Q4 2018 Earnings Call
Today at this time I'd like to welcome everyone to the DXP enterprises fourth quarter and fiscal 2018 conference call. All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
Todd if you would like to withdraw your question. Please press the pound key.
I would now like to turn the call over to Kent T Senior Vice President and Chief Financial Officer. Please go ahead Sir.
Thank you Kelly this is Kent Yee and welcome to Dxp's Q4, 2018 conference call to discuss our results for the fourth quarter and fiscal year ended December 31, 2018, 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.
Filiation of GAAP to non-GAAP measures is included in our earnings press release, the press release and an accompanying investor presentation are now available on our website at IR Dot DXP Dot Com I will now turn the call over to David to provide his thoughts and a summary of.
Fiscal 2018 and fourth quarter results.
Thanks, Kent and thanks to everyone on our 2018 fourth quarter and year end conference call.
DXP started 2018 was some very lofty goals and coined the term smart recovery internally. This described our objective to grow the top line, 20% and the bottom line, 100%, we accomplish both goals congratulation.
<unk> to all our stakeholders and a special thank you to our Dx people you can trust.
Customers can trust DXP to be fast convenient and technical <unk>.
Experts with whom our customers enjoy doing business with Dx people, they like and trust.
Q.
DXP sales professionals. Thank you DXP operations for making our sales professionals look good.
Also thank you to corporate support.
One team, making the customer happy.
<unk> Dx people for them also in the year and our future looks bright.
Our smart recovery plan for 2018 included organic growth strategies for both local regional and national accounts.
Such as Tech program for finding new accounts BMI to make the point of sale faster selling pumps through our bearing and PT channel and custom API pumps sold through our global and national relationships.
<unk> expanded our efforts to sell measurement equipment and better communicate around leveraging local plants into multiple plants or corporate accounts.
Supply chain services continues to add new customers and new sites for existing customers, we have a suite of smart.
Programs to expand value added services and technology to existing sites.
This rotating equipment is in a tough market yet they had a great year, taking market share from the competition congratulations.
Pump works aftermarket re manufacturing all had great success selling their products and services through Dxp's sales channel.
Quality products made in America, and a faster supply chain gives us tremendous success.
Accounting inventory management are all working hard to support DXP sales organization and manage our return on invested capital which has been a.
A success versus our peer group working capital is only 16, 8% of sales which is truly outstanding.
Our integration team is ready for acquisition for our acquisition strategy HR is working hard to keep up with the growth of Dx people. We started the year with 2511 Dx people and ended with 2740.
Innovative pumping solutions started 2018 with planned growth strategies of new products increased fabrication space application specialists service similar pair with increased engineering and fabrication support.
All of these actions and strategies resulted in a terrific 2018.
Our fourth quarter results.
Round out to a tremendous rounded out a tremendous 2018 for DXP during the year strong sales growth and EBITDA expansion delivered triple digit diluted earnings per share growth and strong free cash flow.
<unk> delivered a 16, 1% organic sales growth for the full year accomplished.
Company by a 47 5 million sales contribution from the closing of an acquisition of ASI at the beginning of 2018.
These thus translated into a 28% sales growth year over year.
Dx people continue to provide 100% effort and do a day's work in a day driving stakeholder success and value creation.
We generated $29 1 million of free cash flow in 2018, which is a significant improvement over physical 2017.
This will help position us for significant capital deployment going forward as we look at our financial performance DXP has now experienced nine quarters of sequential increases in quarterly total days per business day.
We continue to ring.
Remain on track for gross margin improvement that we outlined during Q3 of 2017.
Our results year over year have been consistent with our expectations and in line with our financial goals to grow 20% year over year, the right combination of organic sales and acquisition growth.
We believe we continue to take market share in many of our businesses driven by our focus on being fast convenient and technical for our customers and all stakeholders Dx people you can trust.
As it pertains to the operating environment. The Ism's PMI manufacturing index has averaged 58, 8% during 2018.
This supports the Org grant organic sales increases we experienced during the year. The metalworking business index showed strength, averaging slightly less at 56, 8% during fiscal 2019.
Sentiment indexes remained in positive territory, but has softened in December .
We remain optimistic around the industrial economic despite the news headlines and volatility in financial markets.
In terms of oil and gas U S market indicators show some pullback in the fourth quarter.
<unk> oil prices to move from 76 per barrel to $45 per barrel the significant drop in price in the fourth quarter was driven partially by the U S shale producers oversupply to the upside.
Additionally, geopolitical negative impact supply and demand balance sentiments. The combination of these factors together with a large sell off in the equity markets.
Concerns around global growth and increased U S interest rates created a near perfect storm to close out 2018.
As a result, we anticipate customers will take a more cautious approach to capital Capex budgets and spending levels in response to the continued volatility in the market dynamics.
Currently prices for Q4 were down 14% from Q3.
That said prices have been improving from our low of $44 four eight.
<unk> per barrel through January and February and provided optimism as we move through physical 2019.
Turning to our results total DXP revenue of $311 million for the fourth quarter of 2018 was a 17, 1% increase year over year.
This reflects stability rebound in growth in our end markets.
As well as the addition of application specialties.
These this result is dxp's physical 2018 sales of $1 2 billion or a 28% increase over physical 2017, 16, 1% organically and $47 5 million contributed by <unk>.
Yes, hi.
Okay.
Innovative pumping solution sales increased 43% year over year to $291 7 million, while service center sales increased 17% year over year to $750 million supply chain services sales increased 8%.
<unk> year over year to $174 $5 million.
Innovative pumping solution sales increase was driven by modular packaged equipment for onshore markets and products sold into the midstream market.
Additionally, similar to 2017 DXP.
A meaningful amount of Lac <unk> units, HP, plus pumps and other modular packages within both our configured and engineered to order business in terms of the strength in the Ips backlog. It continues to grow through 2018 the Ips.
Yearly average backlog increased 57, 6% from 2017 to 2018 versus 39, 3% growth from physical 2016 to 2017.
The service center year over year sales growth was primarily driven by increases in our rotating equipment and metalworking product divisions within service centers, we saw particular year over year sales strength and Dxp's Canadian rotating equipment southwest.
Southeast and west regions.
Dxp's overall gross profit margin for the year.
We're 27, 3%.
34 basis point improvement over 2017, adjusting for the acquisition of ASI gross margins were 27, 7% or a 76 basis points improvement over 2017 the improvement in gross margins is in line.
With our communication back in Q3 of 2017.
What we expected and reflects a 116 basis point improvement from Q3, or an average of 23 basis points quarterly improvement from our crop.
We still are driving improvements in gross profit margins and look to have incremental improvement through 2019.
The improvement in gross margins are a result of a combination of sales increases in the Ips segment, along with improvements in the average gross margin on capital related projects as well as the consistent strength and improvement in our service centers.
SG&A as a percentage of sales declined to 196 basis points going from $23.
7% in 2017 to 21, 7% in 2018.
In terms of my thoughts on SG&A SG&A will decrease as a percent of sales an increase as expected and dollars, reflecting our investment in our people and organization as we focus on accelerating growth through 2019.
Yeah.
Dxp's overall income margin was five 6% or $68 5 million, which includes excludes corporate expenses and amortization. This reflects a 230 basis point improvement in margins over 2017 that being said we feel there is off.
<unk> in our operations to be more efficient.
This year we.
We continued to benefit from the leverage we get as SG&A growth is less than the overall sales growth within the business plus gross margin improvements.
Ips operating income margin was 11, 6% service Center operating income margins were 10, 8% was the second half of the year showing strength with an average operating income margin of 11, 3% and supply chain services operating income margin was nine.
Nine 3%.
As we mentioned during our Q3 call.
Apply chain services experienced margin contraction during the second half of 2018, which is a result of higher than normal ramp up cost associated with seven new sites, we expanded the seven new sites, whereby we hire the personnel convert the customers.
The war rooms to our standards, which causes DXP to incur upfront cost. Once we go live revenue start sales along with an improvement in margin should come along with the completion.
Of these startup phases, evidenced by which is evidenced by our 9% basis points improvement we experienced from Q3 to Q4.
Overall, DXP produced EBITDA of $995 8 million versus $61 7 million in 2017, a year over year increase of $34 1 million or 55.
2% EBITDA as a percent of sales was seven 9% versus six 1% for 2017.
Hundred 75 basis point improvement.
Looking forward to 2019 in terms of oil and gas, we expect these supply and demand balance sentiment and the oil prices to improve over the course of the year as the OPEC and Russia cuts take full effect the dispensation from the Iran.
Export sanctions expire and are not renewed and as the U S and China continued towards <unk>.
<unk> solution to their own ongoing trade dispute.
While the indices for our industrial market show below recent highs we believe there is.
<unk> still in the market and that our domestic focus weighs favorably should global industrial activity slow.
Yeah.
From customer discussions, we are seeing clear signs of oil and gas investment sentiments, starting to normalize and positive undertones with our key industrial customers.
In summary, we are pleased with our overall momentum DXP delivered 28% sales growth through both organic and acquisition sales. This is consistent with our strategic financial goals and position us well for the physical year 2019, we look to continue to do.
<unk> improvement in our gross margins and move closer to our historical average of 28 plus percent on a combined basis.
And physical 2018 capital allocation was focused on leveraging our inventory investing in project work, maintaining our working capital as a percent of sales. Additionally, DXP was focused on generating cash paying down debt and maintaining a pristine.
Balance sheet that would give us.
Optionality headed into 2019 to pursue acquisitions more forcefully.
With the feature.
<unk> SaaS SaaS.
SaaS full execution of our strategy, we expect continued improvements toward generating free cash flow and greater shareholder value.
Yes.
We know that DXP has a differentiated and a compelling value proposition.
<unk> sales operations and corporate functions, we remain energized and continue to work together to create value for our customers.
<unk> is a great team focused on producing great results for our customers suppliers and our show our holders alike, all three business sectors.
Segments performed well during the year, we will drive change innovate for growth and lead smart.
With that I will now turn it back to Kent to review the financials in more detail.
Thank you David and thank you to everyone for joining us for our review of our fourth quarter and fiscal 2018 financial results Q4 was another great quarter for DXP and allow us allowed us to finish the year strong while building momentum going into fiscal 2019 as David mentioned, we are growing through a combination of organic.
An acquisition driven sales our balance sheet is poised for us to be acquisitive and we look to continue the execution of that part of our strategy in 2019. The Q4 2018 financial results marks our ninth consecutive quarter of increases with respect to quarterly sales per business day.
Total sales for the fourth quarter increased 17, 1% year over year to $311 million.
Adjusting for the $12 4 million in Q4 sales contribution from ASI organic sales increased 12, 4% total DXP sales for fiscal 2018 grew 28% with 16, 1% coming from organic sales growth.
<unk> contributed $47 5 million in sales for fiscal 2018, and we are excited to have them as a part of the team and performed ahead of plan and they have been a positive addition to DXP total.
Total sales growth for fiscal 2018 was supported by Dxp's three business segments, reflecting the differentiated go to market strategy of each segment the opportunities available given where we are at in the cycle and the continued expansion we are seeing from existing and new customers.
Average daily sales for the fourth quarter were $5 million per day versus $4 4 million per day in Q4 2017.
Adjusting average daily sales for ASI average daily sales for Q4 increased 10, 6% versus Q4 2017.
Average daily sales for fiscal 2018 were $4 8 million per day versus 4 million per day in fiscal 2017.
The overall growth reflects the execution of our strategy supported by our key end market indicators for fiscal 2018.
While we experienced another round of volatility in Q4 and oil prices, we experienced overall strength throughout the year and the rig count U S oil and gas production drilling the metalworking business index and the PMI.
Ism's PMI manufacturing index averaged 58, 8% for 2018 compared to 55, 4% in 2017 or is essentially still up 140 basis points compared to 2017. This supports the organic sales increases we experienced through 2018 in our non oil and gas end markets.
Additionally, the metalworking business index averaged a reading of 56, 9% in 2018 versus 55, 5% in 2017 and supports the strength we have experienced in our metalworking businesses in <unk>.
Terms of oil and gas average average U S rig count for 2018 was up 17, 9% versus 2017.
That said Canada's rig count was down seven 7% from fiscal 2017 to fiscal 2018. This impacted Dxp's Canadian safety services business on a year over year basis in terms of business segments. All three experienced sales growth year over year with Ips showing the greatest improvement increasing 43% followed by our service.
<unk>, which experienced 17% growth in supply chain services with 8% growth.
Businesses within our Ips segment, excuse me, which experienced year over year sales growth include our configured to order engineered to order re manufacturing businesses and our branded private label pump offering as well as our measurement equipment business.
Regions within our service center segment, which experienced meaningful sales growth in fiscal 2018 include the southwest southeast and West regions. Additionally, we saw a meaningful increase within our seal and metalworking product divisions. The metalworking product sales were supported by the strong performance from ASI turning.
So our gross margins Dxp's total gross margins were 27, 3% adjusting for the acquisition of ASI gross margins were 27, 7% Dxp's total gross margins for 2018 reflect the progress we continue to make century trough in Q3 of 2017 and.
And improvements reflected through 2018 and are engineered to order and our Canadian safety services businesses.
In terms of operating income combined all three business segments improved 181 basis points in year over year business segment operating income margins versus 2017.
Total DXP operating income increased 104, 4% versus 2017 to $68 5 million.
Ips had the greatest uptick improving operating income margins 604 basis points to $33 9 million followed by service centers, which had a 90 basis point improvement to $80 7 million supply chain services decreased 28 basis points on a year over year basis. This was primarily driven by a decrease in gross profit margins associated with the <unk>.
Cement patient of new sites and revenue not fully scaling as mentioned during our Q3 conference call turning to EBITDA fiscal 2018, EBITDA was $95 8 million up 55, 2% from 2017. This does include a onetime gain of $1 3 million associated with the sale with the sale of our corporate facility.
Adjusting for the debt for the gain EBITDA grew 53, 1% year over year year over year EBITDA margins increased 175 basis points, primarily reflecting the fixed costs SG&A leverage we experienced as we grow sales EBITDA margins for fiscal 2018 were seven 8% compared to six 1% in fiscal 2007.
17.
Sales growth of 28% with only 13% SG&A growth on a year over year basis translated into two seven times operating leverage.
In terms of EPS, our net income for 2018 was $35 5 million. This is up $18 7 million or 111, 6% versus 2017, our earnings per diluted share for fiscal 2018 were $1 94 versus <unk> 93 in fiscal 2017.
Adjusting for the onetime gain earnings per diluted share would have been $1 87, or seven <unk> per share impact related to the gain.
Turning to the balance sheet.
In terms of working capital working capital increased $35 million from the prior year to $204 2 million in Q4, we remain focused on providing the capital to support growth in our businesses working capital as a percentage of sales at the end of the fourth quarter was 16, 8%. This is above our historical average, but reflects a 129 basis points.
Improvement compared to Q3, while this is above our historical averages. It reflects the growth in our business and investment and project related jobs within Ips.
The main drivers of the increase in working capital include cost and estimated profits in excess of billings and inventory.
This has been consistent through fiscal 2018, as we have supported our core distribution business and project related businesses cost an estimated profit has increased $5 6 million from Q4 2017 to $32 5 million and inventory is up $23 4 million from Q4 of 2017 to $114 8 million. This refer.
Flex DXP carrying higher levels to support our revenue growth, we achieved inventory turns of seven eight times down from eight four times a year ago.
From Q3 inventory is down $1 7 million in cost and estimated profits is down $5 9 million.
In terms of cash we had $45 million of cash on the balance sheet. At December 31, 2018. This is an increase of $24 3 million compared to December 31 2017.
In terms of Capex capex in the fourth quarter was $1 6 million or 0.5% of fourth quarter sales Capex in fiscal 2018 was $9 3 million or <unk>, 8% of sales compared to fiscal 2017, Capex dollars are up $6 5 million Capex.
Capex during fiscal 2018 reflects investments made within our Ips business segment, including the purchase of patterns for our Remanufacturing business.
Some smaller items, including various tools and equipment. We are also making investments in software to enhance our sales efforts and our corporate operations.
Turning to free cash flow, we generated solid operating cash flow during the fourth quarter. During Q4 and fiscal 2018, we had cash flow from operations of $26 million and $35 8 million respectively.
This reflects an increase of 185, 7% over fiscal 2017 cash flow from operations of $12 5 million.
Fiscal 2018, we generated $29 1 million in free cash flow, while we are always looking to enhance and improve our cash flow generation. We are comfortable with where we're at at the end of the year with further improvements in the future.
Return on invested capital or ROIC increased 770 basis points from 2017 to 28, 8% and continues to improve as we drive margins and operating leverage. This return does reflect an adjustment to the tax rate assumption used in the calculation to both fiscal 2017 and fiscal 2018.
In terms of our capital structure at December 31, our fixed charge coverage ratio was $3 five to one and our secured leverage ratio was two two to one total debt outstanding at December 31 was $248 7 million and.
In conclusion, we are pleased with our ability to have nine sequential quarters of increases in quarterly sales per business day. This has included organic sales and acquisition growth EBITDA margin expansion with room for improvement and significant diluted EPS growth momentum has been good and we look forward to pushing this through the entirety of 2019.
DXP is on its path of its financial goals driving organic and acquisition sales growth EBITDA margin improvement and EPS increases with that now I'll turn the call over for questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the pound key.
First question comes from the line of Joe Mondello from Sidoti and company. Please go ahead. Your line is open.
Hi, guys good afternoon.
Thanks, Joe.
Okay Kent.
Can you just repeat the gain on sale, how much that was and confirm that it hit the fourth quarter and what segment did that did that hit one of the segment operating income lines.
No the gain actually occurred early in the year you may not remember Joe the game was actually in Q2.
It was just.
<unk> reflects the sale of our corporate facility and it was $1 3 billion.
Okay, great. Okay, that's what I thought I just wanted to confirm that.
Yes, yes, no I apologize.
On the on the service center side of things.
Organic growth was pretty good I thought you guys were going to be going up against alright, Yes, we were going up against sort of a tough comp.
The fourth quarter of last year.
Could you just talk about the trends that Youre seeing there you mentioned that you are seeing some really good growth in the rotating equipment metalworking equipment, but did the deal.
The celebration was not as much as I anticipated what are you thinking as we are now into 2019.
Yes no.
No Fair question, you know you always got to remember our service center business is 80% MRO, roughly 20% OEM and so.
I think I saw your note just in general in the industry and so we.
We for a majority of our business there we benefited from that.
From a maintenance spend.
We also benefit from ASI ASI was a contributor I don't know if youre looking at an organic or a total basis, but ASI finished the year at roughly $47 million and that was ahead of plan and so that kind of pushed pushed us through on the service center side as well and so we saw strength, yes on the rotating equipment side on the MRO side, but also.
ASI was a huge contributor throughout the year.
Okay, and then I feel like I ask this question almost every quarter the margins at the service Center segment.
Just sort of a really tough for me to get my hands around.
It seems like its quite volatile it's been actually pretty consistent the last few quarters.
Could you just comment on where you are in terms of the service center margins.
Is there more room for expansion or are we going to have a tough comp.
In 2019, given the.
Expansion that you saw in 2018.
Sort of color or insight you can provide there that would be helpful.
Sure.
Joe I'll just walk through the trends in terms of operating income margins from Q1 in 2018 through the fourth quarter, and then I'll kind of jump to your question.
Q1 operating income margins for service centers were 9% for Q2 of 11, 3%.
For Q3, 10, 9% and then for Q4 of 11, 6% so.
But directionally what I'm getting at is there was call it a little bit north of 200, plus basis point improvement of operating income margins for.
For the year 10, 76% operating income margins historically that business has kind of been call. It in the 12, maybe at the most 14% operating income margin range and so we're seeing improvement and we did through 2018.
If we keep the trend we're starting to get to the higher end of that.
So, but that's natural that typically comes once again as we get strength in our rotating equipment business.
We're not.
We're not expecting any decline in sales.
For the service centers.
I was talking about growth like a deceleration of growth still growth yeah, Yeah, right right right and I think that's fair certainly fair based on.
It was fair back in <unk>.
Remember in December when we thought the sky was falling.
But it's it hasn't played out.
We seem to be.
Tracking January and February pretty nicely. So so we feel we feel like yes.
We're going to do 16% organically again.
It's possible, but it is not probable and so so I'm going to have to knowing what I know today things that it will be less but still how much less.
Okay.
Just a sort of a broad question on the oil and gas sector.
It seems like the estimates out there calling for sort of E&P capex budgets being slightly down this year integrated companies sort of flat to slightly up.
So the capex budget seem sort of maybe flattish maybe potentially down maybe potentially up.
Given that environment and looking at the rig count and all these other indicators.
It looks like.
A pretty significant slowdown, but you're coming off of a buffer.
We have not been in an up cycle when it wasn't good enough cycle until 17.
So we got 17, and 18 and and so Theres really not any reason to think that oil and gas will continue to be a really really good market.
And really we we prefer if I can just say this we prefer a more stable oil and gas market than the one that shoots up to $110 a barrel of oil and.
And gas goes down to $2 I mean, if we could just have stability, then thats really better for us.
And it will perform really quite nicely.
Okay, great perfect. Thanks for taking my questions and good luck.
Your next question comes from the line of Blake Hirschman from Stephens. Please go ahead. Your line is open.
Hi, Yes, good afternoon, guys great quarter.
First just wanted to ask about.
Scott.
Ex ASI organic margins I think I heard you say 27 seven.
That was full year, but wanted to clarify and then.
Follow up to that could you kind of talk through some of the drivers of that organic margin expansion. I think you mentioned engineered order in Canada, but just kind of wanted to get a little bit more color there.
Yes, you are.
Correct Blake.
Sohns ASI gross margins were 27, 7%.
Just to retrace.
The history real quickly trough in Q3.
<unk>.
And we.
<unk> trough, partially because of the two businesses you mentioned Canadian safety safety services excuse me in our engineered to order business. We've seen continued improvement in both of those businesses.
Throughout 2018 really since.
Q3 of last year and so.
Yes.
On the safety services side.
In spite of their revenue actually being down on a year over year basis.
But their gross margins are not back to where they've been their gross margins are probably still off roughly around 39 basis points.
From.
From some of their peaks and so.
We're pleased once again with the direction and kind of what they've done.
Double digit increases some competitors, who his source overseas might be saying.
Right.
So.
We we haven't seen the major players closer rules saucer really come out with any kind of.
20% price increases so so that hasn't panned out as much as we would have.
Hope for.
The.
The key again is.
Is that R.
And really made in America.
As great as long as you are competitive.
It's not.
People aren't going to Bob made in America, if it costs twice as much as they are just not going to do it so they would like to but they're not wanted.
So we have to be competitive so we're so we're close.
What really.
Drives a premium.
Is is fast delivery.
That drives the premium the American if we're equal and were made in America that may witness the order.
If we're.
20% higher made in America, well, we're not going to get the water what.
It gives the order to is that our salesman.
Have relationships with these accounts so we have.
Some.
Influence on the channel as it relates to our salesman and the customers that we're dealing with.
So just targeting that 2500, 35% 19 as well.
Yeah, I think so I think so once again I was just trying to emphasize that there is noise just depended upon because of our project you guys. This but the Davis.
But the Davis point.
Also a mix of where our growth comes from once again if we.
I think it was.
Joe at Cydonia, you asked about service centers, but.
It's more of our growth is coming there's service centers, well, that's not going to require as much and so.
Once again, it just depends on the quarters, where that growth comes from too so.
Hi, Thanks for taking my question.
Absolutely.
Your next question comes from the line of gentlemen, Delo from <unk> Company. Please go ahead. Your line is open.
Hey, guys. Most of my questions were actually answered I actually tried to withdraw but.
Just one or two clarification questions the tax rate that you're sort of thinking about for this year.
What would that be.
Yeah.
Going back to tax reform Joe.
I gave a range around 28% to 30% this year, we are around 27%.
I think the lower end of that range is still applicable.
Year over year, we had some remeasurement adjustments it makes us look different the most where our tax rate actually it looks like it went up in 2018 versus 2017.
But I think just in terms of kind of directionally.
Private lower and if you will have that range back.
At the end of the 17, when I said, 28% to 30% so.
Okay and then last question just the 13 perform.
4% operating margin at the Ips segments.
How do you think about that as sort of a benchmark.
Or a high.
And Ah.
As we go into the beginning of 2019 are you going to see sort of.
Potential of under that number or is that sort of a low bar and going forward you should see improvement from there.
Right. So once again and then I'll just trace the trends for everybody else on the call.
Through the quarters, we had nine 4% operating income margins $12, 1% operating income margins, 11.4% operating income margins and we ended the year with 13.4% operating income margins.
We do have a different mix of business today than we have had historically.
<unk>.
In the past I know, we've peaked up around the 20% operating income margin today, but I wouldn't want anyone necessarily to have those higher and expectations.
I think our business today the mix is totally different that said is there room to go from 13.4% absolutely.
Once again it is also going to depend upon mix we have.
<unk> business Ie lax enact units.
Tends to be a little bit lower lower margin and that's some of my comments around mix, but then we also have some other higher margin.
Different things related to that so.
It's all going to be a mix. It now we fall out so Joe you remember when you do you remember when we had 16% operating income margins in that area and and basically in those days, we were doing a lot more offshore work and the complexity and the value add was higher and so we made high.
Here margins on offshore stuff and so today would we do very little offshore so it's more onshore and so it's not quite as.
Technical and so therefore, the menu ads, it's easier for other people to do it too so our competitions a little greater.
So that's part of it and then and so I'll just remind you about that.
How does.
The pump works.
They're sort of some funky way of accounting I remember this from a year or two ago at least I guess.
Where the revenue up until breakeven was accounted for in the service Center segment, and then sorted the profits beyond that were accounted for in the Ips is that anywhere it's correct or how does the accounting in terms of profitability at the pump works business.
Play.
That's not that it doesn't play like that does happen is that.
Ah manufacturing facility like a pump works almost everybody's has a pretty.
Hi, fixed cost versus the distribution business where people really.
Are your highest fixed cost is people yet people are variable twos.
Can get rid of them, whereas we have this plant and you've got all this equipment and all that stuff you got.
Fixed call so.
Does happen almost for everybody is that as you cover.
Get fixed cost you variable costs are not that high. So so your margins will go up with volume.
Great no that makes sense, but where is where is your your in house manufactured pumps.
Counted for us in the service center segment or Ips.
No again.
Ips.
It has been Ips, okay, and that would as we go down the road, maybe and a quarter or two but as that start ramps up becomes a bigger percentage that should help.
And increase the ceiling to margins overtime correct.
Absolutely yeah right, okay. Okay, great. Thank you.
And there are no further questions at this time. This concludes today's conference call you may now disconnect.