Good day and welcome to DXP Enterprises Inc. Third Quarter Conference Call. All lines are currently in a listen-only mode. [Operator Instructions] Please note today’s call is being recorded. It is now my pleasure to turn the conference over to Mac McConnell, Senior Vice President of Finance and Chief Financial Officer.

Thank you. This is Mac McConnell, CFO of DXP. Good evening and thank you for joining us. Welcome to DXP’s third 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 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 third quarter 2015 results, David Little will share his thoughts regarding the quarter, then we will be happy to answer questions. Sales for the third quarter of 2015 decreased 21.7% to $303.1 million from $387.1 million for the third quarter of 2014. After excluding third quarter 2015 sales of $2.2 million from businesses acquired, sales for the third quarter decreased $86.2 million, or 22.3%, on a same-store sales basis. This decrease was primarily the result of declines in sales to customers engaged in the upstream oil and gas industry or manufacturing equipment for the upstream oil and gas industry. The strength of the U.S. dollar contributed to the sales decline. Sales of our Canadian operations were $32 million for the third quarter of 2015. The change in the exchange rate reduced sales by approximately $4.8 million. Sales by our Service Centers segment in the third quarter of 2015 decreased $55.7 million or 21.9% to $199.3 million compared to $255 million of sales for the third quarter of 2014. After excluding 2015 Service Centers segment sales of $2.2 million from acquired businesses, Service Centers segment sales…

Thanks Mac. Thanks to everyone on our call today. Let me begin with market conditions and our performance against the ongoing softness in our key end markets. As many of you know, an estimated 20% of DXP’s business is tied to upstream drilling, development and completion market and 60% of our business touches oil and gas across upstream, midstream and downstream markets. That said, DXP continues to perform in the midst of a cyclical downturn ahead of its similar peers with like exposure. The root causes are the same, the prolonged impact of rapid drop in rig count and oil prices and the strong U.S. dollar. During the third quarter, we experienced a major decline in oil and gas from the highs of the $50 range back to the low to mid-40 range. This has increased volatility and financial stress within our customer base and has led to a second round of rig activity reductions and in some cases, some of our customers have simply gone out of business. That said, DXP’s segments performed well in the midst of a challenging market. Total DXP revenues of $303.1 million declined 64% sequentially, 21.7% year-over-year, continued to outperform the 20% sequential drop in the North American rig count and the 56.6% decline year-over-year. Organically, sales declined 22.3%, with Tool Supply and Cortech acquisitions positively contributing $2.2 million in sales. Regarding Cortech, we completed the Cortech acquisition on September 1. We are excited to have Cortech as a part of our DXP family. Cortech provides us a premier rotating equipment presence on the U.S. Western seaboard and bolsters our market share in the municipal wastewater treatment, water treatment and desalinization markets. Additionally, it provides DXP with a presence in Bakersfield, California, one of the largest crude oil productions in the United States and…

[Operator Instructions] And we will take our first question from Matt Duncan with Stephens. Please go ahead.

Hi guys.

Hi Matt.

So David obviously, I am sure you know where I am going to start here, let’s talk a little bit about this breakup with Goulds and the launch of your home brand, can you talk a little bit about how you guys are going to position your product in the marketplace, how you plan to compete with Goulds and talk about your manufacturing capabilities, do you have the capacity to serve all of the demand that you had for Goulds pumps with your own line today?

Okay. I will try to remember those six questions. This is really an exciting time for DXP. We have – Goulds has had very stringent handcuffs on us, told us where we could and couldn’t sell, who we could and couldn’t buy. And so – and other pump manufacturers just simply don’t have those kind of restraints. We all understand territorial restrictions, but if you are assigned a territory, we understand that, if you are not in – if your area of responsibility is not that territory, well then you should be able to sell something else. And because we are trying to take care of customers that are global customers. These aren’t little customers. These are Fortune 500, Fortune 1000 customers and they are global customers and they want standardization. They want somebody that can take care of their needs. And so this allows us to build our national sales team, call on corporate America, go out and really give the customer what they want. To do that, we had to unhitch ourselves with Goulds. And to be fair, Goulds wanted to unhitch themselves with us. And so we went about how do we go about replacing Goulds’ breadth of product, because they are a good company, there is nothing wrong with Goulds. Their philosophy is a little prehistoric, but their product is really good. So we bought B27, who makes an API 610 product, which is really a big, big product. Somebody that’s really, really good and in that business is somebody like Flowserve. And so it was an easy step for them to put together a manufacturing state-of-the-art system to make quality, quick, price-competitive ANSI products. Then we filled in with some other private label people on some other types of things and other products that Goulds…

Sure. I appreciate all the detail. That was very helpful, David. So what is the quarterly revenue run rate that you had in Goulds pumps? And how quickly do you think you can transition that to your line? Or is it just too early to know? Are you still kind of trying to go to the customer base and educate them on your product?

Well, we are having great success. And most of the success is that – we just – we can do it quicker. I like to describe it this way, with modern technology you can build one of something as inexpensive as it used to be when you had to have capacity that you were building 1,000 of something. So you have a – you are running through 1,000 of something and you have this long run, and you did it because it was cheaper to do that. Setup time, all the things associated with that. Now you can build one of something that I believe you can build it just as inexpensive as building 1,000. Plus, let’s just say something goes wrong, nobody’s perfect, so the world is not perfect. So if something goes wrong, well, when you go to the end of the line and you have to start over, would you rather go to an end of the line of somebody building 1,000 of something, or would you rather go to the end of the line that you’re next to get fixed? And so speed, speed is what we’re all about, and we have just examples of where – a perfect example, a customer called, and it was frankly a Goulds account. And Goulds – they wanted a super duplex impeller, and Goulds told them it would take 18 months. And they were going, look, you don’t understand, we are down. We’ve got to have this item. So for whatever reason, I’m not sure why, but they called us. And we didn’t have a super duplex impeller either. But we were able to say, look, what – we will give you this stainless steel impeller, and we’ll have your super duplex in a week. Well, it doesn’t take many of those examples for the word to get out, and for the customers to – I mean, they just loved us. They were like, you are kidding, you can do that? and we go, of course we can. And so we’re excited where we’re headed. We are early in the game, so I don’t think I’m prepared to predict when the crossover will come. We were doing $2 million to $3 million worth of purchases from Goulds a month. And so when does that – when does it that we crossover and we’re exceeding that. But remember, we had a very restricted territory and a very restricted area that we could do business in. And now the world’s our oyster, so we expect that to happen.

Sure, okay. And then just last thing, if I may and then I’ll hop back in queue. Just, Mac, on business trends as we move through the quarter, what did the month-to-month sales trend look like? And how does it looking headed into October?

Look to the monthly sales schedule. So there are 64 business days in the quarter, so the sales per day were $4,736,000. And they started out in July, they were at $4,450,000, August, $5,015,000, September, $4,755,000.

And do you have October there handy?

October would be estimates.

Sure.

And the estimates is $4,003,000.

Right. I will hop back in queue. Thanks, guys.

[Operator Instructions] And we’ll go back to Matt Duncan with Stephens.

Alright. Okay, well let’s look a little bit more at the balance sheet, Mac. How much debt did you pay down in the quarter? I think you gave a debt balance, but what was the actual debt reduction in the quarter?

The actual debt reduction was $1 million.

Okay. And then looking out, I think what people are going to be most focused on is if we look out and predict – project forward, EBITDA seems to be still declining based on the sales patterns that we’re talking about. Are you guys at all concerned about maybe bumping into your debt covenants again, or do you think you’re going to be able to pay debt down fast enough to stay clear of those?

We believe we’re going to be able to – we still expect to pay down debt. I mean, we – I kind of went through the litany of even though we only paid down $1 million, we made a $10.5 million acquisition. We paid $11.3 million on a working capital dispute. We spent $1 million on legal fees. We bought $4.7 million worth of equipment for our new ANSI pump manufacturing facilities.

Okay. What was the non-controlling interest item that showed up on the income statement this time?

That’s our foundry. We own 47.5% of – I mean we consider it our foundry. And it’s also assumed that because we’re the sole customer and have the right to buy the rest of it that we actually control it. So it’s fully consolidated in our financial statements.

Would you assume that you will buy the rest of it so that we get rid of this non-controlling interest line?

Yes.

When do you think that will happen?

Next year. I’m not the person that decides that. So...

Sure. Sure, okay. Just back on the pump manufacturing for a minute, I don’t know, David, did you give out a sales number that you had that you were getting from Goulds? I don’t remember if you gave out a number or not, or if even you want to, maybe for competitive reasons you’d rather not.

Well, we were doing a – I mean, I have – we were doing about $3 million worth of purchases from Goulds.

Per month? Is that the – is that per month?

Per month, yes. And so that would equate into – and then you have a lot of value adds, all that, that goes on with that, so it’s – so don’t take this as just the kind of the margin we made on Goulds, because we don’t make this much. But that was probably $5 million worth of revenues. I’m guessing a little bit on that.

Okay. What about sales force? Do you have the sales force capability to sort of rep this product truly nationally? Or are there some holes in the footprint that you may look to fill in? I’m assuming that Cortech probably fits that bill. But are there other spots where you might need to do other small acquisitions or greenfield new offices to be able to sell your pump line?

So, yes. We want to have – we want to be the Motion Industries of rotating equipment. So they have – so we look at them as an example. They have 500 stores across North America. So we don’t – it isn’t quite the same in the sense that a – pumps will travel further than a bearing that’s needed immediately. So, we won’t need 500, but we need to build out the network. So what we have with the products that we have is the ability to now go out – and we don’t have Goulds telling us we can’t buy somebody. So we have the ability – and I say tell us, there was always the threat of, well, if you buy somebody, we’ll cancel you, okay? So we won’t have the – they can’t tell us we can’t buy somebody, but you get my point. If you do, you run the risk of being canceled. So, our targets to buy people, now is somewhat unlimited and certainly unrestricted. So yes, we plan on doing that. We also have the ability to do possible Greenfield startups now, so to do some of this more on an organic basis. And I think let’s not miss the point. We are an $800 million rotating equipment company, $800 million. So when we talk about purchases of $3 million, or we talk about sales of $5 million, we’re not talking about a very big number. So that’s – so I don’t want to get too caught up in that we’re just replacing Goulds, so because that’s not really what we are trying to do. What we’re trying to do is to capture 20 plants of this chemical customer across North America. And when we do that and we sell him all of his pumping needs, that deal in itself may be $20 million. And that’s the kind of – that’s the numbers we are talking about. We are not talking about oh, we are making a little bit of ANSI pumps over here to replace Goulds. That’s not the objective. I mean, it is the objective. It’s certainly the objective to some of my salesmen probably right now, but they would like to feel comfortable that they can replace Goulds with something. And so we’ve done this for them, by the way. I mean, we’ve – Goulds wanted to take accounts away and so we said no, and it wasn’t fair to our salesmen and the relationships we have built up over the years. And so we have given our salesmen more than a fighting chance and a way to grow beyond their abilities in the past and they are fired up and excited and we are having success.

Okay, great. I appreciate the help. Thanks.

[Operator Instructions]

Everybody is traveling today. Let’s go home.

Yes. It appears we have no further questions at this time.

Alright. Thanks to everybody on the call.

Thanks.