Welcome to the DXP Enterprises, Inc. 2011 Fourth Quarter and Year-End Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, February 29 of 2012. And I would now like to turn the conference over to Mac McConnell, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you. Good evening and thank you for joining us. Welcome to DXP’s fourth quarter conference call. David Little our CEO will also speak to you and answer your questions. Before I 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 may 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. The DXP assumes no obligation to update that information. I will begin with a summary of DXP’s fourth quarter 2011 results. David Little will share his thoughts regarding the quarter's results. And then we will be happy to answer your questions. On October 10, 2011, DXP acquired substantially all of the assets of Kenneth Crosby or KC. DXP paid approximately $16 million to KC. KC operates at 5 locations in New York and Massachusetts. DXP recognized approximately $11.9 million in the sale of KC during the fourth quarter of 2011. On December 30, 2011, DXP acquired substantially all of the assets of C.W. Rod Tool Company or C.W. Rod. C.W. Rod has 7 locations in Texas and Louisiana. DXP paid approximately $1.8 million DXP’s common stock of 35,714 shares and approximately $42 million of cash to CW Rod. DXP did not recognize any revenues to C.W. Rod in the fourth quarter of 2011. Sales for the fourth quarter increased 28.7% to $218.4 million from the fourth quarter of 2010. After excluding fourth quarter of 2011 KC sales of $11.9 million and October and November D&F 2011 sales of $4.2 million, sales for fourth quarter increased 19.2% on a same-store sales basis. Sales for Supply Chain Services increased 21.8% to…

Thanks Mac and thanks to our participants today. DXP's fourth quarter and yearend results for 2011 were exceptional. We have produced 8 straight quarters of sequential quarter-over-quarter growth in top line and bottom line results. Our sale for the year grew 23% reaching $807 million producing a net income increase of 62%. We promised 2 acquisitions and delivered two metal working companies, Kenneth Crosby and C.W. Rod. They will now make up a separate division called the Metal Working Division. We are pleased to have Chuck Rod from C.W. Rod heading up this division as Vice President of Metal Working Products. We continue to demonstrate our ability to acquire companies and set our strategy to grow our breadth of technical products and services. All 5 divisions including Rotating Equipment, Bearings & Power Transmissions, Safety Products and Services, Metal Working and Industrial Supply increased sales in 2011. Our goal is to capture more of the customers' maintenance, repair and operating MRO spend and to improve their efficiencies in operating cost. As we accomplish this, the entire breadth of DXPs technical products and services become stronger than any one individual could be. Our multiple segments and support divisions make us unique and gives us a competitive advantage that is winning market share against the competition. Great growth strategy, passion for outstanding customer service and technical expertise and our great DXPeople executing on all our strategies above is what makes DXP successful. Customer driven experts in MROP solutions accomplished by fantastic DXPeople who wants to help our customers improve their operations. We have policies, procedures, operating excellence to control the amount of growth along with the right balance of our entrepreneurial spirit to grow sales and be customer-driven. Thanks to our outside sales professionals and our inside customer service representatives that are experts…

We will now being the question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt Duncan with Stephens Inc.

The first question I've got, David, you actually address this towards the end of your comment, just sort of about your growth outlook here in 2012, if I understood you correctly, you feel like there is no reason you guys can't do at least the 10% organic growth goal that you laid out in 2012, correct?

That's correct.

Okay. And then looking at the various pieces, I think on the last conference call you said, you felt like IPS, to do about $120 million this year, I know there has been some pretty nice strengthening in that market over the last 3 to 6 months, is that still what you think the right goal is for 2012, with the goals now starting to come back as well you maybe do better than that now. Just can you update your thoughts on that segment?

25% to 30%.

That’s helpful. On the SuperCenters conversions, I guess, you converted 2, you’ve now got 28, you said there is 8 in the conversion process today. What is the annual goal for the number of locations you would like to convert?

Well, we like to convert one per region. We’re realistically that doesn’t always happen and as you know some of this is opportunistic and our ability to find the right people to help us create these SuperCenters. So I think [indiscernible] who is Senior Vice President those ServiceCenters was saying and its right up there was that he feels pretty good about the 8 that he has on the board. And he plans on identifying some more to put in process, which in process by definition means that we hire the outside and inside person for a new value proposition. So we’ve got to hire them first before they would come in process.

I guess just kind of depend on how quickly you can hire the people.

Right.

So whether or not it’s going to be 8 or some number great than 8 that you convert this year?

That’s correct.

Okay. Mac, do you have the sales data by month handy and then if you can maybe talk a little bit about what you’ve seen so far in January and February?

I don’t have it in front of me, but I can kind of tell you from memory that I guess if you take the number of business days and calculate sales per business day in Q3, it was 3,248,000 or Q4, it was 3,580,000. My memory tells maybe that really we were kind of just running along at that Q3 level or little below during October and November and December was our very big month that really brought most of that group.

What do you attribute that to? Was there some close outs in IPS, or was it really the whole business accelerated in December?

We definitely IPS things that shipped in fourth quarter and some of it, I think December was strong.

And is that strength and acceleration you saw in December, has that continued here in January and February?

Well, I think when you take the oil and gas industry and realize that they really push hard to get all the equipment going into year especially if had any budgets left, and then when they head into New Year there seems to be typically a little bit of a lag as I get the new budgets approved, and so our January, which normally is going to be our lightest month of the whole year was really good.

Okay. So it sounds like you guys are off to a really good start and given that January is usually soft and was strong there is no reason to think you can't put up another very good growth number here in the March quarter.

We're going to keep those sequential quarters going maybe.

Two more things, David. First, just as you look at various end markets, it sounds like oil and gas is probably the strongest. There's been some obviously a lot of talk about natural gas rates getting laid down. Can you talk a little bit about how that might impact you guys. I know you've got a lot of oil exposure and then very low gas-- low nat gas prices are probably helping you with the petrochem. So can you talk a bit about what you're seeing in the various energy markets?

First of all, the horizontal drilling is increasing every month. Normal traditional drilling is declining and that's normally related to gas, doesn't have to be, but it can be. And I will tell you that we have customers saying they are cutting back on the number of gas wells that they are going to be drilling this coming year, doesn’t really go to zero, but they are cutting back in those areas. Now that makes sense, of course, because natural gas prices are very low. And that same lowness is that the chemical and petrochemical people that use natural gas as their raw materials are really doing quite well. So, to us we see very nice drilling activity mostly after oil. We see a lot of pipeline business designed around moving the oil whether that's pushing to down here in Houston where we have a plants or we need to ship it overseas or wherever we're shipping it. So, the pipeline industry is good, all that midstream. And then we see the downstream chemical plant being good. So, we're not really worried about natural gas drilling. We're more than making up for it in oil.

That's what I was getting at it. And then last thing I’ve got is looking at your balance sheet if I adjust your debt balance for the check that were outstanding at the end of the year for C.W. Rod, it's around $151 million to $152 million. Your borrowing capacity is about $200 million facility. So what are your thoughts on the balance sheet at this point? And as you look at the M&A pipeline, I gather, it's probably pretty full, so how do you think about funding those deals and sort of balancing that out with the right level of leverage?

For the deals that were in active discussions on right now, we have plenty of money available. In case we’re successful in some other deals that are still just preliminary, we have actually have a proposal to increase our line from $200 million to $300 million.

And then, what's the leverage sort of max leverage you guys are comfortable at in terms of the leverage ratio?

Three times to 3 1/2.

[Operator Instructions] Our next question comes from the line of Greg Garner with Singular Research.

Couple of them were already answered by the prior questioner. I just want to find out, with the recent acquisition, just opened up a new Metal Working division, is this also an avenue for potential growth, could it be organic or is it something that has to be by acquisition based on the geographies, where they are located?

Well, it's both. We like to acquire any type of company that fits one of our 5 divisions now and then we bring additional products and additional resources to them to help them grow organically. We're always ---We tell them the good part about being public is you now got a growth, your top line and your bottom line at same time you got to do it at least 10%.

Is that make a difficult I mean that business is it difficult to grow organically into another geography or do you need to purchase another facility elsewhere?

That's a really good question. And we do, do greenfield starts-up, but they are normally going to be related to oil and gas where we are really, really good and we have customers that want us to come there and help them. So I would say, typically, we prefer to do an acquisition where we buy market shares and then we add to what they do.

And we are also, sort of, you could call it acquisitions where we hire people which is how we create SuperCenters or we are adding people if I understand your question, you may be asking can we expand in becoming than in our 120 locations is up.

Yes. Okay. Good point. I forget that.

That’s why I leading to about having the SuperCenters grow through acquisition that way, okay.

But we actually own Metal Workings we have a new start-up in Ft Worth. And then by the way, we're already doing about $20 million in that area through our integrated supply and through our service centers already. And so we just added enough volume, now we’re talking about $130 million volume in the Metal Workings area, and so that’s why we decided to make this effort.

Okay. And I just want to clarify; I didn’t quite hear. It’s very end of the commentary, the EBITDA margin that would have to wait till 2013. What was the goal in that margin or the level?

10%.

10%. And it was mentioned that did I hear this correctly, $1 billion revenue is likely for 2012?

Yes.

Our next question comes from the line of Joe Mondillo with Sidoti & Company.

First off, I was wondering if you could give me or just at least talk about the profitability of each of the 3 segments in the fourth quarter.

As in total operating income?

Yes, operating margin.

The fourth quarter Supply Chain Services.

Or just the income amount?

Operating income will be about $2,381,000. That is 6.2% operating margin. IPS was $6,165,000 that shall be in 19% operating margin. ServiceCenters were $16,505,000?

Can you say the last one again, sorry.

I'm sorry, I'm arguing with Mac, in the sense that, you were talking about operating.

ServiceCenters is $16,505,000 and operating margin percentage is 11.3%.

Okay. I guess just to concentrate on IPS, David, I guess in terms your 25% to 30% goal, you did 27% growth in 2010, 33% in 2011, so you are essentially thinking that you can sustain that growth. What gives you the confidence that you can sustain that growth and how are you going about getting, how are you going about continuing to grow at those levels?

Okay. I think although we have do the history and realize that when BP had their oil spilled on offshore that most of our business back in those days came from offshore platforms. And of course that business really went to zero or almost zero, and we had a big shift and to capacity we added to the acquisition of Quadna to onshore activity and now what's happening is the drilling utilization rates going from 40% to 64% in the Gulf. And the activity is picking up and we reported a lot of stuff last year that even became orders last year that will be produced this year. And so we’re going to be hitting on more cylinders with more capacity in the fact that the offshore and the onshore business is robust.

Okay. So primarily drilling activity is generally driving that business?

Well, production activity.

Production activity. Okay. And what kind of capacity what sort of your max sales level or what kind of capacity does that business have right now?

Well. We’re adding capacity to Snyder, Texas. We’re adding capacity to our Denver, Golden facility. We were down to one shift and now we've-- last year we were at 2 shifts, we actually could work with 3 shifts. We have flexibility and I’m not sure, I know if we were just maxed out 100% percent what that number would be.

What we call 529 locations I think that second shift is not a full shift. They have a lot more than what they’re doing now before. And we have another location that’s just barely touching what they did before. [indiscernible] in a year and they did 7 or 8 in 2011. And there is lot of product capacity available. And we can create more if it's needed. We have to hire people. We are not having much people sitting around.

Great. And then I guess in terms of the profitability I mean, you've had 19% in the fourth quarter, you did 14% in the second 15% in the third, you've seen a good amount of improvement there. Is that 19% sustainable or was there something in there in the fourth quarter that really boosted the margin there. How you thinking about profitability for 2012?

It’s a utilization of assets that will drive higher margins to a point, and then you kind of reach that point and it will level out.

I mean, I guess the sales base compared to the third quarter you had a similar sales base. So was there a particular product, the product mix in there that really shifted or drove the profitability in the fourth quarter compared to the third and is that sustainable. I’m just trying to get an idea?

Everything we build is unique and part of that is it may have a unique profit margin. We have been commenting in prior quarters about how the gross profit was lower, had been lowered than what we've normally accustomed to on our Innovative Pumping Solutions jobs and lot of that is driven by that, when these jobs were bid, we and our competitors had empty shops and the competitors were bidding well to get that, but I think what we're doing is progressing towards a more reasonable, more normal gross profit margin product.

Okay. So is a high teen operating margin more of a reasonable profitability standpoint?

Yes.

Okay. And then just lastly, in terms of being able to hit the top line, your 2013 $1 billion top line goal this year, but not being able to hit the EBITDA margin, why is that or is that just related to the less profitable acquisitions that you have taken on?

No.

I know some of those acquisitions carry lower than company average margin. I imagine that's dragging on it a little bit but.

I do think we are going to get the 1% scale in expenses by being the larger company. And I don't think it’s-- we bought Kenneth Crosby they had lower EBITDA margins, a great return on invested capital, but C.W. Rod had 14% EBITDA margin. So, kind of offsets it. I think the question is a cultural one and a scale one. And the cultural part is being able to feel good about charging more and bringing more value to the customer and the scale one is about driving SG&A expense down. And I think you will see the scale happens, so I wouldn't be surprised to see 9.1% EBITDA margins this year. But I just don't think we are going to make the cultural change where we are able to charge more that's going to get us that other 1%.

Thank you. Ladies and gentlemen, that concludes the DXP Enterprises, Inc. 2011 fourth quarter and year-end conference call. We thank you for your participation. You may now disconnect.