Good morning, my name is Sarah, and I'll be your conference operator today. At this time, I would like to welcome everyone to the DXP Enterprises 2017 Fourth Quarter and Fiscal Year 2017 Conference Call. [Operator Instructions]. It is now my pleasure to turn the call over to Mr. Kent Yee, Chief Financial Officer. Please go ahead, sir.

Thank you, Sarah. This is Kent Yee, and welcome to DXP's Q4 conference call to discuss the results of our fourth quarter and our full year fiscal 2017 results. Joining me today is our Chairman and CEO, David Little. Before we get started, I want to remind you that today's call is being webcast and recorded and includes forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis are contained in our SEC filings, but DXP assumes no obligation to update that information as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings press release. The press release and the accompanying investor presentation are now available on our website at ir.dxpe.com. Now turning to the fourth quarter and fiscal 2017 year-end results. Q4 was a strong quarter for DXP and a great end to the year. The Q4 financial results reflect continued sales growth since Q4 of 2016 and consistent improvement in year-over-year EBITDA. The fourth quarter performance was broadly in line with all of our key financial metrics and expectations. Total sales for the fourth quarter increased 19.5% year-over-year to $265.6 million. Total DXP sales for fiscal 2017 grew 7.2% to $1.0 billion after adjusting for the sale of Vertex in October of fiscal 2016 over $22.7 million in sales. Average daily sales for the fourth quarter were up 8.9% over Q3 or were $4.4 million per day in Q4 versus $4 million per day in Q3. Average daily sales for fiscal 2017 were $4.0 million per day versus $3.7…

Thanks, Kent, and thanks to everyone on our fourth quarter conference call today. Overall, I am pleased with our fourth quarter 2017 and the progress we made throughout the past fiscal year. As we look forward into 2018, we believe our end markets have turned positive, which will provide us with the foundation we need to drive profitable growth. Our near-term focus and priority is to ensure that DXP has a smart recovery. We define this as growing the top line and the bottom line as well as providing speed, quality and convenience to our customers. DXP has more potential than it has ever had, and we are committed to unlocking this through our collaborative efforts of our sales, operations and corporate functions working together to serve our customers in a collaborative and an inclusive fashion while providing a differentiating value in the marketplace. We touched on some of this last year, but our sales objectives remain the same, continue to cross sell product divisions and capabilities, increase geographic reach and industry presence and growth; capture additional fabrication work on capital projects; target upstream, midstream, downstream, food and beverage, manufacturing and other industrial opportunities; and continue to aggressively sell existing and hunt for new customers to capture more market share. Our operational objective is summed up in one word, speed, fast delivery and first to serve; easy to do business with internally and externally; and quality products and services. As we move forward, speed becomes a fabric of our culture, both internally and externally. As we discussed in early 2017, speed is not just DXP's competitive advantage, but is a guiding principle. Our corporate department's objectives are the same, support our customer-facing operations with customer service orientation. DXP sales and operations are our customers. We want to build a collaborative…

[Operator Instructions]. Our first question comes from the line of Joel Mondillo from Sidoti & Company.

I wanted to ask about the IPS segment. A little surprised at how strong the margins came in as well as the volume. First off, could you tell us what the backlog was sequential growth? And then regarding the margins, it sounds like, if I'm reading you correctly in terms of your prepared commentary, that the mix is maybe still a little bit of an issue. So was the fourth quarter just sort of an anomaly in terms of mix where you did see maybe some larger jobs? But going forward, you're still going to sort of see this dynamic where smaller jobs with IFS are going to weigh on margins. And in terms of the 7% op margins, where do you see margins going in sort of the first half of the year in 2018?

Okay. First of all, on backlog, I think we -- we don't give backlog numbers, but we've stated that from the beginning of 2017 to the beginning of 2018, our backlog is up 35%. And it's been up sequentially growing every month and has continued to do so. Second, the good and the bad, I mean, the good is we can fix this and we'll -- and we're not necessarily hitting on all cylinders. So we look forward to do it better. But where we're at today is IFS, Innovative Flow Solutions, has a business that's really, we call it engineered to order. The customer just comes to us and says, "We've got this product and we want that product. Will you engineer the process? Will you build us the equipment? Et cetera." And in that business, we make a lot of margin. I mean, it's 40% to 50% gross profit margins. What's happened to that business is offshore is more complex than onshore. And so offshore has kind of dried up over the last 3 years, really. And so our business has continued to decline in that engineered to order segment. But it's a great business and it's pretty lumpy, but it will come back, and in fact, they have close to a $20 million backlog of ETO business today. But we wanted to expand. If you remember, we closed down Denver to contract based on the capital projects that we had at the time 2 years ago. And now, we're wanting to enlarge our fabrication footprint. And so IFS has had fabrication space because our ETO business was down. And so we looked at that and said, "Well, that will also will make that business less lumpy if we can get some normal, just building a modular package…

Okay. And so when we look at sort of the 3% to 4% op margins in the first 3 quarters of 2017 and then sort of shooting up to 27%. Considering what you can see sort of in backlog, how do you think that mix translates into sort of op margins? It's really tough for us to tell from our vantage point, so any sort of guidance or insight into that -- into the first couple of quarters or 2018 overall, that'd be helpful.

Yes. So I think I'll be glad to give some guidance there. I really think that we'll stay around where we are on the fourth quarter for the first 2 quarters of next year, Q1 to Q2, as it relates to IPS overall. IPS' other businesses' really doing really, really well by the way. So really, IFS and a few jobs that maybe some manufacturing type jobs where we bought some business in the past and we still need to cycle through that. But anyway, I think if you look at the fourth quarter and project that out for the first 2 quarters, you might see 1% or 2% improvement. But in the second half of the year, you should see some significant improvement. Joe, as you remember, our IPS segment used to be a 16% EBITDA business. And so we're long ways for 16% EBITDA business. And we certainly aren't going to get there this year, but we're going to make progress to certainly getting it back to 10% or something like that.

And in terms of those sort of historical levels that you've been at. Just given, considering the entire market overall, where the rig count has sort of gone to and the overall like oil and gas space really spiking when oil was $100, now it's come back. The rig count has sort of plateaued a little bit over the last 4, 5 months. Considering the competition whether there's more competition or pricing strain or anything like that, do you think the historical levels are achievable to get back to within 2 or 3 years?

No, I don't. And so I think you're right, not 100% right based on all your comments, but one of the big missing pieces, both for IFS and the ETO business, and really just a lot of the other IPS-type business, is that we used to have this offshore work, which was that higher margins, higher complexity, higher value, and that offshore work has not come back. It's -- there's little signs of some activity. And so we're excited about that. But we make more business on that than we do onshore. And then when you talk about onshore, then everything you just said was correct. There's more competitors. There's more -- there's good activity. I don't think we're lacking in activity. But the margins and things associated with onshore, they're just not as high.

Your next question comes from the line of Matt Duncan from Stephens.

So just first thing, the typical trends question. Can you walk us through what the monthly sales trend look like in the fourth quarter? And your first quarter is just about put to bed here as well, how does it look so far?

Yes, no, Matt, we can provide that. Sales per day, I'll just back up, going kind of from October kind of through February, if you will. But sales per business day starting in October were $4.0 million, $4.3 million, $4.8 million. And then starting at the beginning of the year, January, $4.2 million, which I would note, includes kind of Application Specialties, and then $4.4 million in February.

Okay. So I guess, the obvious question there is you've thrown Application Specialties then. If I look at January and February relative to October and November, it's pretty similar organic revenues, it looks like. Now typically, you would start the year slow. Have you seen an impact from weather in January and February? It's obviously been a stronger bite from winter this year than last. Just curious if that's causing any issues. And then how does March feel like it's tracking? I know you obviously have a lot of the month left with the last week being the biggest last day being the biggest, but how does it feel like it's tracking?

Yes. No, just in terms of your weather comment. I mean, absolutely, I guess, we're getting more diverse geographically. But still, the bulk of where we're at is 1/3 of our business or so is still on kind of Gulf Coast region. And so we're not necessarily impacted by the weather as much, if you will.

With the exception of Canada. And this is just our typical slow time.

Slow time, yes. In terms of your comment regarding March. It's hard to say. Once again, Matt, I mean, you know this and everyone in the call knows this. There's a fair and large amount of business we book that call it that last week of any month, yet alone, at the end of the quarter. So kind of hard to give any full comments around March. So ...

Yes, totally understand. On the IPS business, the sequential increase, as you've seen, the last two quarters, in revenue have been pretty substantial, right? Up 15% 3Q versus 2Q; up 17% 4Q versus 3Q. Is there anything we need to be thinking about in terms of timing of shipments? Or would you expect to continue to see a sequential build in that segment given what you're seeing in the backlog there?

Yes. No, once again, we would expect to continue to see, as David said earlier, the growth in the top line given that the backlog has sequentially just really grown quarter-over-quarter and month-over-month. And so we expect that. The only other comment I'd add to it, to the conversation David and Joe were having is that's exactly the leverage we're also getting in that business. Gross margins have been a little bit, if you will, disappointed, as we said in the segment, and they've kind of really frankly been more stable. So what we're getting the benefit of is that sales growth and that sequential sales growth driven from our backlog.

Yes. All right, makes sense. David, just big picture. You always target 10% revenue growth organically and 10% through M&A. Do you feel like the environment is there in 2018 to achieve the organic side? Obviously, the timing on acquisitions can move that around. And maybe, Kent, if you could talk about the -- what the M&A pipeline's looking like.

Yes, I'm pretty excited about organic and inorganic growth. And we had always talked about 10 and 10. That seems pretty lofty on the organic side. The inorganic is probably easier to do. I feel good. I think our business planning processes and things that people submitted gives us a really good shot at the 10%.

Okay. So yes, I mean I know you said in the press release...

Yes, no, and I'm basing that on their forecast from their sales spend and what they think they're going to do, so.

Okay. So yes, I mean, I would think, based on the comment in the press release, that you're expecting organic revenue growth to accelerate from the 7 you did last year. That kind of points us high single, low double digits. The Service Centers business, I would think, grows a little slower. But it sounds like IPS, you're going to continue to see very healthy growth in that business. Is that predominantly we're starting to see better completions on the upstream side, which I know tends to drive [indiscernible] battery construction and you get a lot of business there? What other drivers are you seeing to that IPS business?

We're seeing a lot of large midstream projects. And so we kind of burn through a lot of pump backlog, the API type backlog last year. And so we've seen a build up of that and we've seen a lot of activity there. So a lot of our health manufacturing is getting -- their backlog's bigger than they've had for a long time.

All right. And then last thing, just on the Application Specialties acquisition. I want to say that was around $37 million of revenue or $3 million of EBITDA. Are those numbers right, Kent? Do you expect that business to grow this year? And how much do you think it can contribute in terms of earnings accretion this year?

Yes. No, I mean, your numbers are correct kind of when we announced the transaction. $37 million and call it $2.9 million in EBITDA. We expect that business to grow. They have some counter cyclical markets that are -- that have positive trends, some in the transportation space. And so we look to and welcome the Application Specialties team as part of DXP in growing that business. In terms of the accretion, yes, if we were to kind of get some ranges, if you will. There's new tax reforms, so once again, it complicates things. But call it $0.03 to $0.05 per share. It is fully in line with what we probably would expect this year.

Your next question comes from Steve Barger from KeyBanc Capital Markets.

This is Ryan on for Steve. Yes, inflation's been a hot topic recently, given 2 32. I imagine as a distributor, you'll pass along any price increases that you experienced to the customer. Am I thinking about that right? And can you maybe talk about the magnitude of price increases you might receive related to that? And do you expect that to have any impact on demand or capital budget decisions from your customers?

So I think our customers mostly are expecting price increases. We haven't had across the board price increases for a long time. We're pretty much getting the 2% to 5% type price increases and they're coming from everybody. So the only exception of that, and it's always a battle for the Supply Chain Services group, they have contractual pricing and they get the opportunity to raise it, but they don't get the opportunity to raise it right away. And so they suffer a little bit, and I think that's what you saw in 2017 when their gross profit margins went down. What was that? 60 basis points or so. So but -- and then now, we've got carriers coming and you've got some other issues. When you think of IPS, you have structural steel in the basis. The good news there is that the base needs only 10% or 15% of the job, so it's not a killer. But we expect steel to go up and we expect oil and gas producers nothing like that. So there's some little issues out there. Nothing catastrophic. But at the same time, we have a market that's a lot more conducive for the seller than it is the buyer, where it's kind of been much more a buyer's market than a seller's market. So as the economy improves and people start running out of capacity, then they have a tendency to be braver on what they sell things for.

Okay. And then my next question. Can you maybe give a little bit more color on what you're our experiencing it the oil and gas market year-to-date? And particularly, what are you seeing as it relates to well completion activity? Are you still hearing positive commentary from your customers in regard to that?

Yes. I mean, the activity, what they're buying from us is good. We're not hearing any -- nobody's thinking oil prices are going back to 40. I mean, so at 60, they're really happy. I think when we go back to probably where [indiscernible] thought the price of oil was going to land in 60. Unfortunately, it went much, much lower than that. But -- so I think probably the world' is happy at 60, and so they're forging ahead.

Okay. And then just a couple of more for me. Last quarter, I believe, you talked about having trouble pushing price in your Canadian Safety Service business. And you discussed something around a mid-single-digit price increase. Can you give us an update to where you're at with that? Did you guys push through the price increase, or is it -- do you still have some legs to go there?

We're pushing through price increases. It's not quite as easy as I thought it would be in the sense that we, on Safety Services, your asset that you're winning is people. So you expect the paramedic as an example. If we're paying that paramedic, let's say, $30 an hour and the customer's not willing to pay $30 to $60 or $100 an hour, we need to make money, then really, there's no other choice, because you can't pay the paramedic $30 an hour, so now, you got to pay him $25. Well, there's -- in Canada, there's this phenomenon going on where the old companies are still struggling a bit up there. They're not as in fat, dumb and happy as we are down here in the United States or the Permian basin. And so they're still wanting to push back pretty hard. And then at the same time, there's e labor shortage in Canada. Normally, if times are good, well then you have higher unemployment. And so there's lots of people looking for work and you can pay them less. So -- but we have the reverse. We have pretty high employment rates, and we have the oil companies still trying to push back. So it's a struggle. But at the same time, we're the market leader in Canada. We're the only ones that they need 20 people. We're probably one of the few companies out there that can give them 20 people. So we're typically -- where we run into issues typically is just the little mom-and-pop that lives in some far-off place in Canada and happens to be pretty close where they need somebody. But they're normally only able to provide 1 or 2 people. So you got to be careful. I'm giving you way too much detail. But the point is, is that it's been a little hard to push the price increase through than I thought.

Appreciate the color. And then one last housekeeping question for me. And sorry if I missed this. But Application Specialties, that will be reported in the Service Centers segment, right?

Yes. That's what I'd assume.

Your next question comes from Joe Mondillo from Sidoti & Company.

Just a few follow-up questions. First, on the tax rate. I thought it might've been -- your rate would've been a little lower just given sort of normalized historically. I think the rate was around 36%, 37%. So is there -- do you think there's any chance of seeing that come lower, or...

Joe, so the federal. You get to 21%. And then you got to add in state. And so call it another, call it 3% to 4% or so. Then that kind of starts to get you closer to the 28% to 30%, which I gave guidance. And Then you look, there's a lot of moving pieces. But then you look at the production tax credit, which we used to benefit from, will go away. And so Matt, if we're going to give guidance in terms of the tax rate in this scenario, which we normally don't give guidance, the 28% to 30% seem appropriate. But there's a lot of moving pieces to this as you know, and so that's kind of what I would say.

You will go through that exercise pretty thoroughly in the first quarter. And the first quarter kind of sets the kind of the standard rate for the year. So I guess, we'll know the true answer [indiscernible].

Okay, that's fine.

And once again, not to give the details, but historically, on a federal level, we've been around 35%, and then once again...

And Canada's higher now, so...

Okay, that's fine. I wanted to ask on the Service Centers margin. They were sort of all over the place in 2017 on a quarter-to-quarter basis. Could you help me understand or what you're thinking in terms of seasonality on the margin on a quarter-to-quarter basis for the Service Centers segment?

Yes, Joe, once again, you got to keep in mind, there is some seasonality in Service Centers because you have the Canadian Safety Services business, which is in Service Centers. So Q4, kind of Q1, if you will, if you choose 2 quarters, tend to be the stronger quarters from a Safety Service perspective. And then, you can kind of get into break up and you kind of -- that impacts our Service Centers segment.

Okay. So Q1, Q4 a little stronger than Q2, Q3?

Yes. Now I know if you look at this year, it doesn't 100% look like that? They -- if you remember our comments, I think in kind of Q2, we were surprised that, that performance, meaning that I think they had a longer winter basically. And so some of it carried over into Q2. And so Service Centers kind of experienced a spike there, if you will, in operating income.

Okay. And when you talk about the IPS backlog improving month-to-month, was that through the end of 2017? Or is that -- has that continued through that month-to-month improvement, has that continued into February? And have you experienced -- have you noticed any sort of slowing of that sequential growth maybe with the rig count sort of plateauing, oil prices sort of hanging out where they are?

No. Yes and no. Yes, it's continued into '18, and no, we haven't seen any slowing.

Okay. And then last one for me. Just the corporate expense line. I imagine that -- do you think that continues -- will that grow at the rate of revenue? Or how do you look at that sort of $11 million a little bubble of $11 million in terms of a run rate going forward?

So I don't know what $11 million you're talking about is. But the SG&A will grow -- well, the percentage of SG&A to sales should continue to come down incrementally because there's leverage in the business or there's certain parts of our business that are fixed. And so there's -- it's going to come down as a percentage. The dollars will go up. The dollars in the first quarter, my historical experience since I've been around a long, long time is that payroll taxes, maybe more prepaid insurance or there's some things that are a little heavy in the first quarter. And so we might err on the pretty conservative side on SG&A in this first quarter, but the percentage should come down.

All right. I was referring to the corporate expense, which is the expenses outside of the three segments. You did $11.1 million in the fourth.

Yes, yes. No, no, I know what you're referring to, Joe. And you're right into David's comment, I mean, just to tag on to him. Specifically, as it pertains to that corporate line, you will see some growth in that line. Will it grow in line with sales? Probably not. But it will grow as we kind of, once again, from a corporate perspective, love to support the operations. I mean, once again, at peak, we're a $1.5 billion company and we took some pretty extreme measures in the downturn. And so as we kind of return to normal CF care, if you will, we're going to need to invest some in corporate to support our sales and operations. But it won't be in excess of what we're growing in the top line.

And I'm showing no other questions. Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation, and you may now disconnect.

Thank you.