Good afternoon, my name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the DXP Enterprises Inc. Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Mac McConnell, Senior Vice President and Chief Account Officer. You may begin your conference.

Thank you. This is Mac McConnell. Good evening and thank you for joining us. Welcome to DXP’s second quarter results conference call. David Little, our CEO; and Kent Yee, CFO 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. Now, I will turn the call over to Kent.

Thanks Mac and good evening to everyone on our call today. We will begin with a summary of our key financial information and then Mac will go into more detail regarding our sequential and year-over-year performance. David will conclude with comments about DXP and our financial results. So let’s jump right to it. Total sales for the second quarter were $250.7 million. Total DXP sales grew sequentially 5.1%. Average daily sales for the quarter were up 6.8% over Q1 or 4 million per day in Q2 versus 3.7 million per day in Q1. This was predominantly driven by our service center segment, which experienced 10.8% growth or an average of 2.6 million per day during Q2. Additional drivers of this growth include our rotating equipment in safety product divisions. Canada also experienced stronger than normal growth during this time of the year with its third consecutive quarter of sequential increases. Our service center segment, which year-to-date is 64% of total DXP sales experienced a second quarter of sequential growth along with total DXP results. The increases in the quarter we believe are supported by an improving macro backdrop. The key indicators that support our business point to the results year-to-date, specifically the increase in the US rig count, increases in the US oil production, the improving PMI, and the strength in the NVI. In addition, and more importantly the feedback that we are also getting from our regional leaders remains favorable and upbeat as we head into the second half of the year. Turning to gross margins, gross margins improved 45 basis points from 27.1% in Q1 to 27.5% in the second quarter. Again, service centers was a big driver here as they improved gross margins 143 basis points from the first quarter. Product and customer mix were key drivers…

Thank you, Kent. Sales for the second quarter of 2017 decreased 2.2% to $250.7 million from $256.2 million for the second quarter of 2016. After excluding second quarter 2016 sales of $7.8 million for Vertex, which was sold on October 1, 2016, sales for the second quarter increased $2.3 million or 0.9% on a same-store sales basis. Sales by our service center segment in the second quarter of 2017 increased $2.9 million or 1.8% to $164.7 million, compared to $161.8 million of sales for the second quarter of 2016. After excluding 2016 service center segment sales of $7.8 million for Vertex, service center segment sales for the second quarter of 2017 increased $10.7 million or 7% from the second quarter of 2016 on a same-store sales basis. This sales increase is primarily the result of increased sales of pumps, safety services, industrial supplies, and bearings to oil and gas and industrial customers. Sales of innovative pumping solutions products decreased $9.9 million or 18.2% to $44.5 million, compared to $54.3 million for the 2016 second quarter. This decrease was primarily the result of the lumpy nature of IPS sales combined with the decline in capital spending by our oil and gas customers during the first half of 2016 when many of the jobs recognized to sales during the second quarter of 2017 were ordered. In connection with the increased capital spending in 2017 by our oil and gas customers, our IPS backlog has been steadily increasing since December 2016. Sales for supply chain services increased $1.4 million or 3.6% to $41.5 million, compared to $40 million for the 2016 second quarter. The increase in sales is primarily related to increased sales to customers in oilfield services and oilfield equipment manufacturing industries. When compared to the first quarter of 2017, sales for…

Thanks Kent and thanks Mac. And thanks to everyone on our second quarter conference call today. Before I jump into our results, I would like to make some general comments directed at our DXPeople. Let me thank all of you for your continued hard work and grit as we turn the corner and momentum begins to build on our business. We have worked as a team to meet the challenges of the past 2.5 years, and I could not have asked more or be prouder of each of you as your positive attitude, customer service excellence, and winning culture has served all of us very well. Now is the time to benefit from our efforts by having fun growing again, being customer driven experts, and MROP solutions, bringing the solution and being the solution and leveraging all of our DXP capabilities across our product divisions. I look forward to everyone finishing the year strong and building a path to an even better 2018. Additionally, some of our DXPeople have heard me more recently talk about being fast and convenient for our customers. DXP has to continue to improve and be an easy-to-do business with. As we move forward, speed must be a fabric of our culture, both internally and externally. Speed is not just DXP's competitive advantage. It is a guiding principle. Customers will choose companies to do business with that not only keep a promise, but follow through and make convenience a priority not just a transaction. These qualities will be essential as we move forward and continue to build DXP. Moving to our results, this is DXP's second quarter of sequential increases and total sales and EBITDA. As such, we are encouraged by the improvement and market conditions and remain focused on growing our business in fiscal year…

[Operator Instructions] Your first question is from Matt Duncan from Stephens.

Hi good evening guys, congrats on a good quarter.

Thank you, Matt.

Thanks.

To start off, can you just talk about the sales trend you saw month-to-month through the quarter, was it sort of your typical build of revenue on a monthly basis?

Yes, it was. April sales per day were $3.986 million. May sales per day were $3.682 million, June sales per day where $4.270 million, for the quarter averaged to be $3.979 million.

Okay. And then as you are talking to customers right now with oil sort of balancing around in this range, rig count seems to kind of topping out a little better, are you sensing any kind of change in customer tone or demand pattern at all or is it still marching forward?

No, we are looking for that because as you know, oil prices have had a lot of volatility to own and volatility is not very easy to count on. So, I mean it is difficult to plan for it. But we are really not seeing projects cancelled or projects put on hold or - of course our daily business through our service centers is pretty robust, and a lot of that is because of pent up demand on maintenance and things that were differed, and so we see our aftermarket growing pretty nicely. And really on capital projects, they are out there and we actually see our backlogs continue to build. So, we are not, again we are not, Kent emphasized this now, we are not seeing some hockey stick recovery and things are just shooting off the table here, but it seems like nice steady growth and you know, I mean the two weeks we’ve had a down rig count, I believe they were one or two rigs a piece. So it’s not like, you know you have seen a big decline.

Okay, so as you look out to the third quarter then, typical seasonal pattern would be for the revenues to be up a little bit. You had a really, really strong sequential improvement in service centers, is there anything there that may not be repeatable? And then on the flip side it sounds like you are seeing great growth in the backlog with the IPS business, so would it be safe to assume that the back half of the year, your revenues there ought to be better than the first half?

Again, I think that’s correct, but I do think that it’s, I think when we look at this month, which isn’t necessarily indicative of the whole quarter, but I think our sales have grown 1.6% and so that’s not that robust, but at this point, we will take that we will take the leverage that that brings with us to improve the bottom line and keep moving forward.

But David is the -- is the IPS increase in backlog, is that turning into, you know customers are ready to actually have you get to work on those projects and take delivery, is that a good leading indicator, I guess is what I’m getting at for what we should see happen on a sequential basis with those revenues.

Right. So to be perfectly clear about things, I want to make sure, you know it’s hard to give some of this in a script, but the quarter that we just had was things that we sold back in the first half or kind of in the middle of 2016. So two things were happening, one is, that was a buyer's market, so our margins were lower. We just need the business to keep our shops busy and full et cetera. And so, we see some pluses around the fact that the fabrication jobs are still very competitive, but they are not extreme. We’re not having to be as extreme as we were a year ago. And then, I think that the projects have built starting in probably the third quarter of 2016, project started coming about and then each quarter those projects and number of things were quoting, booking, and then now producing, are all growing.

Okay that’s all very helpful. And then last thing from me and I’ll hop back into queue. On the PumpWorks line, your own pump which you guys are making, can you talk about how that’s going, what’s your annual revenue run rate up to at this point, and how is the product being received by customers? Is your quicker delivery time, shorter lead time, however you going to put that, is that helping you with oil and gas customers as their businesses get busier?

So when we think about PumpWorks, we think about two different pieces of it. We think of PumpWorks being our - for DXP, it is our private label centrifugal pump line that competes with Flowserve rules [ph] and Flowserve. And so when we take that line, we think of API 610, those are more sophisticated bigger pumps et cetera and pretty much most of the first-half of 2016 we were living off of our backlog. As we turned the corner, started probably in the fourth quarter of 2016, our backlog started building in that particular arena and has continued to build and really it got to a level that wasn’t all that comfortable, but we always did have a backlog, and we always very giving some orders, but now that’s building in a bigger way. Those pumps are typically going to be on pipelines and refineries. So that business is doing much, much better and will continue to improve. The other piece of our business is what we designed and that was more of a commercial pump and that part of the pump is the part where we kind of started from scratch two or three years ago, and I think two years ago. That and that was to replace the fact that Goulds went one way and we went a different way. That has been wildly successful. We are doing every bit as much PWA, PWH which is really kind of the low end of API, but we are doing, we are really doing fantastic in those areas. I would say we are selling as many pumps or more than we did when we were at the Gould’s distributor. What’s not quite up to speed and is not a bigger number is when we had Gould, so we are kind of net negative is the aftermarket, the parts business, and even though a lot of our parts were interchangeable with Gould’s customers tend to go back to the OEM. So, as we sell more and more of these PumpWorks pumps and then it’s our pumps out in the field. We will begin to see a lift around partners. That lift is important because you make a whole lot more money on parts than you do on new pumps.

That’s very helpful David and last thing’s if I can. On the margin that you're getting on the pump that you are selling that you are manufacturing versus the Gould’s pump are you getting a better price, really not better price, better margin percentage then you were on the Gould’s line, I know that was something that you anticipated, hopefully having happened, is that actually happening?

So, it depends. We are perfectly clear, if we're going against Gould’s direct then the margins can take a pretty skinny and it’s because Gould’s only way of comparing us is with price. We actually make a better pump than they do. So - and there is not anybody out there that frankly don't appreciate that probably except for Gould’s, they don't appreciate it. But a lot of - so the lot of the margin on the direct accounts was going to be in the parts area, but again we don’t have the population of pumps out there, so piece of it is just us trying to gain market share and they're trying to keep their market share. So things are pretty skinny in that arena. We do really quite well and sell at much higher margins than we did before is when we're competing against another distributor and that is because we will have two mark-ups. Goulds is still trying to make some money on their product and then the distributors are trying to make some money on the product. So there is a double market and that’s where we really shine, we really shine in terms of being fast and quick and getting the customer what he needs and we shine because if that’s the case and speed is important. Well than we make nice profit margins.

All right. Helps a lot. Thanks David.

Good.

[Operator Instructions] The next question is from Steve Barger from KeyBanc Capital Markets.

Hi Guys this is Ryan Mills on the call for Steve, congrats on the quarter.

Thanks Ryan.

Thanks Ryan.

My first question is, if we continue to see the cycle improve, how should we think about incremental margins going forward more so in the 2017, rather than the back half of 2017?

I feel very strongly about this that we are going to make improvements on our EBITDA margins. To the point of ultimately 10% and maybe Kent wants to argue that because we’re having our own private label pumps and et cetera that our margins on that piece of the business will be better. So, maybe we do better than 10%. Your question is an appropriate one where we went from 6.5 to 6.7, I guess is that, did I get that right. I am trying to remember, I think that is right and I think that is what we said. I think that is what I said. But anyway I will breed in that. So anyway - we are going to - we would like to see us - we would like to see 7% possibly by the end of this year. Not across the whole year, but at least maybe in the fourth quarter hit that 7%. And then as we go to the next year we would like to see again at least a percent increase in that and another percent. It took us a long time to get there, but we know we can get there; there is leverage in this business, as you know sales go up 5% and the bottom line is going to go up 15% or 20%. And on a lot different, this particular case we get more leverage in the early stages where we went from, we had 5% and we went up 35%. So, anyway we will get there. What concerns me a little bit and I really don't want to make this mistake again is, I think there is an appropriate percentage for our business. And really we hit 10 during the last up cycle. I think we hit 11. Everybody wanted to know if we were going to go to 12 and 13 and I think that is pushing the envelope too much. I think this deserves to be at 10% EBITDA business. So, does that answer your question?

Yes. And then my next question, just thinking about IPS in the third quarter, its gone us against easier comp and considering the growth you’re seeing in the backlog and maybe what you are hearing from customers so far, is it out of the realm to assume you might return to positive year-over-year growth in IPS in the third quarter again?

Yes. And really I would like to comment, I think we made this point, but I’m going to make it again, we divested ourselves of a faster, fastener, master distributor that bought the product from China. And as a master of distributor that didn’t really fit our model. So, we sold that and if you really - if you back that out and I think somebody has some numbers of what that is then we’ve already turned the quarter and have year-over-year growth. And so we’re pretty proud of that and we will continue to do so.

Okay. And then I believe in your prepared remarks you highlighted the positive strength in Canada, just kind of curious, was the seasonal break-up in Canada this year have less sort of an impact compared to your expectations of what you have seen in previous years?

That’s correct. I mean, Q2 was a surprise portion. We have the breakup and they have their normal call it warm season starting. It didn’t start necessarily any earlier, but it started as expected, but Canada became a surprise for us in Q2. We frankly probably expected it to be a little softer than when it was. So, three quarters of sequential increases will be hard to repeat as we move forward, until we get to Q4.

Okay. Thank you, guys and again congrats on the quarter.

Thank you.

The next question is from Matt Duncan from Stephens.

Hi guys, you made a comment on the refinancing of the balance sheet in you prepared comments, just wonder if you are in a position to be able to expand on that anywhere, are you in the process of getting the debt refinanced, I don’t know if this is more for you David, but which way are you guys leaning in terms of what kind of debt structure you think you are going to have and is there a time line for when you would like to have this completed?

Good question Matt, I mean hey, I mean I think the comments are still the same, the evolution of our capital structure in the way we thought about it has been a ABL plus follow some institutional debt piece in terms of our capital structure. And as you probably know those things take time and particularly when you go to that institutional debt market because you got to do things like get a rating etcetera, and so we are exploring all those things. I don’t think we are in a position to communicate leaning if you will, but obviously we get, hey we need to be cognizant of the dilution and or accretion frankly from a cost of capital perspective and so we are just trying to be sure we get to the right structure for DXP going forward. That creates flexibility and that is cost effective as well.

Yes, I think, I will just add to that that we are not in a giant hurry, but we are not in a slow down mode either. We are pushing forward to get the best deal we can for DXP. If we could get something that would be better than cost neutral that would be just unbelievable. I think everybody would pat me on the back if we get something a little more costly, I think that is going to be okay too. So, we’re pushing forward, but we’re not going to do something down.

David is the convertible note something that’s one the table or do you not want anything that’s going to dilute the common holders and we’re really talking more some kind of institutional bond plus an ABL just a question of size and time?

That’s not - a convertible debt piece is not in the cards.

Okay, just wanted to make sure on that and then from a timeline perspective appreciate that there is obviously some things here that how do you guys control, remind us, when you need to have this done, I think my recollection is the current bank debt matures at the end of March of next year, is that correct?

That’s correct.

So is the goal to have it finished by the end of the calendar year or could it stretch into early next year, just how quickly would you like to have it done? Obviously David the key here is that you want to get free of covenants so that you'll be able to get back to sort of the bread and butter of DXP, which is these nice small bolt-on acquisitions you guys have done so well in the past, but obviously the sooner you get that done the better, so just maybe a little thoughts on the timeline.

I think you said it well, and so the answer to your question is yes, yes, yes, yes, but we are going to, we will get something done before the end of the year.

Okay.

We’re not going to push ourselves right up to the back of March 30, 2018 that’s not going to happen.

Have you started conversations with acquisition targets and maybe you just never really stopped, but are you lining some stuff up, so that once you’ve got the new debt structure in place you will be able to move forward?

I mean Matt we always keep dialogues going, I mean in theory we never stop, but we may take a pause internally because we never want to catch a falling knife, per se. But we're always keeping dialogues open and free.

Okay, are you talking about acquisitions?

Yes, acquisitions yes.

Was that your question Matt?

Yeah, exactly.

Okay.

Alright guys appreciate it. Thanks as always.

Alright, thank you.

The next question is from Patrick Murchison from Coker & Palmer.

Hi guys. Thanks for your time.

Hi Patrick.

I just want to follow-up on the M&A front as well, you know with the cycle kind of starting to turn and the market is improving, does that present any challenges and trying to find these specifically priced acquisitions?

No, I mean we are a regular acquirer present market excluded and I think we're able to find guys at reasonable multiples and fair multiples, so we don’t see any challenge right now. Obviously, we always compete with other strategics and private equity buyers, but those tend to be on the larger transactions.

Okay, and then, I guess as far as the acquisition market, I mean, are you all seeing any particular geographies or product categories that look more attractive than others.

No, I mean, the great thing about our model at least from our perspective is that we have the five key product divisions and we are able to look at acquisitions across all of those, but more recently obviously it has been waited towards rotating equipment and metal working, but there is, you know we can’t time geographies and or product divisions frankly speaking and so we keep the dialogues fresh and that’s why we keep them fresh with across all those product divisions and all geographies. Obviously there is, as we like to call it, holes in our map, but we can’t tell when those will become available, we just keep the dialogues fresh.

Okay. Alright great, I appreciate the answers guys. Had a good one.

Thank you.

There are not further questions at this time. I will turn the call back over to the presenters.

We’re done unless Kent or Mac have something to say. Thank you everybody.