Good morning ladies and gentlemen welcome to the DXP Enterprises Incorporated fourth quarter and end of the year results conference call. During today’s presentation all participants are in a listen only mode and following the presentation this conference will be open for the question and answer session. (Operator Instructions) I’d like to turn the conference over to Mr. Mac McConnell, Senior Vice President of Finance. Please go ahead sir.

This is Mac McConnell, CFO of DXP. Good evening and thank you for joining us. Welcome to DXP’s fourth quarter and full year 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. Our fourth quarter press release is available on our website www.DXPE.com. I will begin with a summary of DXP’s fourth quarter 2008 results. David Little will share his thoughts regarding 2008 results and then we will be happy to answer your questions. Sales for the fourth quarter increased 14.7% to $193.6 million from the fourth quarter 2007. Excluding fourth quarter 2008 sales of $18.4 million from businesses acquired in 2007 and 2008 on a same store sales basis, sales for the 2008 fourth quarter increased 3.8% from the 2007 fourth quarter. Sales for supple chain services decreased 4.7% to $37.1 million compared to 2007 fourth quarter. Sales of innovative pumping solutions products decreased 28.7% to 24.3 million. We recorded a $12 million sale of an innovative pumping solutions project in the fourth quarter of 2007 which accounted for the decline in the innovative pumping solution sales. Sales for of the MRO products by our service centers include 35.6% to $132.3 million excluding sales of acquired businesses sales of MRO products by our service centers increased by 16.8% on a same store sales basis. Gross profit for the quarter increased 22.7% from…

Thanks Mac and thanks to all you guys on conference call today. I also want to give a big thanks to our DXP people for the dedication and their accomplishments, our customers who have supported us and believe in our strategy to reduce our total cost of ownership of being experts, our suppliers who make quality products at competitive prices and our shareholders who have supported our top line growth of 65.76%, bottom line growth of 49.24%, and EBITDA growth of 59.69%. Year 2008 had its disappointments as Precision and Vertex Distribution did not perform as we have expected yet we still had a good year. Okay, 2008 was great. In fact, since 2002 every year has been significantly better than the previous year but what is our plan for 2009? We recognize the 2009 and most of our existing markets will consume less of our services than products. So to have a great 2009 we must find new markets, sell more in different products and services to our existing customers and find new customers, in other words take market share which we are good at based on our growth rate a little last six years. We are looking at 2009 as a great opportunity to gain market share because our growth strategies will be even more desirable to our customers and easier to execute because of weaker competition. Let us revisit these growth strategies and look at why we feel stay we will work better in a down economy. First let us review innovative pumping solutions, IPS and Vertex Distribution as both will gain market share this year but sales will be down. Vertex Distribution has experienced a significant decline in volume and a decline in commodity prices. Lead times have also declined from countries like China that have…

(Operator's instruction) Your first question comes from the line of Matt Duncan - Stephens, Inc.

First question, I got David, I want to make sure I got clarification on that last thing you just said when you said would be down 20% for the year, were you talking earnings or revenue?

Okay.

So, you are talking both?

Okay, both.

Okay, that total sales could be down 20%?

Yes.

Is that organic or is that the whole company?

No, that would be…

I am just trying to make sure I got this right because you were talking about growth and supply chain services, you were talking about IPS being down 20% top line and it sounds like you were talking about service centers when you include the impact of Super Centers being kind of flattish to up so I am trying to get how we get to that point.

Well, basically, I am going to understand your question. We will about sales first. IPS, we think that will be going down 20%. Vertex by the way happens to really be in by the IPS group so that is 20% there. We expect supply chain services to be up 16% and we expect the service center part to be down approximately 11% and all that going to add up expect with 11% is the year-over-year calculation and so assuming January at the bottom and February is trending up and March is trending up which is a good thing, we still have to overcome that we had a pretty substantial growth here.

And David when you say February and March are better than January and January was down 11, are you talking about 11 in number or the growth of the change in revenue? So, if January was down 11%, what was the year-over-year change in February?

Well, first of all, sales for January on a total basis are about the same as January of the year ago.

Okay.

But you have to understand that included in that is Vertex and included in that is I guess, the Company we had not talked much about is Falcon which is a little pump acquisition that we did. So, when I talked about it, when I talked about the service centers being down 11% year-over-year, I am talking about the MRO piece and I did not tell you per say what innovative pumping solution was down and what supply chain services was up or down so I did not give you the whole picture but the big disconnect I think is that we are kind of giving you a number that we think is worse case and then we are also giving you a number of we kind of start where we were in January but each month, we had what did we grow I will say is when we found the top line growth with 65.76%. So, we have got to keep pretty close track to that or we are going to be down.

I just want to make sure I am hearing you correctly. Total company sales including the full year impact of Vertex when you add it for five months last year and you got it, well four and a half months last year and you got it for 12 months this year, total company sales could still be down 20% or is that organic and not total or is there something that I am not hearing correctly?

I may have to check my numbers but when I looked at it, that has went out.

Okay, I just want to make sure that we get this right. So what you guys are thinking 2009 could look like and maybe if we take step back and instead of looking at the total number, maybe we need to refocus on what you are saying each piece can do and so IPS is down 20%, Vertex down 20% from what they did last year as the standalone company but not what they did for DXP and then supply chain service is up…

That is right.

Sixteen percent, I mean what do you say your expectation is for service centers for the ful year of 2009 just for the center piece, flat?

Well, no. I think…

Okay, sorry. Service center, you said down 11%.

Right, exactly.

And that takes into account the impact of new Super Centers, David?

One of the things I think we are getting a little mixed up. I am getting a little mixed up on is that we do a pretty detailed budgeting job and one of the things we do is you are right, we put Vertex in there as if it was there for the whole year. So, they did $60 somewhat million and we think they are going to be down 20%. So, that may be distorting my number a little bit.

Okay, so then I do not need to look at the whole company could be down 20% because your number assumed that Vertex was there all year and it was not, right?

Right.

Okay, I just want to make sure I got that right and then…

That number came from multiple extrapolating. I thought your comment was if January is the bottom and we stay the same then we could be 10% or 20% for the year. Is that what you were saying?

Yes, Vertex had been a part of your Company for the whole year of 2008.

Right.

Okay. Moving on then. Mac, I just want to make sure I heard the couple of the numbers correctly for the fourth quarter since a lot of the fourth quarter I sought in the press release, the innovative pumping solution you said was down 28.7% to $24.3 million. Maybe if you could run through those numbers again really quick because we did not get all that when you went to it the first time

[Residual] supply chain services was down 40 basis points year-over-year so [$47.1 million] for the fourth quarter of 2008.

Okay, [ $37.1.]

The innovative pumping solution was $24.3 million which is down 28.7% from a year ago, but year ago in the fourth quarter, we have that $112 million drop.

Right, yes I got that.

MRO was $132.2 million, up 35.6% from…

Okay, I just want to make sure I have those right and now, looking at Vertex; number one, what was their sales for the quarter and number two, was it accretive or dilutive to earnings?

The earnings were essentially breakeven with less than $0.01 of accretion. Sales for the quarter were $14 million.

Okay, on those $14.0 million.

That was $13.97.

Alright, fair enough. On the Super Centers, you said you got 23 of those today. Maybe David if you could give us a little bit of insight to how that conversion process is going. Are you guys having easy or harder times finding sales guys right now? You got 23, 14, or 12 under construction today. If you were to take a guess at the end of 2009, how many Super Centers DXP will have? What would you guess that number might be?

Well, I would like to think, there is two things going on. One is I will call them bets and what I mean by that is we really do not want to have more than 12 or so plus or minus couple under construction any one time because it is going to be a big drain on expenses for some period of time so if we converted all of those and then had another 14 or 12 under construction, I would be happy with that.

Okay, so kind of at the end of the year you are having 35 and 12 go under construction. Alright, that is helpful. And then last thing here and I will jump back in queue, Mac, can you give us the cash and debt balances as of the end of the year and then talk about so what is your planned uses of cash are for 2009?

Cash balance was $5 million, sort of thing, $5.7 million. Total debt including the current portion was $168.6 million.

Okay the planned uses of cash during 2009, was that just cutting down debt?

I guess if business is going slow, then I would assume receivables and inventory will go down and so instead of typically receivables and inventory are going up, we will be collecting those and paying down debt.

Your next question comes from the line of Ray Rund - Shaker Investments.

Yes, I had a lot of my questions answered in that. I am just wondering, can you give us any sort of a sense of what your plan is for the year in terms of debt reduction looking out? You said that was going to be a priority.

We are an inventory-receivable intensive company as a distributor.

Great.

So, the more business goes down, the more inventory and receivables are reduced and the more we pay down debt and if the business increases then when they get paid down, there is much debt. We are going to be investing in inventory receivables to support growth.

Okay.

So, there is not, our focus is on if our business is going down, our focus is on reducing debt.

Alright. In terms of your gross profit margin, you had pretty good increase in the quarter. Do you think you will be able to maintain that level overall or are you seeing a lot of pressure from your customers in terms of pricing pressure?

We have had very few suppliers reduced their cost to us and we had actually push back on some that have tried to increase. So, we really just had zero that have increased their product costs this year also and yes, we are having some pushback from certain industries on pricing and to the extent that we go back to our vendors and we are able to negotiate better pricing. We pass on those savings to the extent that we think our suppliers just not going to do it then we do not. So, there is a lot of, what to say, there is customer pushback and the commodity prices are down or so therefore, they want a price reduction. But typically they really kind of understand that we are the distributor and we make a spread between what the manufacturer charges us and what we will charge them and so we are not giving up any of that spread.

So, you think you will be able to hold your gross margins in the same range that they have been?

It is actually, you might hope that as we got some control of these precision service centers that we actually can get their margins up. So, to the extent we can hold everybody else's margins and get them up, we could see some incremental that we have $800 million Company and their service centers are about $150 million. So, if we got their margins up 1%, we would be happy. That is pretty diluted across the whole Company.

Alright, last question. Can you give us any guidance on your tax rate going forward?

I would say that 39%, 39% to 40%. They might get a little higher.

(Operator's instruction) You have a follow up question from the line of Matt Duncan - Stephens, Inc.

Just want to look at margins for a second if we could back to the question about gross margins, 29.4 kind of stands out as quite a bit higher than normal. I am sure a lot of that is the impact in Vertex and there are higher gross margins on your business. When we are thinking about modeling 2009, you want us to use a gross margin that high or would it be safer using a number below that?

What is it last year, 28.1?

Yes, 28.1.

Which is down to 28.3?

Yes, but you had Vertex for a full quarter in the fourth quarter so it is different than the rest of the year.

I would say 29 to 29.5.

Okay, 29.5 to 29 and then if I look SG&A as the percent of sales, perhaps I could tell you what, let us just look at the hard number. It was $43.6 million. That is up about $4 million from the September quarter, how much of that increase is a number one of full quarter of SG&A from Vertex and number two, the full quarter of amortization from Vertex. If we put those two pieces together, how much of that increase is explained by I guess the whole Vertex for a whole quarter?

We should add Falcon into that equation too.

Sure.

And it is…

When was Falcon actually acquired, David?

December 1st.

Okay, and what are their annual revenues?

About 10 to 12.

Okay, and do you expect it to be accretive in 2009?

Yes.

Alright.

If that came up with the fourth quarter SG&A, $4.7 million of it was acquisitions.

And that is, well, is that 4.7 the difference from the piece of Vertex you had in the September quarter? I am trying to figure out how much of the increase for the September to December was a full quarter Vertex and the addition of Falcon just so I can get back to kind of..?

Okay, so you are comparing, I missed that you are comparing third quarter with the fourth quarter.

And if maybe, the easier way to ask this is this $43.6 million a new base to use going forward? I mean it sounds like your revenues are going to be down in the first quarter from what they were in the fourth quarter. Do you feel like you will be able to get your SG&A expenses down as well and I am just trying to figure out sort of how we need to, I will have a better picture now what we will do with gross margins but as far as SG&A, is $43.5 million sort of a new quarterly base that will move around depending on revenue, the main copies to that and was there anything one time in nature in the SG&A expenses in the fourth quarter?

Particularly. Okay, there might be a little.

Okay, so that is the new base to use and then obviously it is going to move around. Were there some variable costs in there that is dependent upon your sales level?

The new SG&A for Vertex third quarter is by about $3 million.

Okay, you probably only had a million to that in the September quarter because you only had it really for the month of September, right?

Correct.

Okay.

In Falcon, it is less than $200,000 with SG&A.

Okay, so then…

Per month.

Okay, so the difference between the third and fourth quarter that is explained by acquisition, if I am hearing you correctly, is a little over $2 million.

Yes.

Okay, that is helpful.

Well, in math, as you know we are very incentive per unit extremely so to the extent the sales are down and profits are down somewhat and there is compensation expense that comes out.

Okay, and then just a last thing, I want to try one more time to kind of make sure we got the sales being clarified, 2009 versus 2008, if you look at the $736.9 million that you did in 2008, you are clearly not expecting that number to be down 20% because you got a full year Vertex versus the year before and when I say expecting, I mean in your worse case analysis. If I look at that number, how much, in the worse case analysis that you referred to that included the full year Vertex?

What was your quote for the worse case analysis?

That was based on January.

I just want to make sure I am hearing you correctly, on what your expectation is for your 2009 regiment.

I heard what David said was if you take January and multiply it by 12, we can be down worse case 20%. Is that what you..?

So, with the dollar number that you have in the month of January, was that…

There was no dollar in acquisition because we have not done any in January.

Okay, but you have made acquisitions, right?

Not in January.

Okay, I got you. I think the dollar number…

No acquisitions. They are all there.

Okay, it is making a lot more sense now. But as you said, February was better than January and March is looking like it is better than February.

Right.

Okay, so if 20% is the worse case and maybe you do not want to answer this but what are your same stores realistic case is for your revenue? Is it sort of a down 5% organic and down a little bit total sort of more realistic or is that still too aggressive? What sort of the baseline that we ought to be thinking off not the worse case?

I think there is not a lot of clarity on what is happening in the economy. We kind of told you if you multiply January by 12 and we told you that February and a little bit of March so far look a little better so it looks better than that.

Yes. Okay, alright. I think I got this.

Your next question comes from the line of [James].

There is definitely some issues with regards to the revenue build as we comp Vertex albeit at a lower level for the balance the first half of 2009 and through September. You add the new Falcon acquisition and you suggest that the underlying MRO piece was up in double digit organically. It definitely seems like the underlying revenue number is something slightly higher 2009 versus 2008 regardless of any sort of organic decline. Taking that a step further for averaging Vertex, I do not know $10 million to $12 million a quarter, that is added year-over-year for the first half at higher gross margins and again you have another kind of $4 million to $5 million from the Falcon business. I just wanted to help clarify what Matt was trying to hammer home the fact that if you kind of blend the three key items of the model together, we are still seeing something at the midpoint say at the low end when your January number comes, if your January number potentially comes to fruition. We are looking at a $55 or so in low end and frankly flattish with some margins degradation in the model that is closer to two and that would assume then that the largest pieces of your business articulated by share gains, etc at lest stabilize. So, I think that the true total Company guidance by my kind of my revenue math assuming obviously that Vertex is added for the first half and we do not see any incremental margin depreciation. We are kind of looking in the $750 million or so range because in 2009, in my model, I already had a negative 20 in the IPS business so understanding that it is a lumpy situation but helped up by the repair and replacement piece of the business and it still gets us somewhere kind of in that mid range $50 to $2. I mean, is that a fair way to look at it? Just kind of help us out with regards, because you did have some nice growth in some of your MRO businesses suggested. So, let us break that out again because we have to assume that obviously Vertex in the first half is completely added versus the first half of 2008 excluding any non-cash type items, correct?

The question is all about whether or not Vertex is going to be accretive?

No, the question, accretive to sales.

Oh, they are going to have of sales.

Right, exactly so you sit there and you suggest your basically worse case type revenue number for the full year and then from our vantage point, we still have to add basically eight months Vertex to 2009 versus 2008 and then we have another $10 million or $12 million from the Falcon deal and you have some level of flat, up, slightly down trailing your core for supply side business. So, just help me out with the sales number.

Well, I think what we have said is that that our January sales…

But if you do the math given all the little pieces that you articulated what occurred in January, you kind of, it is the math work.

If we can assume that every month that we have the same volume that we had previously, then our sales will be the same. In other words, they will be the same in January.

Right.

So, they are probably going to be the same in February. So…

In terms of absolute dollars.

Yes, absolute dollars.

Right, exactly. That is, I mean, the organic push and ticks are different conversations.

Correct.

Okay, fair enough. It is clear now.

Yes, I think it is unrealistic to think that as sales are again 736 whatever that number was, that we have more into this producing that 736 so our bottom line is not going to be this good.

Of course.

It has got to be.

The 736, to put it plainly that you reported in the 2008 period, excludes approximately call it $35 million from the Vertex acquisition and another $12 million from the Falcon acquisition. I understand the underlying cost structure that you have added underneath those sales but I was just wanting to clear up the fact that we will still be solidly over $750 million regardless of some cyclic organic variations that you have seen in your core business.

That is very possible.

Okay, good.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you for your participation and at this time, you may disconnect. Have a nice day.