with many CapEx budgets showing mid- to high single-digit increases.

Our sales results reflected this sentiment, with Q1 and Q2 sales growing 7% and 5% sequentially. During the second half of 2017, oil prices moved to a range of $46 to $60 per barrel by the end of the year. Our customers were meaningfully more upbeat.

And towards the end of the year, we started to hear either directly or through public means that the improved macro economics, the relative stability of oil prices at higher levels and the improving U.S. regulatory conditions were some of the factors supporting their expected increased spending levels.

During the second half of 2017, DXP took advantage of this backdrop and the market conditions completing the refinancing of its existing credit facility. Today, DXP has a new undrawn $85 million asset base loan and an institutional Term Loan B as part of our capital structure.

In terms of DXP's industrial markets, ISM and PMI manufacturing indexes continue to show strength through 2017, from 56% rating in January to December with a rating of 59%. Similar to last year, the strength in the PMI has continued with strong readings into 2018. This trend is an improvement over 2016.

As we look at our financial performance, DXP has now experienced 4 quarters of sequential increase in total sales. Thank you to all of our DXPeople for the hard work and resilience as we have now completed our first bounce back here.

Total DXP revenue of $265.6 million for the fourth quarter of 2017 was a 5.4% increase sequentially and a 19.5% increase year-over-year. This reflects continued improvement in our end markets and strength through the second half of the year, as we discussed. Comparing the first half of fiscal 2017 to the second half, sales increased 5.8%.

This resulted in DXP's fiscal 2017 sales of $1 billion or 4.6% increase over fiscal 2016. And of course, adjusting for the sale of Vertex, DXP sales increased 7.2% year-over-year. Innovative Pumping Solutions segment sales increased 9.7% year-over-year to $205.3 million.

While Service Center sales increased 3.1% year-over-year to 6 40 , taking into account the sale of Vertex, the sales increase was 7.2%. Supply Chain Services sales increased 4.9% year-over-year to $161.5 million.

The Innovative Pumping Solution increase was driven by modular packaged equipment and pumps for upstream and midstream onshore markets as the offshore market is still very soft.

Specifically, DXP sold a meaningful amount of black units and ag units, HP-Plus Pumps, PumpWorks pumps and other modular packages, Sequentially, IPS experienced a 19% increase from Q3 to Q4 or $9.7 million sales uptick. We continue to remain encouraged by the improvements in our backlog, which have continued to grow throughout the fiscal year.

Trends in our backlog show IPS yearly average backlog increase 35% from 2016 to 2017. The Service Center sales growth was driven by an increase in Safety Services, Rotating Equipment, Bearing and Power Transmission and metalworking product divisions. It was really nice to see all four of our product divisions growing again.

DXP's overall gross profit margins for fiscal year were 27%, a 50 basis point decline from 2016. 2 major factors that grow the weakness at our gross profit margins were DXP's Integrated Flow Solutions business and Canadian Safety Services, which we discussed both in Q3.

Integrated Flow Solutions within IPS segment is working through a reduced level of complex, high, large high-margin orders. To revisit briefly, Integrated Flow Solutions, or IFS, was part of the B27 transaction and provided customers with a single source solution for engineering services and modular packing systems.

We call this business engineered to order, ETO. DXP is addressing the margin and order intake by not only focusing on engineered complex orders, ETO-type orders, but also nonengineered solutions with just a focus on fabrication. As such, sequentially, our IPS segment experienced a 105 basis point improvement from Q3.

We still have plenty of work to do in order to move our margins in the direction where we have been historically. And as always is the case, IPS tends to be a lumpy business segment for DXP. In terms of DXP's Canadian service -- Safety Services business, we experienced a 76 basis point decline year-over-year in gross margins.

However, DXP's Canadian Safety Service business sales were up 27.1% year-over-year. Wage inflation and pressure have outpaced our ability to pass on corresponding price increases to our customers, which drove the decline in gross margins.

In Q4, Canadian Safety Services increased gross margins 163 basis points, which are still below our 2016 average by approximately 35 basis points. In conclusion, we have opportunities to increase our gross margins because of the value DXP brings to our customers and the backdrop of a better economic environment.

However, over the short term, IPS has some orders or older backlog with lower margins as a headwind against projected improvement in other areas. SG&A for the fiscal 2016 -- 2017 declined $7.4 million or 3% from fiscal 2016. As a percentage of sales, DXP's SG&A declined 186 basis points going from 25.5% in fiscal year 2016 to 23.7% in fiscal 2017.

That said, SG&A for Q1 was $56.3 million and Q4 SG&A was $62.7 million, reflecting the growth and investment in our business and our people. At the end of fiscal 2017, DXP has approximately 2,511 full-time employees.

As always, it is my privilege to share DXP's financial results of these people who work hard every day as one team, driving customer success and value creation. Again, I would like to take this opportunity to thank all the DXP employees who are with us and have helped in this bounce back year.

SG&A will increase, as expected, and reflects our investment in people and organizations as we position ourselves for growth going forward. DXP's overall operating income margin of 3.3% or $35.5 million, which included corporate expense and amortization.

This reflects 132 basis point improvement in margins over 2016, but also includes the impact of lower gross margins. Distribution companies have operating leverage when sales are growing, and DXP expects the same results for 2018 as other distributors. Service Centers operating income was 9.8% or increased 216 basis point year-over-year.

Driven by the lower SG&A as a percent of sales and a small improvement in gross margins versus 2016, while IPS and Supply Chain Services operating income margins were 5.7% and 9.6%, respectively, IPS operating income margins increasing 46 basis points driven by lower SG&A and Supply Chain Services operating income decreasing 46 basis points driven by a 61% -- 61 basis point decline in gross margins.

Overall, DXP produced EBITDA of $61.7 million versus $55.2 million in 2016, a year-over-year increase of $6.5 million or 11.8%. Adjusted for the sale of Vertex, EBITDA increased 32%. EBITDA as a percent of sales was 6.1% versus 5.7% in '16. Note, our company goal is for EBITDA to be 10%-plus of sales.

Earnings per diluted share for fiscal 2017 was $0.93 compared to $0.49 per share in fiscal 2016, a year-over-year increase of 90% or 4. -- or 0.4-4 or $0.44 per diluted share. As Kent has discussed, Q4 reflects a $1.3 million provisional tax benefit related to the U.S. tax reform legislation. In summary, DXP delivered 7% sales growth, 32% EBITDA growth.

And the third quarter -- and in the third quarter and fourth quarter, we were impacted negatively by gross margins, but we do not see this as a long-term trend. We've completed the refinancing of our debt. We now have a capital structure are in place to execute our strategy and position DXP for the future.

Moving forward, we will pursue both organic and inorganic growth during the first quarter of 2018. We closed only ASI acquisition, which we will discuss during our Q1 conference call. DXP and all our stakeholders remain excited about our future and our smart recovery in fiscal 2018.

As DXP believes our growth is to grow the top line and the bottom line at the same time as well as providing speed, quality and convenience for our customers and stakeholders. We will execute on this by having sales operation and corporate support working together and delivering on our goals.

Before I turn it over to the analysts for questions, I am personally excited about the future and our capabilities that would bring value to our customers, suppliers, DXPeople and shareholders. I would like to thank specifically our entire team again for their hard work, commitment and dedication to our plan to be customer-driven.

We use the term speed wins. During 2017, DXP's facilities endured the flood from the hurricanes, and unfortunately, many DXP employees and customers are not so lucky. Our thoughts and prayers remain with those employees and customers and their families. Thanks again, and we are all proud to be a part of DXP.

With that, I will now turn it over to questions..

[Operator Instructions]. Our first question comes from the line of Joel Mondillo from Sidoti & Company..

I wanted to ask about the IPS segment. A little surprised at how strong the margins came in as well as the volume. First off, could you tell us what the backlog was sequential growth? And then regarding the margins, it sounds like, if I'm reading you correctly in terms of your prepared commentary, that the mix is maybe still a little bit of an issue.

So was the fourth quarter just sort of an anomaly in terms of mix where you did see maybe some larger jobs? But going forward, you're still going to sort of see this dynamic where smaller jobs with IFS are going to weigh on margins.

And in terms of the 7% op margins, where do you see margins going in sort of the first half of the year in 2018?.

Okay. First of all, on backlog, I think we -- we don't give backlog numbers, but we've stated that from the beginning of 2017 to the beginning of 2018, our backlog is up 35%. And it's been up sequentially growing every month and has continued to do so.

Second, the good and the bad, I mean, the good is we can fix this and we'll -- and we're not necessarily hitting on all cylinders. So we look forward to do it better. But where we're at today is IFS, Innovative Flow Solutions, has a business that's really, we call it engineered to order.

The customer just comes to us and says, "We've got this product and we want that product. Will you engineer the process? Will you build us the equipment? Et cetera." And in that business, we make a lot of margin. I mean, it's 40% to 50% gross profit margins. What's happened to that business is offshore is more complex than onshore.

And so offshore has kind of dried up over the last 3 years, really. And so our business has continued to decline in that engineered to order segment. But it's a great business and it's pretty lumpy, but it will come back, and in fact, they have close to a $20 million backlog of ETO business today. But we wanted to expand.

If you remember, we closed down Denver to contract based on the capital projects that we had at the time 2 years ago. And now, we're wanting to enlarge our fabrication footprint. And so IFS has had fabrication space because our ETO business was down.

And so we looked at that and said, "Well, that will also will make that business less lumpy if we can get some normal, just building a modular package systems instead of having to engineer this big process, et cetera." So it doesn't have the engineering component, therefore, it doesn't typically have as much value to the customers, so they go out and get three bids on fabrication work.

So we're competing with other fabricators. So in theory, our margins on that type of business is around 18% to 20%. And on that type of business, because margins are thin, you need to be really good at it.

And so part of our issue to date so far is that IFS is sort of in a learning curve on how to -- their quoting stuff or winning orders, I think they have a $10 million backlog or so of this type of work. But they haven't figured out how to get that 18% to 20% gross margin to the bottom line yet. They're really coming in short of that.

So that's just a learning curve. It's learning the efficiencies from a labor point of view, learning the components that you buy, sort of buy the $5,000 valve for high spec, high sophisticated-type job. You need to be buying a $700 valve for this kind of work. And so to sum up, it's a learning curve and we're going through that.

And that's bringing down our overall margins. Look, I think we've made a really good move here. It's just going to take a little time to iron out the kinks..

Okay. And so when we look at sort of the 3% to 4% op margins in the first 3 quarters of 2017 and then sort of shooting up to 27%.

Considering what you can see sort of in backlog, how do you think that mix translates into sort of op margins? It's really tough for us to tell from our vantage point, so any sort of guidance or insight into that -- into the first couple of quarters or 2018 overall, that'd be helpful..

Yes. So I think I'll be glad to give some guidance there. I really think that we'll stay around where we are on the fourth quarter for the first 2 quarters of next year, Q1 to Q2, as it relates to IPS overall. IPS' other businesses' really doing really, really well by the way.

So really, IFS and a few jobs that maybe some manufacturing type jobs where we bought some business in the past and we still need to cycle through that. But anyway, I think if you look at the fourth quarter and project that out for the first 2 quarters, you might see 1% or 2% improvement.

But in the second half of the year, you should see some significant improvement. Joe, as you remember, our IPS segment used to be a 16% EBITDA business. And so we're long ways for 16% EBITDA business. And we certainly aren't going to get there this year, but we're going to make progress to certainly getting it back to 10% or something like that..

And in terms of those sort of historical levels that you've been at. Just given, considering the entire market overall, where the rig count has sort of gone to and the overall like oil and gas space really spiking when oil was $100, now it's come back. The rig count has sort of plateaued a little bit over the last 4, 5 months.

Considering the competition whether there's more competition or pricing strain or anything like that, do you think the historical levels are achievable to get back to within 2 or 3 years?.

No, I don't.

And so I think you're right, not 100% right based on all your comments, but one of the big missing pieces, both for IFS and the ETO business, and really just a lot of the other IPS-type business, is that we used to have this offshore work, which was that higher margins, higher complexity, higher value, and that offshore work has not come back.

It's -- there's little signs of some activity. And so we're excited about that. But we make more business on that than we do onshore. And then when you talk about onshore, then everything you just said was correct. There's more competitors. There's more -- there's good activity. I don't think we're lacking in activity.

But the margins and things associated with onshore, they're just not as high..

Your next question comes from the line of Matt Duncan from Stephens..

So just first thing, the typical trends question.

Can you walk us through what the monthly sales trend look like in the fourth quarter? And your first quarter is just about put to bed here as well, how does it look so far?.

Yes, no, Matt, we can provide that. Sales per day, I'll just back up, going kind of from October kind of through February, if you will. But sales per business day starting in October were $4.0 million, $4.3 million, $4.8 million.

And then starting at the beginning of the year, January, $4.2 million, which I would note, includes kind of Application Specialties, and then $4.4 million in February..

Okay. So I guess, the obvious question there is you've thrown Application Specialties then. If I look at January and February relative to October and November, it's pretty similar organic revenues, it looks like. Now typically, you would start the year slow.

Have you seen an impact from weather in January and February? It's obviously been a stronger bite from winter this year than last. Just curious if that's causing any issues.

And then how does March feel like it's tracking? I know you obviously have a lot of the month left with the last week being the biggest last day being the biggest, but how does it feel like it's tracking?.

Yes. No, just in terms of your weather comment. I mean, absolutely, I guess, we're getting more diverse geographically. But still, the bulk of where we're at is 1/3 of our business or so is still on kind of Gulf Coast region. And so we're not necessarily impacted by the weather as much, if you will..

With the exception of Canada. And this is just our typical slow time..

Slow time, yes. In terms of your comment regarding March. It's hard to say. Once again, Matt, I mean, you know this and everyone in the call knows this. There's a fair and large amount of business we book that call it that last week of any month, yet alone, at the end of the quarter. So kind of hard to give any full comments around March. So ....

Yes, totally understand. On the IPS business, the sequential increase, as you've seen, the last two quarters, in revenue have been pretty substantial, right? Up 15% 3Q versus 2Q; up 17% 4Q versus 3Q.

Is there anything we need to be thinking about in terms of timing of shipments? Or would you expect to continue to see a sequential build in that segment given what you're seeing in the backlog there?.

Yes. No, once again, we would expect to continue to see, as David said earlier, the growth in the top line given that the backlog has sequentially just really grown quarter-over-quarter and month-over-month. And so we expect that.

The only other comment I'd add to it, to the conversation David and Joe were having is that's exactly the leverage we're also getting in that business. Gross margins have been a little bit, if you will, disappointed, as we said in the segment, and they've kind of really frankly been more stable.

So what we're getting the benefit of is that sales growth and that sequential sales growth driven from our backlog..

Yes. All right, makes sense. David, just big picture. You always target 10% revenue growth organically and 10% through M&A. Do you feel like the environment is there in 2018 to achieve the organic side? Obviously, the timing on acquisitions can move that around. And maybe, Kent, if you could talk about the -- what the M&A pipeline's looking like..

Yes, I'm pretty excited about organic and inorganic growth. And we had always talked about 10 and 10. That seems pretty lofty on the organic side. The inorganic is probably easier to do. I feel good. I think our business planning processes and things that people submitted gives us a really good shot at the 10%..

Okay. So yes, I mean I know you said in the press release....

Yes, no, and I'm basing that on their forecast from their sales spend and what they think they're going to do, so..

Okay. So yes, I mean, I would think, based on the comment in the press release, that you're expecting organic revenue growth to accelerate from the 7 you did last year. That kind of points us high single, low double digits. The Service Centers business, I would think, grows a little slower.

But it sounds like IPS, you're going to continue to see very healthy growth in that business.

Is that predominantly we're starting to see better completions on the upstream side, which I know tends to drive [indiscernible] battery construction and you get a lot of business there? What other drivers are you seeing to that IPS business?.

We're seeing a lot of large midstream projects. And so we kind of burn through a lot of pump backlog, the API type backlog last year. And so we've seen a build up of that and we've seen a lot of activity there. So a lot of our health manufacturing is getting -- their backlog's bigger than they've had for a long time..

All right. And then last thing, just on the Application Specialties acquisition. I want to say that was around $37 million of revenue or $3 million of EBITDA.

Are those numbers right, Kent? Do you expect that business to grow this year? And how much do you think it can contribute in terms of earnings accretion this year?.

Yes. No, I mean, your numbers are correct kind of when we announced the transaction. $37 million and call it $2.9 million in EBITDA. We expect that business to grow. They have some counter cyclical markets that are -- that have positive trends, some in the transportation space.

And so we look to and welcome the Application Specialties team as part of DXP in growing that business. In terms of the accretion, yes, if we were to kind of get some ranges, if you will. There's new tax reforms, so once again, it complicates things. But call it $0.03 to $0.05 per share. It is fully in line with what we probably would expect this year..

Your next question comes from Steve Barger from KeyBanc Capital Markets..

This is Ryan on for Steve. Yes, inflation's been a hot topic recently, given 2 32. I imagine as a distributor, you'll pass along any price increases that you experienced to the customer.

Am I thinking about that right? And can you maybe talk about the magnitude of price increases you might receive related to that? And do you expect that to have any impact on demand or capital budget decisions from your customers?.

So I think our customers mostly are expecting price increases. We haven't had across the board price increases for a long time. We're pretty much getting the 2% to 5% type price increases and they're coming from everybody.

So the only exception of that, and it's always a battle for the Supply Chain Services group, they have contractual pricing and they get the opportunity to raise it, but they don't get the opportunity to raise it right away. And so they suffer a little bit, and I think that's what you saw in 2017 when their gross profit margins went down.

What was that? 60 basis points or so. So but -- and then now, we've got carriers coming and you've got some other issues. When you think of IPS, you have structural steel in the basis. The good news there is that the base needs only 10% or 15% of the job, so it's not a killer.

But we expect steel to go up and we expect oil and gas producers nothing like that. So there's some little issues out there. Nothing catastrophic. But at the same time, we have a market that's a lot more conducive for the seller than it is the buyer, where it's kind of been much more a buyer's market than a seller's market.

So as the economy improves and people start running out of capacity, then they have a tendency to be braver on what they sell things for..

Okay. And then my next question.

Can you maybe give a little bit more color on what you're our experiencing it the oil and gas market year-to-date? And particularly, what are you seeing as it relates to well completion activity? Are you still hearing positive commentary from your customers in regard to that?.

Yes. I mean, the activity, what they're buying from us is good. We're not hearing any -- nobody's thinking oil prices are going back to 40. I mean, so at 60, they're really happy. I think when we go back to probably where [indiscernible] thought the price of oil was going to land in 60. Unfortunately, it went much, much lower than that.

But -- so I think probably the world' is happy at 60, and so they're forging ahead..

Okay. And then just a couple of more for me. Last quarter, I believe, you talked about having trouble pushing price in your Canadian Safety Service business. And you discussed something around a mid-single-digit price increase.

Can you give us an update to where you're at with that? Did you guys push through the price increase, or is it -- do you still have some legs to go there?.

We're pushing through price increases. It's not quite as easy as I thought it would be in the sense that we, on Safety Services, your asset that you're winning is people. So you expect the paramedic as an example.

If we're paying that paramedic, let's say, $30 an hour and the customer's not willing to pay $30 to $60 or $100 an hour, we need to make money, then really, there's no other choice, because you can't pay the paramedic $30 an hour, so now, you got to pay him $25.

Well, there's -- in Canada, there's this phenomenon going on where the old companies are still struggling a bit up there. They're not as in fat, dumb and happy as we are down here in the United States or the Permian basin. And so they're still wanting to push back pretty hard. And then at the same time, there's e labor shortage in Canada.

Normally, if times are good, well then you have higher unemployment. And so there's lots of people looking for work and you can pay them less. So -- but we have the reverse. We have pretty high employment rates, and we have the oil companies still trying to push back. So it's a struggle. But at the same time, we're the market leader in Canada.

We're the only ones that they need 20 people. We're probably one of the few companies out there that can give them 20 people. So we're typically -- where we run into issues typically is just the little mom-and-pop that lives in some far-off place in Canada and happens to be pretty close where they need somebody.

But they're normally only able to provide 1 or 2 people. So you got to be careful. I'm giving you way too much detail. But the point is, is that it's been a little hard to push the price increase through than I thought..

Appreciate the color. And then one last housekeeping question for me. And sorry if I missed this.

But Application Specialties, that will be reported in the Service Centers segment, right?.

Yes. That's what I'd assume..

Your next question comes from Joe Mondillo from Sidoti & Company..

Just a few follow-up questions. First, on the tax rate. I thought it might've been -- your rate would've been a little lower just given sort of normalized historically. I think the rate was around 36%, 37%. So is there -- do you think there's any chance of seeing that come lower, or....

Joe, so the federal. You get to 21%. And then you got to add in state. And so call it another, call it 3% to 4% or so. Then that kind of starts to get you closer to the 28% to 30%, which I gave guidance. And Then you look, there's a lot of moving pieces. But then you look at the production tax credit, which we used to benefit from, will go away.

And so Matt, if we're going to give guidance in terms of the tax rate in this scenario, which we normally don't give guidance, the 28% to 30% seem appropriate. But there's a lot of moving pieces to this as you know, and so that's kind of what I would say..

You will go through that exercise pretty thoroughly in the first quarter. And the first quarter kind of sets the kind of the standard rate for the year. So I guess, we'll know the true answer [indiscernible]..

Okay, that's fine..

And once again, not to give the details, but historically, on a federal level, we've been around 35%, and then once again....

And Canada's higher now, so....

Okay, that's fine. I wanted to ask on the Service Centers margin. They were sort of all over the place in 2017 on a quarter-to-quarter basis.

Could you help me understand or what you're thinking in terms of seasonality on the margin on a quarter-to-quarter basis for the Service Centers segment?.

Yes, Joe, once again, you got to keep in mind, there is some seasonality in Service Centers because you have the Canadian Safety Services business, which is in Service Centers. So Q4, kind of Q1, if you will, if you choose 2 quarters, tend to be the stronger quarters from a Safety Service perspective.

And then, you can kind of get into break up and you kind of -- that impacts our Service Centers segment..

Okay.

So Q1, Q4 a little stronger than Q2, Q3?.

Yes. Now I know if you look at this year, it doesn't 100% look like that? They -- if you remember our comments, I think in kind of Q2, we were surprised that, that performance, meaning that I think they had a longer winter basically. And so some of it carried over into Q2.

And so Service Centers kind of experienced a spike there, if you will, in operating income..

Okay.

And when you talk about the IPS backlog improving month-to-month, was that through the end of 2017? Or is that -- has that continued through that month-to-month improvement, has that continued into February? And have you experienced -- have you noticed any sort of slowing of that sequential growth maybe with the rig count sort of plateauing, oil prices sort of hanging out where they are?.

No. Yes and no. Yes, it's continued into '18, and no, we haven't seen any slowing..

Okay. And then last one for me. Just the corporate expense line.

I imagine that -- do you think that continues -- will that grow at the rate of revenue? Or how do you look at that sort of $11 million a little bubble of $11 million in terms of a run rate going forward?.

So I don't know what $11 million you're talking about is. But the SG&A will grow -- well, the percentage of SG&A to sales should continue to come down incrementally because there's leverage in the business or there's certain parts of our business that are fixed. And so there's -- it's going to come down as a percentage. The dollars will go up.

The dollars in the first quarter, my historical experience since I've been around a long, long time is that payroll taxes, maybe more prepaid insurance or there's some things that are a little heavy in the first quarter. And so we might err on the pretty conservative side on SG&A in this first quarter, but the percentage should come down..

All right. I was referring to the corporate expense, which is the expenses outside of the three segments. You did $11.1 million in the fourth..

Yes, yes. No, no, I know what you're referring to, Joe. And you're right into David's comment, I mean, just to tag on to him. Specifically, as it pertains to that corporate line, you will see some growth in that line. Will it grow in line with sales? Probably not.

But it will grow as we kind of, once again, from a corporate perspective, love to support the operations. I mean, once again, at peak, we're a $1.5 billion company and we took some pretty extreme measures in the downturn.

And so as we kind of return to normal CF care, if you will, we're going to need to invest some in corporate to support our sales and operations. But it won't be in excess of what we're growing in the top line..

And I'm showing no other questions. Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation, and you may now disconnect..

Thank you..

Thank you..