Welcome to the DXP Enterprises Inc. 2010 second quarter results conference call. (Operator Instructions) At this time, I'd like to turn the conference over to Mac McConnell, Senior Vice President of Finance and Chief Financial Officer.

Good evening. Thank you for joining us. Welcome to DXP's second quarter conference call. David Little, our CEO, will also speak to you and answer your questions. Before we begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings, but DXP assumes no obligation to update that information. I will begin with a summary of DXP's second quarter 2010 results. David Little will share his thoughts regarding the quarter's results. Then we will be happy to answer questions. Sales for the second quarter increased 15.9% to $167.3 million from the second quarter of 2009. After excluding the Quadna sales of $13.4 million, sales for the second quarter increased 6.6%. Sales for the Supply Chain Services segment decreased 5.7% to $31.5 million, compared to $33.7 million for the 2009 second quarter. Sales for Innovative Pumping Solution products increased 41.1% to $18.7 million, compared to $13.3 million for the 2009 second quarter. After excluding Quadna IPS sales of $6.3 million, IPS sales for the second quarter of 2010 decreased 6.4% from the second quarter of 2009. Sales of MRO products by our service centers increased 19.8% to $117.1 million, compared to $97.7 million of sales for the second quarter of 2009. After excluding Quadna MRO sales of $7.1 million, MRO sales for the second quarter of 2010 increased 12.5% from the second quarter of 2009. When compared to the first quarter of 2010, sales for the second quarter of 2010 increased 13.8%. After excluding Quadna sales, second quarter 2010 sales increased $6.9 million…

Thanks, Mac, and thanks to all our participants on our conference call today. I would also like to thank the DXP people for their efforts and execution of our sales and operational strategy be customer driven. Your improvements for the second quarter are certainly appreciated. We all welcome Quadna, our latest acquisition to our DXP family and thank you for an impressive first quarter, contributing $13.4 million in sales and pretax profits of $728,000, which includes various acquisition fees. The Quadna people have a great can do attitude and in a very short time have become a part of the DXP culture. I could not have imagined a better win-win situation by putting these two companies together. Thanks go to our suppliers and their continued support to produce quality and competitive products that helps us both grow our market share. Thanks to our customers who value our expertise to customer driven solutions that helps them more successful. Our focus continues to be on operational excellent programs and consolidation of administrative functions for cost savings, process improvements and reduced working capital requirements as well as decentralizing customer service to capitalize on growth opportunities by being experts at customer driven solutions. Our senior management team of Todd Hamlin, Senior Vice President of DXP Service Centers; John Jeffery, Senior Vice President of DXP Supply Chain Services; and David Vinson, Senior Vice President of Innovative Pumping Solutions, are focused on team building and top and bottomline growth, and their intended plans depend on results. DXP Service Centers, which represents 70% of our business, the Service Centers segment of DXP is emerging from a positive second quarter and continues with an optimistic outlook for the third quarter. There has been a slight improvement in several markets primarily onshore oil and gas, which includes terminals, chemicals…

(Operator Instructions) Our first question is from the line of Matt Duncan with Stephens.

The first question I've got, Mac, I just want a point of clarification from you real quick. You said that month to month revenues had improved throughout the quarter. Is that for total sales or is that organic DXP excluding Quadna?

That's total sales, but we own Quadna. April is up compared to January, February, March. And it is rather a late quarter result. So each month, with Quadna in it, sales got better.

Are you saying, (inaudible) in those sequential improvements, or has it been kind of slow and steady each month?

Let me look and make sure I'm answering.

And I guess what I'm really getting at is, is the tone of your business still fairly similar to what it was early in the quarter? Have you seen the end markets slow at all, or do you feel like things are by and large still pretty good out there?

From a sales perspective, we didn't see a slowdown.

And then maybe, David, from your conversations with customers, and then just your DXP folks, kind of what's your sense of what's happening out there in the marketplace right now?

Well, I think we already have a close eye on the stock market, because I think it's a six month indicator of where we might be headed. And of course, I'm not sure they've got it figured out. But what my people are telling me is that they feel good. We know supply chain service services should have continuous improvement. IPS and capital projects, that's a little iffy. It's only 10% of our business. The offshore piece that maybe down is even a smaller piece than that. So that's really not that concerning to us. That segment is very profitable and we're okay with that. The big number is the 70% of the businesses and the service centers, and of course we're really driving hard to push super centers. That piece of our business has been the most substantial grower that we've had in the first quarter, and the second quarter. And those people are telling us that they feel very good about the rest of the year.

When you look at the Quadna revenue breakdown, I guess I was surprised it was a little bit more innovative pumping solutions there than I thought it is. Is that sort of normal breakdown of their revenue, kind of 60/40 service centers to innovative pump?

Yes they have a very substantial part of their businesses in Denver. And Denver is a rather a large, of course Denver and Phoenix fabricate, but Denver fabricates more for the oil and gas industry. And those packages are bigger. We've had meanings between the two teams. They do exactly what our innovative pumping solution does for offshore and onshore. And they do all their work onshore. And so they are participating in the shale plays north of Denver and all the way to North Dakota. And then I guess they come south sometimes too. So it's a sizable amount of their business.

And then staying on Quadna for a second, the $0.03 of EPS accretion that you guys showed there this quarter, backing out the fees, is that about what you expected it to do? Or is it may be doing a bit better than you expected? Maybe just talk about the profitability of Quadna.

Just like the team of people there are really outstanding. And we are really excited to have them. And I think their first quarter with DXPE exceeded our expectations. I talked to Jeff, and I specifically did talk to him before this conference call, I'll assure you. He feels good about the year. And he feels good about his backlog. It's actually up. And so he didn't have anything but positive things to say.

Moving on to supply chain services for a minute, I guess it feels a bit like that piece of your business has kind of been stuck in the mud for a few quarters here. And I guess it sounds like you have signed some new business there. But sort of what actions have you guys taken to get that business moving and starting to show the improvement that really your service center based business is? Because it's pretty much the same type of customer base that makes up the supply chain services, too. So I would think if the economy is recovering we should see that growing too. So kind of what are you guys doing with supply chain services to kind of get it improving?

Well first of all, Precision legacy people, we don't call it Precision any more; a great group of people there. They have a great deal of knowledge about that business. John Jeffery, who was Senior Vice President of service centers, is now running that. And I think he has done a really nice job of pulling the teams together and the people together. And so we've really not lost a step I guess in terms of personnel and moving forward. The things that are a little different, actually things aren't different I guess that will be a better question first. So things that aren't different is, is that they have lost some accounts and we've been struggling through the fact that they come off the books faster than they come on the books. At the same time, they had signed up some new business and then some of it's been harder to get implemented, mostly because of the customer. But it can go both ways. And so I think what's really happening is on the short term here, is that we are going to stop losing accounts, and stop the business from flowing up to bottom. And that's just a natural thing that's happened. And then we have some new businesses coming on. So I think we have simply hit bottom. Longer term, we really feel good about the fact that we are going to leverage our wholesale sale sales channel across all DXPE to bring them new business. This is going to have DXPE operators before Precision. The legacy people there had a little different attitude about that, didn't make them (inaudible). It's just that we feel pretty strong that we can leverage our relationships with these customers. And it gives us more credibility upfront. And so we are excited about that. And for that, I guess again in summary is we went through some tough times like we've hit bottom and we're ready to move forward.

It sounds like in your commentary about the way the business progressed through the quarter, it seems you feel like the back half of the year is going to be pretty good, too. Is there any reason that your revenues would not be up sequentially again here in the September quarter that both your sales and earnings theoretically should be higher in the 3Q than they were in the 2Q?

We certainly believe that.

I'll jump back in queue. Thanks, guys.

Our next question is from the line of Holden Lewis with BB&T. Holden Lewis - BB&T: Could you elaborate a little bit more on the gross margin trends you saw? I kind of heard, I think you said that certain of your suppliers are starting to push some higher prices for their products. Are you unable to increase your own price in that kind of environment? In the past I think you've gotten price increases pushed through. But are you not trying to recover those hikes with better price?

Of course we are and of course we do try to push those things through, but I think given more push-backs than normal, business is not bad. It's not robust off the chart either. And so our customers are looking at inflation is supposed to be next to nothing. And so I am personally surprised that it's not all of our suppliers but some of them are having these price increases. So if I am surprised by the things, certainly our customers are. So can we pass them through? Yes. There's always some component of business we have with fixed pricing for year something like that, but that's typical, nothing unusual there. It's not a very big percentage. So margin enhancement and the tools we're putting in place to increase that margin is such a big buzzword in DXP in terms of that's what we need to be doing and that's what we've been trying to do. And then so it's just a little discouraging that our manufactures are having some of these price increases. It doesn't really make sense to us right now. Holden Lewis - BB&T: So do you have a sense when you think about the price/cost relationship, was it negative in Q2? So it was like some number of basis points drag on the gross margins in the quarter? Or do you offset it somewhere else? I mean, has it gotten to that point where it's actually visibly negative in your model?

It's visibly negative. Holden Lewis - BB&T: In other words, all other things being equal..

This is visibly negative in certain accounts. Holden Lewis - BB&T: Okay. And so what are you doing outside of the pricing element to offset? If you could sort of give us rundown on maybe some of the top initiatives that you have working right now and kind of how those are progressing?

It's a combination of just encouragement, we still can't give our inside and outside people suggest the pricing. And then it's a function of encouragement to believe in that suggestive pricing. They have the ability as of now to overwrite that pricing. And at a certain level, they get paid less commissions. At certain level, it takes approval processes. But it's a combination of very sophisticated tools that are looking at geography, type of customer, volume of business, fast moving item versus slow moving items and coming up with suggestive pricing. And then it's a constant battle to get people to believe in that. Holden Lewis - BB&T: And then the suggested pricing is based on your the IT systems that you have in place?

Yes. Holden Lewis - BB&T: Right, and just sort of driving adoption of that model?

Right. Holden Lewis - BB&T: Okay. But isn't that in effect kind of price increases, if you will? If you're suggesting pricing on certain products, faster trading products, is that effectively price increases or is it product substitution to move people into more attractively margined products? How should we look at that?

We are incentivized to make as much margin as we can on every order. So we don't think of it as the price increase, because we don't have a big book of items. They're all priced. And we're going to raise our pricing order 2% and try to see if that will stick in the marketplace. We don't function like that. So what we have is a lot of items, we sale a lot of different customers and a lot of different people selling that stuff so we suggest the price. And then it's a matter of them having the flexibility to get as much margin as they can. So we don't really see that as the ability to say that we're having a big price increase, because we're really not. A lot of people listen to these conference calls, so let me rephrase this a little bit. Part of it is to lower the price. If you have a item that has what we call a velocity item, the customer is going to know when he can buy that item, because he buys it everyday. And so it could be that we lower the price on that particular item. Whereas when he sits there and he calls you up and say I need this, and we go, "Wow, we'll have to figure out how to source that or we're going to have to figure out how to help you out here." Then it becomes a different problem to make a margin that we deserve. Holden Lewis - BB&T: And if you look at your product offering, your portfolio, and your customer portfolio; you've been sort of utilizing this technology for a while and trying to sort of get everything into the right bucket and price areas and that sort of thing. How close do you think you are to kind of having your offering and customers sort of in the price bucket that you want them to be in at this point? Where are we in the process, and at what rate does that improve, or has that been improving?

I think we're using the utilization rate as a system is about 10%. Holden Lewis - BB&T: And has that been rising or has that been kind of static?

It was rising until we hit this recession and then what happened is we kind of went in everybody (inaudible) whatever it takes to get an order. So it kind of lost traction. And now we think that the economy is getting better and we're seeing improvement. And some longer lead times from manufacturers, et cetera. Then we're back trying to get traction again. Holden Lewis - BB&T: And you referenced that people aren't necessarily incented, if you will, at this point. At some point in order to get that 10% up meaningfully, do you adjust the compensation to say that you have flexibility within a range and beyond that you don't have flexibility? I mean, at what point do you incentivize to get people working or accepting the system?

I think you have that wrong. By the way, I think we do incentivize the people to do that. They get paid more for higher margins. But the problem is some percentage of something is better than a higher percentage of nothing. So they still are going to loose the order and they don't want to loose the order. So they revert back to something lower. We ultimately will not get control of pricing until we really have the ability (inaudible) where you just have publish pricing and you pretty much stick with it and certainly count to get discounts and et cetera. We're just not at that level of sophistication yet, but we're moving in that direction. Holden Lewis - BB&T: And last thing on this and then I'll jump back in. You're seeing cost increases. You're trying to get price increases where possible. Obviously the cost increases are relatively recent. Do you feel like as we get into Q3 and Q4 efforts to reclaim that through real price increases will gain greater traction? Or at this point you just don't think the market is all that accepting of your effort to get prices, so we can't count on that for being offset in the second half?

If I'm guessing, I think the two sort of offset each other and margins will stay about the same.

Your next question comes from the line of Joe Mondillo from Sidoti & Company Joe Mondillo - Sidoti & Company: First, I just wanted to touch back on the Precision supply chain services. When you talk about growth going forward, what are we talking about? Are we talking about maybe a couple million in the back half here? Or what kind of growth do you see, if you could just give us somewhat of a degree there? Well, you were talking about you're adding customers. How many customers are you adding, did you say?

We're adding two additional customers. And we have some new ones already kind of in the work already. Couple more stores. We're not used to giving a range, but if you want to pin me down to one, I think it's going to be from 2% to something percent. I don't know what the something is, but it probably isn't necessarily going to be over 10%. Joe Mondillo - Sidoti & Company: 10% you're saying?

I am saying 2% to 10%. Joe Mondillo - Sidoti & Company: And that's over the first half of this year?

Yes. Joe Mondillo - Sidoti & Company: I just had a couple questions on the debt. What is your total debt at the end of the quarter?

$111.8 million or 112 million. Joe Mondillo - Sidoti & Company: Is that total or long term?

That's total. Joe Mondillo - Sidoti & Company: And how much did you pay down in the quarter, including the debt that you took on?

During the quarter, total debt increased by $1.6 million. But we bought Quadna during the quarter and incurred $16 million of debt. Joe Mondillo - Sidoti & Company: Right. So you paid down roughly $15 million?

No, $14 million. Joe Mondillo - Sidoti & Company: Given no converts on that convertible debt there, do you expect that interest expense to stay there? Should that be around that $1.6 million?

I mean that went a little bit lower. So assuming that interest rates stayed the same, you'd think they would, interest expense will go down, to be pretty close to the same, down a little bit, because debt is lower.

(Operator Instructions) Our next question is a follow-up from the line of Matt Duncan with Stephens.

David, I was just curious if you guys have seen any impact from the oil spill. You obviously have a big footprint along the Gulf Coast. Has it had any impact on your business?

We think we are seeing safety requirements out there, inspected closer and people are kind of getting ready for that. So we've seen some of our fire pump units found that pipe that we used along the column for that, we are seeing people replace that and upgrade that. So we are tagged to production and platform, and we are not really tagged to drilling. So if the drilling person loses rig to South America, well then that really didn't affect this much. We haven't been part of the cleanup or anything like that. So we've gotten really this marginal increase of business through the fact that these production platforms are making sure that all their safety equipment is working around.

And we sold a few pumps to people that are making equipment to clean ships, but it's pretty small.

By the way, we saw BP cancel one project, but then they are going ahead with another project. So we are not too concerned with that now. If our government can't decide how we are going to drill safe for two years, well that ultimately would affect a small piece of our business that we didn't make that up by selling equipment to other offshore places around the world. So we would have to make a shift there. But to date, we haven't seen a big real negative and we really haven't seen it to be a big part of it either. The only thing that we will say is that we have shifted some resources to onshore activity which seems to not being affected at all. So that's a positive.

If I look at the balance sheet for a second, Mac, talk a bit about what happened with inventories and receivables this quarter. You guys announced you were able to generate a pretty good amount of cash flow to pay off most of that Quadna debt. And I'm just curious where it came from.

Receivables went up and inventory went down a little bit.

The last thing I've got for you is on the acquisition landscape. Are you guys seeing anything interesting out there right now? What's your appetite for acquisitions as you continue to pay down debt?

We're looking at acquisition deals. Some of our offshore customers will come maybe dragging their feet a little bit. We are trying to make sure that we feel comfortable with the businesses in other parts of the country and things that are related to us. It does do us any good for us to be doing really, really good and then acquire somebody and then have the bottom fall out from under them. So we're a little reluctant to pull the trigger at this stage. But I would like to do another acquisition before the end of the year, assuming that the economy does behave okay.

Our next question is also a follow-up from the line of Holden Lewis with BB&T. Holden Lewis - BB&T: What was the SG&A level if you strip out the effects of the acquisition? The $0.5 million plus whatever operational SG&A from Quadna, what would the level be?

Quadna SG&A was $2.6 million. That includes the $0.5 million of the expenses and includes the amortization of intangibles. Holden Lewis - BB&T: Even though the revenues have picked up to the highest level in sometime, you're still sticking to sort of around that $36 million level in terms of the organic business, yes?

Yes. Holden Lewis - BB&T: What can we expect from that going forward? Do we have any costs that need to come back into the model at this point? Do we have any sort of incremental initiatives which are going to drop those numbers down further? It's good cost containment at this point. But going forward, can we expect it to vary more directly with revenues, or is there a choke that steps up high? How should we look at SG&A going forward?

If sales and gross profits and all those things improve like we expect, there are certain variable costs that will go, commissions and things like that, that might get little up. I think the answer to the question is that I would like to see us make some gains on the percent of SG&A. 20 or where we're at is too high. That's not the level that I would like to see. So a combination of sales going up and a combination of the fact that we do have some cost initiatives around continued reduction of administrative cost and some operational excellence program stuff that's reducing cost a bit. We're not talking about saving $1 million a quarter or anything like that. We're talking about making some incremental gains there. And the combinations of the sales going up, I'd like to see that percentage come down. I mean you're going to ask me, how much, and I don't know the answer, because I don't really know how much incremental expense I'm going to take out and I really don't know how much sales are going to go up.

We're not aware of some driving needs, some cost that's been cut that now we're having to bring back. We're still reducing the expenses. Holden Lewis - BB&T: And maybe talk about the difference between kind of the sort of the legacy DXP and some of these businesses you've acquired. I mean it seems like you've been more active in terms of trying to integrate the Precision business into the DXP model and the Vertex business. Maybe update us on the progress of those integrations to date, and how much more progress you might have, or do we have them kind of where we want them to be?

Precision and their administrative functions are all being moved to Houston, and that is not complete. We've got David Vinson and others that have been spending a lot of time in Omaha making this happen. So yes, some things are still to come there. I think we'll be complete sometime in September. We're not going to have administrative people out in the field anymore. We're not in control. Precision was treated that way, because it had an earn-out and the earn-out got in the way of integration of those functions. But as an example, Quadna we closed on April 1, they're going to be up on our system and running pretty well by the second week in August. So we're just not going to do it like that anymore even if I have to eliminate earn-outs in terms of acquisition cost, because it's a pain. Holden Lewis - BB&T: Is Precision now on your system or are they still sort of treated separately?

Well, there are three parts. There is a part of Precision that has customers that have spent a lot of money on Neterprise, and they're going to stay on Neterprise. We don't have any intentions to make that customer mad. We don't want to make them mad or unhappy with what they're getting there. And so that piece is going to stay. What we were talking about, because it kind of you led you down to believe that all of Neterprise was going away, and that's just not the case. There's a part of the supply chain service business, number of sites that we are going to move to P21, DXP's ERP system, because we get operational efficiencies and we get access, better visibility of inventories. And so we're going to get that completed by the end of the year. Then more than half of their business is their service centers. And starting in November, we converted all of them under our system. So the Precision legacy service centers are on our system. There is another big piece of supply chain service sites that are going to be put on our system. And then there's part of it that will just stay on Neterprise. Holden Lewis - BB&T: And to give some sense of how effective that could be from a profitability standpoint, when you moved the branches of Precision on to your system at the end of last year, have you seen a meaningful improvement in efficiency, margin, anything like that that we can sort of look at the next transfer and say you could see something similar? How should we look at that?

I think that we have got those service centers focused on customer service and sales. They have access to more inventories. I think we've consolidated purchasing power and rebates. And the last step is to move their administrative people, except for the IT people, to Huston. There's one exception to that, again, for the employees who listened to all this, to be exactly right. The industrial supply division, which has a great team of people that we didn't have here at DXP, that are in Omaha, and they are going to stay in Omaha. And because of that, even though there's inventory management and purchasing group that reports to Houston, there's a group of people there that are going to stay and manage the industrial supply team, and some other small piece I can't remember. The risk of the accounts payable people, accounts receivable people, the controller, the HR person, all those type of functions are being moved to Houston along with inventory management that relates to rotating equipment, safety and bearings and power transmission. Holden Lewis - BB&T: So it sounds like on the SG&A side, there's still opportunity for cost savings, just on the consolidation of the admin down to Houston as well as continue to put both Quadna and some of Precision on your systems.

I'm sure I'm giving you more details than you want. But I'm trying to make sure I'm not going to upset any employees who might be listening to this. We got very specific plans, and we've told the ones that are moving and we've told the ones that are getting to stay. And so we're trying to be sensitive to that.

Falcon was converted under our system in Jan. Holden Lewis - BB&T: I guess returning to an earlier question about your SCS, I think a lot of times these contracts when you sign into them, there's like an expected sort of volume that comes out, right? So you're implementing these sites which are responsive to this volume. I think another way to look at it is do you kind of track what your backlog is, if you will? These two new contracts that you signed, that pushes our total potential volume of full implementation to X-level versus where we were before. I mean is there some way to give us a sense of the order of magnitude of the opportunity as you implement going forward in that respect?

Yes and no. Yes, the customer tells this, the cosmetic company tells this that it's $4 million of spend. Our expectations that have been proven up over the years is probably more like $2 million. And we just expect that. I mean they are enticing you to give them the very best price you can based on a certain volume level, and that volume level never panes out to be quite like that. Holden Lewis - BB&T: On the contracts that you have, what's the potential spend on those contracts that if we ultimately implement them all we'll get from the current level? What's the unimplemented spend so far on your book of contracts?

I'll be really happy to get you that information. I'll talk to John Jeffrey and he can let me know. I don't know the answer to that. Holden Lewis - BB&T: But you haven't lost any more contracts. Do you think that the culling is done?

I'm just saying that we can't answer your question. We clearly can't answer your question. I just personally don't know. Holden Lewis - BB&T: But the culling of contracts is done. The number we have, we don't think we're going to lose any. So anything now is additive?

Right.

Thank you, ladies and gentlemen. If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 using access code 4333065 followed by the pound key. This does conclude the DXP Enterprises Inc. 2010 second quarter results conference call. Thank you very much for your participation. You may now disconnect.