Ladies and gentlemen, thank you for standing by, and welcome to the DXP Enterprises third-quarter fiscal 2019 conference call. [Operator Instructions] I would now like to hand your conference over to your speaker today, Kent Yee. Please go ahead, sir..

Thank you, Marcela. Thank you. This is Kent Yee, and welcome to DXP's Q3 2019 conference call to discuss our results for the third quarter ended September 30, 2019. Joining me today is our chairman and CEO, David Little. Before we get started, I want to remind you that today's call is being webcast and recorded and includes forward-looking statements.

Actual results may differ materially from those contemplated by these forward-looking statements. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis are contained in our SEC filings. DXP assumes o obligation to update that information as a result of new information or future events.

During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings press release. The press release and an accompanying investor presentation are now available on our website at ir.dxpe.com.

I will now turn the call over to David to provide his thoughts and a summary of the third-quarter financial results..

Thanks, Keith, Kent. Are you Keith today or Kent? Sorry about that. Anyway, thanks to everyone on our 2019 third-quarter conference call. Kent will take you through the key financial details after my remarks. After our prepared comments, we will open up for Q&A.

It is my privilege to share DXP's third-quarter results with you on behalf of over 2,700 DXPeople. Congratulations to all our stakeholders and a special thanks to you, our DxPeople you can trust. We are pleased to announce strong third-quarter results with sales, operating income and earnings per share all up over the prior year.

This is a great way to start the second half of 2019. We continue to deal with the ups and downs of our economic environment, as well as our key end market indicators are showing signs of slowing.

We remain focused on servicing our customers and providing products and services that help them save money, consolidate their MRO spend, manage their inventory, provide solutions to solve their evolving needs. Being customer-driven and growing sales profitably is our goal.

And in fiscal 2019, we have executed on this goal by; one, expanding our product offering within PumpWorks; starting a greenfield start-up in Pittsburgh; expanding our aftermarket service and repair business; implementing software upgrades for one of our largest logistics customers; investigating in machine, machinery and equipment to increase reduction of rotating equipment; consolidating and expanding various service center facilities; enlarging our vendor-managed inventory programs; and implementing new sites within supply chain services and diversified industries outside of oil and gas.

Additionally, we have invested in our DXPeople with training, upgraded computer tools and a consolidated corporate facility to bring everyone together. Our focus over the last 12 months has been on organic growth, increased gross -- and the increasing gross profit margins increased productivity.

Our execution has resulted in both top line and bottom line organic growth. That said, our growth has not been as large as we would like, so we expect to add some acquisitions to our results going forward.

We are excited about the future and delivering a differentiated customer experience, creating an engaging winning culture for our DXPeople, investing in our business to strengthen our core capabilities and drive long-term growth.

Year to date through September 30, total sales were up 7.4%, operating income is up 23.7%, total sales for the third quarter grew 6.2% to $327.2 million, and we were able to deliver 54% diluted earnings-per-share growth over the prior-year quarter.

Sales growth year to date has been driven by supply chain services, up 18.5% compared to the same nine-month period in 2018. We continue to roll out new sites and add in-market diversification to DXP. Innovative pumping solutions segment continues to perform and is up 8.9% on a nine-month comparable basis.

This continues to provide us considerable growth, given the strong sales performance across IPS last year. Moving to our third-quarter results. Total DXP revenue of $327.2 million for the third quarter of 2019 was a 6.2% increase year over year.

In terms of sales increases by business segment, I am pleased with the contribution from all three segments, with the greatest increase year over year coming from supply chain services, which grew 17.6% to $51.3 million.

Innovative pumping solutions sales increased 7.2% year over year to $82.2 million, while service centers sales increased 3.2% year over year to $193.7 million. Overall, this is similar to what we experienced in the second quarter, and continued growth is great to see. Supply chain's growth reflects the addition of new customer sites.

They have implemented 14-plus new sites since Q3 of last year, including customers and medical device, aerospace and food and beverage markets.

Innovative pumping solutions sales increase continues to be driven by our modular packaged equipment for both CTO and ETO jobs in the upstream, midstream, refinery, chemical, petrochemical and power customers.

The service center year-over-year sales growth was primarily driven by increases in our rotating equipment, metal working and industrial supplies product divisions. Within service centers, we saw particular year-over-year sales strength in the Ohio River Valley, North Texas and North Central regions.

DXP overall gross profit margins for the third quarter were 28.3%, a 104-basis-point improvement over 2018 and a sequential increase of 73 basis points. SG&A for the second quarter increased $3.7 million versus Q3 of 2018. SG&A as a percentage of sales declined going from 21.8% in Q3 of '18 to 21.7% in Q3 of '19.

SG&A continues to reflect our investment in our customers, people and our organization. As always, it is my privilege to share DXP's financial results on behalf of these DXPeople. DXP's overall operating income margin was 6.6% or $21.7 million, which included corporate expenses and amortization.

This reflects a 118-basis-point improvement in margins over Q3 of 2018. That being said, we still feel there's opportunity in our operations to be more efficient. Service centers operating income margins were 12.9%. IPS operating income margins were 12.3%, and supply chain services operating income margin was 6.1%.

Given though that supply chain services investment in new site implementations, operating income margins will improve going forward. Overall, DXP produced EBITDA of $28.2 million versus $23.2 million in 2018. This turned into a year-over-year increase of $5 million or 21.4% increase.

EBITDA as a percent of sales was 8.6%, up 108 basis points versus Q3 of '18 and essentially flat with Q2 of 2019. I am pleased by our performance in the third quarter. We still have substantial work to do to achieve our goals, but I am confident that the team will continue to execute.

We are growing sales in excess of market and expect that into the near future. We expect driving strong SG&A leverage, managing working capital and generating free cash flow. If organic growth slows, then free cash flow will grow, and we will take advantage of the economy to grow profitably through acquisitions.

With that, I will now turn it back over to Kent to review the financials in more detail..

strong sales growth within supply chain services, gross margin expansion and improvement within innovative pumping solutions. Additionally, we've had strategic investments to drive organic growth and improvement in our operations.

For the nine-month period ended September 30, 2019, total sales grew 7.4% to $971.7 million, and operating income is up 23.7% to $59.4 million. Diluted earnings per share is up 38.4% to $1.84 per share for the nine-month period.

DXP continues to perform as we have moved into the second half of the year and look to close out fiscal-year 2019 with the same momentum. Total sales for the third quarter increased 6.2% year over year to $327.2 million. Third-quarter sales growth was supported by DXP's three business segments.

Third quarter sales growth was led by supply chain services, growing 17.6% year over year to $51.3 million, followed by innovative pumping solutions growing 7.2% year-over-year to $82.2 million, and service centers growing 3.2% to $193.7 million.

Average daily sales for the third quarter were $5.1 million per day versus $4.9 million per day in Q3 2018. The sales growth in supply chain services is the result of adding 14 new customer sites within the food and beverage, aerospace, medical device and oil and gas industries, which has been occurring since Q3 of 2018.

We should start to see sales fully ramping at these sites as we close out fiscal 2019 and move into fiscal-year 2020.

As David mentioned, the rollout of new sites does impact operating income margins over the short term due to implementation costs, including inventory burn-off and the initial hiring of on-site personnel without the corresponding revenue.

Additionally, during the third quarter, supply chain services was impacted by costs associated with implementing a new warehouse management package on behalf of one of their customers. Going forward, we expect our operating income margins to improve.

Innovative pumping solutions sales growth continues to include both configured-to-order and engineered-to-order-related projects, serving customers in the upstream, midstream, refinery, chemical and power markets.

Regions within our service centers segment which experienced meaningful sales growth in the third quarter include the Ohio River Valley, North Texas and North Central regions. Turning to our gross margins. DXP's total gross margins were 28.3%, a 104-basis-point improvement over Q3 2018.

The improvement in DXP's total gross margins reflects a 77-basis-point improvement in service centers and a 304-basis-point improvement within our IPS business segment on a year-over-year basis.

In terms of operating income, combined all three business segments improved by 91 basis points in year-over-year business segment operating income margins versus Q3 2018. Total DXP operating income increased 118 basis points versus Q3 2018 to $21.7 million.

Innovative pumping solutions improved operating income margins 85 basis points to $10.1 million, while service centers improved operating income margins 197 basis points to $25.1 million. Supply chain services decreased 285 basis points year over year.

Again, this was driven by the implementation of new SCS sites, as we mentioned during our Q1 and Q2 conference calls, as well as absorbing some of the costs associated with implementing new warehouse package during the quarter. Turning to EBITDA. EBITDA was $28.2 million in Q3, up 21.4% from Q3 2018.

Year over year EBITDA margins are up 108 basis points. For the nine months, this translated into 1.7 times operating leverage, and for the quarter, 3.5 times operating leverage.

In terms of tax, our effective tax rate was lower this quarter, primarily due to the impact of a future statutory rate change from 12% to 8% in Alberta, Canada and the increased benefit from R&D tax credits that DXP has previously received in the past. In terms of our EPS, our net income for Q3 2019 was $13.1 million.

This is up $4.7 million or 56.1% versus Q3 2018. Our earnings per diluted share for Q3 2019 was $0.71 versus $0.46 in Q3 2018. Turning to the balance sheet. In terms of working capital, our working capital was $250.5 million at the end of the quarter. This amounted to 19.5% of our last 12 month sales.

This is above our historical average but below targeted ranges, albeit at the higher end. The main drivers of the increase in working capital during Q3 included a $3.9 million increase in inventory, accompanied by a 3-day decrease in our DPO days or a $6.1 million reduction in accounts payable.

We recently invested in a new procure-to-pay platform, Coupa, and we are seeing the impact of this investment in managing our financial relationship with our vendors.

While it helped us get more in line with paying our vendors over the short term, we will be in a better position to strategically manage accounts payable as we move forward and take advantage of purchasing data and trends in the future. Inventory is up $15.4 million from Q4. And inventory days on hand, excuse me, have gone from 47 to 52 days.

As we adjust for current market dynamics, we expect inventory to come down and, thus, contributing to improvements in working capital. That said, part of the increase reflects DXP carrying higher levels to support our revenue growth and investment we expect within IPS. We achieved inventory turns of seven times during Q3.

In terms of cash, we had $28.6 million in cash on the balance sheet at September 30. In terms of CapEx in the third quarter was $5.7 million or 1.7% of third-quarter sales. Compared to the third quarter of 2018, CapEx dollars are up $3.5 million.

CapEx during the quarter reflects investments made within our facilities, including our corporate office, which is largely completed, and the corporate support team is in one facility together. Fabrication facilities in Houston and other service center locations also had investments.

We also are continuing to make investments in software to enhance our corporate support operations and provide our people with tools to be more efficient. Fiscal 2019 has been a year where we have focused on growth CapEx versus just maintenance CapEx. Of the $14.2 million year-to-date CapEx, 75% or $11 million has been growth-related.

Return on invested capital, or ROIC, at the end of the third quarter was 25%. During Q3, ROIC was impacted by the $9 million increase in working capital from Q2 to Q3. In terms of our capital structure, at September 30, our fixed charge coverage ratio and secured leverage ratio was 3.6:1 and 2.0:1, respectively.

Total debt outstanding at September 30 was $250 million. In conclusion, we look forward to finishing the year strong, executing on our strategy, growing sales both organically and through acquisitions and driving gross and EBITDA margins. Momentum hasn't been good, and we look forward to finishing the year strong.

I will now turn the call over for questions..

[Operator instructions] Your first question comes from the line of Blake Hirschman from Stephens. Your line is open..

That's close enough. Good morning, guys. To start, I guess, let's look at the service centers. The margins there were really good. I think they were the highest they've been in like five or six years.

Can you talk a little bit more about what's kind of driving that, if there was anything, I don't know, any kind of like a onetime gain in the quarter and kind of the sustainability of those margins going forward?.

Sure. As you know, our goal was to get margins up gross margins up, and at the same time, keep expenses down even though we are under pressure and have people raises that haven't had them in the past. And so expenses are up just a little bit, but not to the extent that sales are and then gross -- well, actually, expenses are down, I'm sorry.

I was looking at the wrong column. The $34 million to $33 million, and then margins were up. There was nothing unusual about that. There's nothing unusual about our service center business. It's just, it's localized business, taking care of the customers' needs on a very quick, fast and convenient way. And so that business is held up nicely.

It's not growing off the chart, but it's holding up really, really nice. And so we're really proud of those guys, and they've done a good job of managing expenses and inching gross profit margins up. So we don't expect that, have they pushed the envelope? I guess, maybe they have.

If things start getting a little more competitive out there in terms of sales being more of a buyer's market than a seller's market, so to speak, so we're not sure about that, but if that happens, and that would cause some margin pressure. But in general, there's nothing unusual there, and we would hope to sustain that..

Yes, Blake, the only thing I'd add on there, there wasn't anything necessarily unusual in the quarter outside of, the strength in our business this year from a product division perspective has been around rotating equipment, as well as we've had some improvement in margins in Canada, and so I think those are contributing this quarter to kind of the upside.

But the larger benefit in service centers this quarter came from an improvement in gross margins. We don't disclose segment gross margins, but the larger benefit came from an improvement in gross margins within the service centers, so….

Got it. That's encouraging to hear. And then shifting over to IPS. Apologies if I missed it, but did you touch on trends in the backlog there? And then a follow-up to that. If you could talk about the margins that you're seeing in backlog versus kind of the 12, 12.5 that we saw in the quarter..

Yes. No, just in terms of IPS, we did see a deceleration in the trends in the backlog, Blake, is the way I'd put it. For the first time, probably on a year-over-year basis, we saw a deceleration. I think when we talk about it, we typically talk about the percent growth. And so what I would say is we, once again, we saw a deceleration there.

That said, when we talk to the segment leaders in IPS, we feel like we'll continue to finish up the year strong, and they're focused on getting bookings, if you will, going into 2020. We'll have a better view of that, obviously, by the end of Q4.

Once again, the average age of that backlog can vary anywhere between six months as long as 12 to 15 months. And so, but we did see, for the first time, a deceleration in that trend. That said, we're off a strong year, as you know. The stack is pretty high.

We grew sales 40-plus percent last year, and we're up another high single digits, 7% to 8% this year. So deceleration is not necessarily a cause for concern at this point. It's more about kind of what we have going into 2020..

Your next question comes from the line of Steve Barger from KeyBanc Capital. Your line is open..

Hi. Good morning, guys. This is actually Ken Newman on for Steve. I just wanted to hit back on the service center margin. It was good to hear that the business is performing well. And I understand the strong, nothing unusual in the gross margin performance.

But maybe a little bit more color as to maybe price cost in that business or any impacts from mix that you saw in the quarter relative to what you've seen in the past 12 months..

Once again, Ken, I would say our rotating equipment division, which is, we have the key five product divisions, tends to be one of our more profitable product divisions. And so that continues to perform. That's where DXP has gotten a good amount of its growth this year. And then the second item is Canada.

Canada, last year, once again, if you remember the dialogue, they were having challenges both from a gross and operating income margin perspective. And so a lot of that's kind of, for lack of better word, kind of, we're working off that trough. And so I think kind of if you're looking at it from a last 12-month basis, that's what you're seeing.

And an improvement there is kind of a benefit of the mix of rotating equipment being one of our larger, higher-margin product divisions, and then Canada, improvement in Canada..

And maybe you're also asking about tariffs and things like that. That's not affected us in any way. The price increases we're seeing, we're glad to see them, quite frankly, and they're in that 2% to 3% range. And so we were able to pass that on. Everybody understands that. We haven't had some increases in a while.

So I don't, we don't see anything negative there. And we don't, we certainly don't see any deflation. That's not in our, that's not the kind of product we're buying. So we're in good shape..

I want to touch on free cash flow, the generation. It looks like working cap was a little bit more of a headwind in the quarter relative to where you were in sales and where the margins were.

So just any kind of commentary or just how we should think about free cash generation as we think about the year wrapping up here in 4Q and how you're thinking about working capital improvements going forward..

Yes. No, absolutely. And fair comment there, hey. Cash flow from operations this quarter is down on a year-over-year basis. Part of that has just been, purely been driven by, during this time last year, frankly, we started a new procure-to-pay platform, Coupa, to manage our relationship with our vendors on a more efficient basis.

And we're starting to see the benefit of that. Meaning, A, in some instances with key suppliers, we were stretching them unduly, is the way I'll put it. Obviously, we're mindful of the impacts of working capital and manage that favorable to us, as well as them. And so what you see there is our DPO days this quarter going down by three days.

So that was a $6 million impact there alone. And then the other thing you see in our balance sheet there is inventory continues to pick up, which really reflects the investments we made within some of the project side of our business, as well as just trying to meet customer demands during the year, if you will.

And so we're going to look, continue to look at that. 19.5% is at the higher end. We prefer kind of, I'll call it, in the 16% to 18% range. And we typically are peaking in Q2 in terms of working capital as a percent of LTM sales and then drive it down as we go into Q3 and Q4. And this year, we're still kind of ticking up.

That said, what I will say is, today, for example, we are creating free cash flow. We have $51 million of cash on the balance sheet just from quarter end. And so Q4 will be, typically, as it normally is, is our heavy free cash flow-generation quarter.

And so not necessarily concerns, but there's areas we're focused on, and we expect to kind of drive, if you will, that free cash flow generation as we move forward. The last comment, and then I'll be quiet, is a fair amount of our CapEx this year has been growth-related versus maintenance-related.

Once again, 75% of the $14 million we spent year to date has been growth-related, and so we have the ability to control that. And as we go into fiscal-year 2020 with the backdrop we have today, we're just -- we'll have those mindful thoughts on top of us, so --.

That's really helpful color. I appreciate that. Last question for me before I jump back in the queue, you talked a little bit earlier in the call just about the M&A pipeline and priorities for capital deployment into the pipeline.

Can you just talk about where multiples are for targets right now? How robust is that pipeline? And any color on how large a deal you'd be willing to entertain?.

The pipeline, we're always working and going. And as David discussed, hey, we're working to close some transactions here, is the way I'll put it by year-end. In terms of your question around multiples, hey, I think multiples are always -- and valuation is always a challenging discussion, but they're fair.

And we continue to be able to get them in the price that's appropriate, which for us, is anywhere between, I'll call it, five to seven times. And so that's a fair value for the size of businesses we look at, and we're able to get those opportunities. And so we don't suffer for a lack of opportunities.

We spend our time being sure we have the right fit both culturally, product and otherwise, and financially, so --.

Perfect. Thanks for the color..

Your next question comes from the line of Blake Hirschman from Stephens Inc. Your line is open..

Yes. Just a quick clarification on some of the backlog commentary. I think you said deceleration. I just wanted to make sure.

Does that mean that that growth is at a lower rate, and it's still up? Or that the backlog is slightly down?.

Slightly down, Blake..

Got it. And I know you guys don't want give 2020 guidance by any means. But if you kind of just look at what peers on both the industrial energy side, I mean, it seems like just end market-wise, not specifically for you guys, that the industrial side is kind of shaping up for flat to slightly down and maybe a little bit worse on the energy side.

I mean, just as a general kind of lay of the land, is that consistent with what you guys see and think about 2020 as we sit now?.

I mean, Blake, hey, I think yes, that's somewhat consistent. Albeit, I would say, hey, you're correct, we don't give guidance. But when we look at all the indicators that we study, the way I'd put it is kind of we feel good from the service center perspective. We feel good from the supply chain services perspective. We feel good about IPS.

But we're just focused on that project business because it's tied to those capex budgets, and we don't have a view right now, right? A lot of those guys are going into their budgeting and planning season, and we don't have a view versus we can look at some of our other indicators and what kind of JJ has been doing in terms of winning new site implementations on our supply chain services business, and we can feel comfortable going into 2020.

I think IPS, we just have to wait a little bit longer to kind of get a little more clarity..

Got it.

As a housekeeping one, can we get the monthly sales per day throughout the quarter?.

Absolutely. I was waiting for that, Blake. So I'll just walk through the Q3 numbers and then kind of where we kind of, preliminarily at this point kind of looks like we're at for October. July was $5 million. August was $4.9 million. September was $5.4 million for a Q3 average of $5.1 million. And then October was at $4.7 million.

Keep in mind, if you look at that on a year-over-year basis, that would suggest 2018, we're a little bit at $4.6 million. So I think the trend is very similar in terms of what you're doing. So that would just be my only additional point of color so….

Yes. My point would be the first month after our quarter is typically a little lighter, and it grows. Even though October had a lot of days in it, you would think it would be stellar, but, but it wasn't. So we'll, we, but we're not that concerned about that..

Got it. Lastly, then I'll stop, you guys announced the new pump, the PWA-SL, I think I got that right, back in August or September, I believe.

Can you kind of talk about anything you can share on the addressable market, the opportunity over time, penetration and kind of what sets that product apart from the others that are out there?.

Okay. Blake, thanks. Sure, I'll answer that. We created a pump that, it's in the ANSI field, but it has, it doesn't have a seal, and so that's why it's called our PWA. It's PumpWorks ANSI Sealless. SL, sealless. And so what the sealless pump does is eliminates the need for a metallic or a metallic pump having a seal. So therefore, it's very likely.

I'm not going to say, I mean, people would say 100%, but I'm going to say 99% so I don't get sued from leaking. So it's really an environmental-friendly pump, and it competes with, cost-wise, a pump that has a seal. So we're pretty excited about that.

It's really a dynamic product, and it's something very new into the market, and we feel good about that. That said, like any new product going into industrial and oil and gas field changes is some work. So we've quoted about 300 of these things. We've gotten close to 100 orders for them. It's, we feel like it's growing.

And, but it's not moving DXP's needle, to be quite honest, from that point of view, from a revenue-generation deal. But it is a really needed product, and it creates differentiation with the PumpWorks brand, and so we're excited about that.

PumpWORKS also has had some success with a significant account, a pretty hard one to crack, in terms of Chevron up in Alaska. It was a significant win. They're using that pump, and a lot of our midstream customers are pretty interested in it. There's also some other things.

Our custom pump deal because we have a, what's interesting about PumpWorks, to describe it in a way that I think is meaningful that, our competition has a worldly supply channel designed to make everything cheap. And we have a United States supply channel designed to make everything passed.

So you can imagine if you're getting your impeller from Korea and your castings from China and etc. and you're trying to put all that together in the United States, that there's just a challenge of speed and being able to pull all that together versus our castings and manufacturing, etc., is all done in the United States.

So we're not the cheapest, but we're the fastest. And that's worked well for us, and we're pretty proud of that..

[Operator instructions] Your next question comes from the line of Joe Mondillo from Sidoti & Company..

I just wanted to understand the, how much of a contribution, the better performance that you saw in Canada as a service center part of the business was.

Could you frame it like in terms of a year-over-year comp, how much better does that part of the business perform at the service centers compared to last year?.

Yes. Joe, I'd have to get that for you. I don't have it directly in front of me, but I can follow-up with you. But what I know is from a revenue perspective, they were, last year, once again, if you remember the dialogue, they were down almost near double digits this year. They're only down 2.6%, 3% on a year-over-year basis.

So they're working off that trough and kind of bounced back. They also have had some improvement in their margins as they've worked through 2019. Once again, they were [indiscernible]..

So I'll give you a little more color. First of all, Natpro is our rotating equipment company in Canada, and they really turned the corner three years ago, really, really nice way to make money and have good margins above 30% and make net income margins of 10 or so where we'd like for them to be, and they've been doing it.

It was our safety services company that had a poor management. We fired that management. There are, we've got new people in there, and they have, they're already making great strides by gross profit margins. If you're not going to find sales, I guess, that would help Joe.

But gross profit margins have gone from 20% to 40%, and they're making some nice 10% operating income margins. And so that's been a really great and nice turnaround. They still have a segment, IPS, which is medical services, paramedics.

And again, we had some management that wasn't doing things very ethically, and so we're still in the process of turning that around. So they still have some upside potential, and so we're excited about that. And the same team is working on that, but it's not where it needs to be. And -- but it will get there. That said, Canada has a lot of headwinds.

All -- everything I talked about -- well, half of Natpro is -- was not quite half. Half of it's on the East Coast of Canada. So that's more of the water business, more of the municipal business, and that's pretty solid and doing really, really well. And then the others, Alberta to Saskatchewan and those areas, certainly, that's oil and gas.

And then you have Vancouver on the West Coast, which is food and beverage and fisheries and things like that.

So it's -- they got a mixed deal, but they've got pretty strong headwinds in terms of oil and gas because the customers there are not only -- the United States customers are saying, We're going to live within our cash flow and not borrow a bunch of money.

Canadian people are saying, "Hey, we're going to buy back our stock and pay down debt." So their budgets are tight, but we have a dominant position up there, and so we do -- we get way more than our share. And so they're doing a really, really nice job of doing pretty well in a pretty tough oil and gas climate..

Yes. Joe, just to give you a sense of the improvement of their operating income margins. It's a little over 300 basis points in the Canadian Safety Services business. And so hopefully, that gives you a little bit of color just in terms of their improvement from operating income. And that's on a year-over-year basis, comparing Q3 2018 versus Q3 2019..

OK. Great. Yes. Thanks. And then it certainly sounds like mix was a pretty good positive for service center. You called out rotating equipment has been quite strong.

Could you just talk about the markets that are driving the rotating equipment demand and how that's sort of trending into the fourth quarter?.

Once again, I like to think of it in terms of our regions. And so once again, the Ohio River Valley, North Texas to North Central regions, and those literally are regions within the United States. But the Ohio River Valley, that's kind of the Rust Belt. So there's some chemical there..

Steel..

Steel, those type of markets. North Texas, that's some midstream oil and gas. And then North Central as well has been a strong region, which is more kind of food and beverage, kind of -- and more industrial side of things, but -- so --.

Okay. And then so if we do see a slowing as it seems like into the fourth quarter, just trying to think of -- I mean, the 12.9% margin that you saw in the third quarter, I think it was second highest in company history behind a quarter back in 2013 when we were seeing a huge oil and gas shale boom.

Has anything structurally changed since then? And how -- I'm just still trying to figure out how sustainable 13% up margin that service center are..

I mean, Joe, hey, your facts are correct. I'm not going to argue with your facts. I think typically, what we said, retail folks is our target, our goal for our service centers is that, call it, that 12% to 13% operating income. And they're kind of, they're on the top of that, right? Mix definitely always impacts us of what's going on out there.

And so that could move on us, or we could have one strong quarter where metalworking is a little bit higher, which tends to be from operating income, a little bit lower-margin business. There's a lot of factors that can feed into it. I think you if you look at year to date, they're at 11.6% versus just kind of the 12.9% in the quarter.

Once again, we don't give guidance, but I think, as long as they're performing in that up 11% to 13% range, that's where we drive those guys toward. We drive them toward improving their gross profit margins, and so we're going to continue to do that. So I don't know if that answers your question, but that gives you a feel of how we think about it..

Okay. No. Yes, that was good. Thanks. Last question, just on the M&A side of things. So you're levered at, I think, around two times debt to EBITDA..

That's correct..

Given where we are in the cycle and the slowing industrial production environment, just curious what your sort of, what sort of your threshold or how high levered up would you want to be given the environment?.

Once again, we've got cash on the balance sheet, Joe. So at the end of the quarter, we had $28.6 million. Today, I've got $50 million worth of cash on the balance sheet. And so once again, we're not going to buy a broken business. We're not going to buy a falling knife.

We're going to buy businesses that perform, but we could probably find businesses in markets that are, for lack of better words, a little bit countercyclical or performing in this environment. And as long as we can get them at the multiples that we think are fair, we're going to pick those guys up.

And so, and that's not going to necessarily increase our leverage once again. We're going to get earnings with that. And with the cash on the balance sheet, it provides us at this point in the cycle an opportunity to be proactive rather than reactive, so….

So I'd like to comment on that since I'm responsible for the equity section. First of all, our debt structure is so entirely different than when we had the bank days, and DXP never made, never missed a principal payment or an interest payment, but we were in technical default. So we've pretty much eliminated all those technical bulk probabilities.

And in doing so, we pay a little higher interest rate than if we were at a bank. So that's a given. But we sleep at night, knowing that we don't have a dumb bank looking over our shoulder. You can tell I like them, but anyway. So debt, our debt structure is what it is, and it's really much more flexible.

Then you take the fact that if things slow down, then working capital comes down, and therefore, we generate a lot of cash flow. And certainly, that's what our competition or what's perceived as our competition. I hate to, I'm going to admit they're our competition. They were in part of our business. Doing so, so we'll generate cash flow.

Then the question then becomes, we, what we have lined up, by the way, is acquisitions that have nothing to do with oil and gas. They're municipal, and they're in other industries that are diversifying us away from oil and gas. In fact, we looked at oil and gas, and it's now under 50% of our business.

And so we want to continue to play in oil and gas because as we know, it's a good market. Eventually, it does cycle, and it gets a little lumpy at times. But -- so if we take our cash, and we don't have dump covenants, we're really in a position to deploy our cash to grow the Company.

We're really a small company, and we need to be a $2 billion, $5 billion company. And so that's -- we're back on that program, and that's what we're going to do..

And then I actually just had one last question. I think the new facility that you're building, I believe it's related to the B27 business, I think.

What is the status of that? And do we still have the old building where we're still seeing some costs related to that?.

Yes. And just a little correction there, Joe, it pertains to our legacy 529 facility in there. They're, call it, 90% moved into the new facility. They have a little bit of their HP-Plus testing and some things kind of still in transition. But we expect by the end of the year, they'll be fully into the new facility. And so that's really the update there.

And that's our fabrication, just to be clear. That's our fabrication facility here in Houston -- or one of them..

Okay. Just to follow up, though, are we seeing still some cost overruns and some --.

Yes, yes, yes, yes. I'm sorry. Yes, a smaller amount, though. Once again, not to get into the nitty gritty just because it involves a third-party landlord, but we are carrying some additional cost temporarily until they get into the facility. But nothing, I would say, notable, but a small amount..

And what about inefficiencies like production-wise because of the trend? Is there anything --.

No, no, no. No, nothing there..

There are no further questions at this time. This concludes today's conference call. You may now disconnect..