HD Supply 2Q17 Earnings Call Notes

Joe DeAngelo – Chief Executive Officer

Change in the competitive environment

I think the competitive fit, if you look at it is one were the traditional competitors have been absorbed in some cases into larger players, right? So you have gone from specialty shops that we competed against that provided a specialty service within our markets and now they are part of a larger entity, primarily retailers and then you have e-tailers out there. E-tailers, we have seen a lot of change in terms of what’s going on there, I mean typically that’s available to the various very small customers and I think that’s an extension from consumer to people that own 10 apartment units, 50 apartment units whatever.”

Tough pricing environment

” I think as you look ahead and kind of where it is now, it is very competitive. So I wouldn’t see price increases. We’re certainly not getting gross margin accretion from going out and raising our prices. We’re getting gross margin accretion from having the right line logic, selling the right mix, and doing great cost work with our suppliers. So that’s real category management execution of being the price rise every day and price rise for the appropriate structure for the side and size of customers that we’re dealing with. So it’s going to be a tough pricing environment, it’s always been a relatively tough pricing environment and we don’t see that change and that’s why when we say executing flat gross margins is a really great execution that is a really great execution up there.”

Very little steel being imported

“in C&I, the installation or cost increases are really coming from one major product category and that’s the Rebar. So with the current administrations tough stance on imported steel there is very little steel being imported into the United States for that and so most of the available steel is now being produced by the domestic mills and the domestic mills have taken advantage of that and raised prices. Because of the competitive landscape, it is very difficult for us to pass on that increase in steel cost to our customers.”

Evan Levitt

Steel prices up but can’t pass on price because of competitive environment

” Rebar gross margins continue to be challenged. The flow of imported steel into the US has dramatically slowed due to duties and the threat of additional counter availing duties by the current administration. The result is an increase in the cost of this product with a limited ability to pass the increase onto the come customer, due to the competitive environment. We expect to reap our margins to continue to pressure construction and industrials overall margin through the remainder of the year.”

Headwind and tailwind from hurricane

“Generally what you see is the short-term headwind and then as the rebuilding efforts begin to take place we get a little bit of a tailwind on balance that hasn’t been a huge positive for us, historically. We are certainly going to lean in and make it as positive to our bottom line, as well as to help the communities in which we participate to the extent possible.”

HD Supply 1Q17 Earnings Call Notes

Evan Levitt

Cost pressures in steel leading to significant margin compression

“The new administration is being extremely tough on imported steel products and as instituted from anti-dumping tariffs on imports, particularly imports coming from Turkey; they’ve also instituted some counterfeit — countervailing duties on those imports which can be retroactive. And so as a result, much of the lower cost source of steel and steel Rebar coming into the country has ceased and so we’re seeing a significant escalation in our cost for steel Rebar and the market is such that it’s difficult to pass at all of that on to our customers. So we are seeing pretty significant margin compression pressures within Rebar. We expect that will continue for the balance of the year.”

Joe DeAngelo – CEO

Margin pressure in Rebar will probably impact through the end of the year

“Yes, I do think that the gross margin pressure in Rebar in particular will impact us through the balance of the year. The dynamics within the Rebar market are a little different. Most of the rebar that’s available now is domestic-based Rebar versus imports and the domestic steel mills, they have distribution functions too and so they will sell directly to [indiscernible] and so to some extent we’re now competing with the mills; obviously they’ve got a much lower cost position as they are the manufacturer of the product and so that makes it difficult for us to pass on the increasing cost. In the past we have access to lower cost import sources, it was easier to compete.”

HD Supply 4Q16 Earnings Call Notes

Joe DeAngelo

Non-resi construction trending positive

” I think we have said this on the last call is we feel really good about the customers we are talking to. There is no customers that I have talked to in a non-res construction environment, it didn’t say, hey, we feel really good about the year and we are proceeding as we thought. So, I think its line with being a solid market out there. I think that’s the right description of it.”

Evan Levitt

39% taxpayer

“Thank you, Joe and good morning everyone. I will start with areas of recent investor focus on Page 7 and share with you our latest perspective on these topics. First, corporate tax reform, we continue to hear about the new administration’s focus on corporate tax reform and are encouraged by the potential outcome. As a reminder once our net operating loss carry-forwards are exhausted, we will be a tax payer at approximately 39% to 40% of free tax income, which includes the federal statutory rate of 35% plus a 4% to 5% net stake rate. As a predominantly domestic company any reduction in the federal statutory rate will directly improve our future after tax cash flows. Border tax, we are a North American company, have a little direct exposure to international economies. The limited exposure we have is a result of our proprietary brands which we manufacture predominantly in Asia with our strategic vendor partners.”

Construction remains mixed geographically

“The construction market, construction markets remain mix through geographically, but we remain optimistic on the forward outlook. We like others share the growing enthusiasm regarding the prospects of infrastructure investment. However, we expect to see certain large multi-year projects in which we have participated come to completion and create comparability considerations as new projects are breaking ground. For example, in Atlanta we had multi-year projects underway at the new Braves Stadium and the new Falcons Stadium. Both of which will be completed this spring. That said, we continued to see solid pockets of strength in most geographies including our Northern priority districts Denver and the Southeast. We have noticed pockets of unevenness in certain Gulf States Houston and California. Despite this, we expect solid activity trends to continue throughout 2017 in the majority of our markets. “

HD Supply 3Q16 Earnings Call Notes

Joe DeAngelo – CEO

There is a high degree of optimism since teh election

” the feel before the election was — it was materially slowing out there and I think we reflected a slowing based on data, right. So, we’re not doing anything based on feel. All the discussions I’ve had with customers, suppliers, and with everybody out there, there is a high degree of optimism, and certainly my fellow CEOs. So, I think we’ve got a little bit of wait and see. But I think we’ve got the position right based on our full inventory of what we see happening out there. And our teams do a great job of ensuring they know every project and we went deep into 2017 [ph] to see kind of the projects that are sun setting. So, look at it, there is a pump of optimism. I think we haven’t reflected it in our numbers either way, either to prop up something that may have been going down faster or to be able to pump up our view for 2017.”

People are worn out from the election but ready to do business

“Yes. I think it was a general feeling that everybody is just worn out from the election; I mean just worn out. And they thought that after the election there wouldn’t be much change of any time. That was kind of where everybody was going. So, typically coming to the end of the year, everybody is just kind of tightening everything. Now, I see a lot of optimism just across, hey, look if we truly are going to have tax reform that is really good, I mean look, we are — particularly domestic business, I mean we are little bit in Canada, but frankly we are about as domestic U.S. business as you will find. And we feel like every customer we touched since we’re satisfying those customers, customers every day, they’re saying it’s going to be easier to do our jobs and we can get on with doing our jobs and that’s the general feeling. So, if there is something big thing up there, I don’t know whether I can answer that. But I will tell you, it does feel like people are just down [ph] to business now and down to business is a good thought for us. So, that’s what we do everyday deliver.”

Evan Levitt

Corporate tax reduction a benefit for us

“First, the election impact: As Joe indicated, we were encouraged to hear that infrastructure investment is expected to be a key focus for the new administration. As we and others have previously shared, much of our nation’s infrastructure is well beyond its useful life. We are well-positioned to benefit from incremental infrastructure investments in both our Waterworks and Construction and Industrial businesses. Until we see more policy detail and specific project approval, we will not know the impact it may have on our business, but we are cautiously optimistic about the implications. We are further encouraged by the prospects of corporate tax reform that appears to be gaining momentum. Once our net operating loss carry-forwards are exhausted, we will be a taxpayer at approximately 39% to 40% of pre-tax income, which includes the federal statutory rate of 35% plus 4% to 5% net state rate. As a predominantly domestic company, any reduction in the federal statutory rate will directly improve our future after-tax cash flows.”

Mixed signals in non-res construction

“The construction markets: To add to Joe’s previous comments, we are seeing similar mixed signals in the non-residential construction market as others including starts, commercial lending data, construction employment and third-party data such as Dodge and ABI. From our brand intelligence, we continue to see pockets of strength throughout our 15 priority districts, particularly in parts of the Northeast and Southeast. Growth in some select markets appears to be moderating. We are therefore revising our non-residential construction end-market growth rate expectations to a low to mid single-digit growth rate as opposed to our previous guidance of a mid single-digit growth rate. ”

Non-res construction markets still growing but more slowly

“Yes. So, first off, David, as far as moderating conditions, keep in mind, we’re not saying that the market is not growing; it is still a growing market. We’re seeing that it may be growing at a slightly lower rate. And what we’re seeing is some [ph] setting of several large projects across the country. And the new larger projects that would normally take its place are showing up a little more slowly than we’ve seen over the past couple of years. That could be temporary; it could be indicative of a moderating growth rate. So, we thought it’s prudent to lower our estimates of low to mid-single-digits from mid-single-digits, particularly, geographically we’re seeing a little more weakness in the Midwest, in Houston and Gulf Coast regions and in parts of California.”

HD Supply 2Q16 Earnings Call Notes

HD Supply’s (HDS) CEO Joe DeAngelo on Q2 2016 Results

Tough to deliver on our 2016 expectations

“Our slower than expected first half performance and elevated investment in costs have created the second half challenge for us to deliver on our previous fiscal year 2016 expectations, especially with challenging comparables, timing considerations associated with our supply chain improvements and typically low sales volume contribution in the fourth quarter. I have challenged the teams to claw back into increased focus on what we can control. However, we really believe it as appropriate to update our fiscal year 2016 performance expectations. ”

Problems with transition from manual to automated systems

“Yes. The systems are different, so we operate SAP in FM and we operate [indiscernible] in Waterworks and Oracle in our Construction & Industrial business. The system is capable of doing everything we needed to do. We did not have the processes and people in place to be able to execute and utilize the full strength of the best-in-class enterprise tools. So we are in the process of making sure that happens. So we retooled these teams and we are aligning these systems, so it’s fully utilized versus utilizing manual processes. Ultimately, you grow yourself out of manual processes and that’s the point that we came to and that’s a point that we needed to address.”

Will Stengel

Remain cautiously optimistic on construction momentum

“Construction markets. As Joe mentioned, we remain cautiously optimistic about the residential and nonresidential construction momentum. We observed the same mixed signals as others, including starts, commercial lending data and third-party data such as Dodge as examples. Our teams are focused on the project and customer activity that we see in the majority of our local markets. The teams across the company are working hard to simultaneously transform and deliver performance”

Evan Levitt

We need to get inventory profile low because we misread demand

“Yes, I think the areas we need to address most aggressively are clearly getting the inventory profile of low. I mean really what we got in trouble with this year is we realized too late that our demand signals were too weak, so we weren’t acquiring enough product. And by the time we figured that out and recorrected, we had too much product available to consume. So, pretty simple, too much going through the pipe in a short period of time.”

Taking longer than expected to right the supply chain

“it’s simply taking longer to right the supply chain, to work the inventory flow through the entire supply chain, including much of this is import merchandise. So, it’s coming from overseas, takes time to bring it over from Asia, receive it into the country, bring it to the distribution centers, receive it into our large distribution centers, and then distribute throughout our network. That does take time. It’s taking more time than we thought. And so we are spending some incremental cost on freight to expedite that to the extent possible, to deliver across the country regardless of where the inventory in the network to meet the customer demand and to invest in surge resources to right-size the supply chain as quickly as possible.”

HD Supply 1Q16 Earnings Call Notes

Joe DeAngelo

Weather has been a consideration

“Weather has been a consideration for HD Supply year-to-date. We previously commented on our favorable comparison in February due to a mild 2016 versus 2015. Flooding in Texas, late snow in certain areas like Colorado and an unusually cool start to spring in 2016 were considerations impacting April and May performance.”

No fundamental changes in our end markets

” There has been no fundamental changes to our end market perspectives since our call in March. We expect the residential construction to increase to mid single digits, non-residential construction to increase in mid single digits, water infrastructure to be down low single digits to up low single digits and for the MRO market to remain stable increasing 1% to 2%.”

Will Stengel

Commodity cost inflation is a short term gross margin headwind

“Commodity cost inflation is another short term gross margin headwind in this environment.”

HD Supply 4Q15 Earnings Call Notes

HD Supply’s (HDS) CEO Joe DeAngelo on Q4 2015 Results

Debt to EBITDA down to 4.6x from 8x in June 2013

“The ratio of net debt for adjusted EBITDA was currently 4.6 times down from nearly eight times at our initial public offering in June 2013. And down 1.5 turns since fiscal year end 2014. We finished 2015 with solid performance in the fourth quarter is well. ”

Will Stengel

No material oil and gas exposure

“oil and gas impacts. We do not believe we have material direct oil and gas exposure. As we have previously disclosed, our exposure is second and third order effect, which is difficult to identify and quantify. We continue to see solid but varied performance in Texas, across city and business unit, Texas today represents approximately 11% of HD Supply annual sales.”

Competitive environment stable

“competitive environment. Our competitive environment is unchanged from when we spoke in December. We have always operated in intensely competitive profit pools, and respect both our small and well-capitalized competitors. We differentiate via customer-centric service excellence that has earned loyalty over many years. We leverage our scale but complement it with fast, agile and precise global execution. The core of our model is our knowledgeable HD Supply professionals, who stand shoulder to shoulder with our customers, to solve their toughest problems.”

Evan Levitt

February benefitted from favorable comps

“However, I note that February sales performance benefited from a favorable comparison. As we disclosed last year February 2015 was impacted by the full or partial closure of 60 branches and distribution centers across the country impacting approximately 140 facility there. For February 2015, the estimated weather represented an approximately 200 basis points sales growth headwind. This headwind did not repeat in 2016.”

3% end market growth

“Our current views for 2016 are for the residential construction market to increase mid single digits for non-residential construction to increase mid single digits. For water infrastructure to be down low single digits to up low single digits, and the MRO market to remain stable, increasing 1% to 2%. These specific end market estimates imply an approximate 3% end market growth estimate for HD Supply’s end markets in 2016. “

HD Supply 3Q15 Earnings Call Notes

HD Supply’s (HDS) CEO Joe DeAngelo on Q3 2015 Results

Construction end markets continue to be solid

“our end market views are mostly unchanged from our disclosure in September. We believe the construction end market continue to be solid. In particular, non-residential demand continues to be strong in our priority districts. We continue to see cranes across the skyline in most of our major markets and our Construction & Industrial teams are executing well. We believe the projects represent multi-year opportunities. Additionally, our views on residential are largely unchanged. The most recent housing data is mixed with October single-family starts, up only 2% versus prior year. However, we believe that a moderated and prolonged construction growth trajectory is a solid environment for HD Supply.”

Continue to see good activity in construction

“we continue to see good activity from a non-res perspective. I think the C&I’s performance obviously speaks for itself. If you look at all of our priority districts, the sentiment and the customer activity continues to be good. We think there are multiyear projects and so it’s got a runway tail to it. So, I would say more of the same from our perspective. We see all the same third-party data points that everybody else does, including folks like Dodge Data etcetera that have pretty hard to interpret revised datasets and so the best intelligence that we can develop our views from is the local intelligence and that continues to be solid.”

We saw a favorable market in November

“So that’s exactly right, we continue to see favorable market and we think that that manifested itself in November. I would say it’s also although it’s only one month only, one data point is encouraging to see that Waterworks improved from the 1% in the third quarter to a 4% in November.”

We never pass up great talent

“We never pass up a great talent and we are always very, very aggressive in terms of having to pass it on full time no matter what the market environment is for great talent both sales and elsewhere across the company. As the economy gets good or bad I mean there is always the opportunity to help to deploy great talent either from competitive sets or from areas where we see people getting development that we would like to have on team. ”

HD Supply 2Q15 Earnings Call Notes

HD Supply Earnings call notes

deflationary and pricing environment and implications for operating leverage, we have not seen a material change in the impact of the deflationary environment versus our last call.

The commodity market continues to be volatile, but as we previously stated, we sell relatively few pure commodity products. We do sell PVC and ductile iron pipe in Waterworks and steel rebar in construction and industrial. As a data point, the rebar categories from construction and industrial has been one of our most improved categories, benefiting from category management processes and disciplines. It is a solid example of the power of category management and value-added offerings for our customers.

Our end market views are unchanged from our disclosure in July. We believe the construction end markets continue to be solid. The most recent housing data shows single family starts up approximately 11% on a year-to-date basis through July, which is generally consistent with our previous expectations of a more moderated extended recovery.

Most of our growth comes from selling more to existing customers. We’ve got longstanding relationships with most of the large REITs and hospitality players in the space. Year over year we typically add a little over 100 salespeople per year, anywhere from 100 to 125. We do that pretty consistently

we participate in an $80 billion market so the question is, would we be adding something else to be in addition to the $80 billion market. The answer is no. When you’re an 8% share play in an $80 billion market, you focus on capturing what you don’t have. And of that $80 billion market Facilities Maintenance is $50 billion of that market.

We keep an eye on all of our competitors. We fear none, we respect all. We know what everybody’s doing in the marketplace. But most importantly we know our customers in the marketplace better than anybody else out there and that’s where we’re going to concentrate all of our efforts.

HD Supply Holdings 1Q15 Earnings Call Notes

Haven’t seen a major change in deflation dynamics

“deflationary environment. We have not seen a material change in the deflation environment versus our last call. As we previously stated, we sell relatively few pure commodity products.”

Haven’t been able to take price either

“We have not seen a material change in the pricing environment either. It remains challenging as it has for the past several years. We delivered 40 basis points of gross margin expansion, driven by our category management initiative. As I mentioned, flat gross margin rate year-over-year performance is good, and gross margin expansion is great.”

Construction rebounding, MRO stable, residential recovery

“We believe the construction end market continues to recover. As we discussed previously, we believe non-residential activities strength is solid in most of our priority districts now and we saw gradual improvement over the past year with strength widening across the country. The MRO market remains stable. Infrastructure markets continue to be sluggish but marginally better than last year. And residential is showing characteristics of more moderated extended recovery. The most recent housing data aligns with our view, showing single-family starts up approximately 8% on a year-to-date basis through April.”

Have seen select, but not broad weakness in oil and gas

“We have not seen a broad-based impact to our business from oil and gas at this time. We have seen select weaknesses in our fusible pipes, our plastics initiative in Waterworks, select power solutions industrial-oriented customers in the central part of the country and certain branches in Western Canada. Additionally, our year-to-date performance in Texas has been mixed across various cities and business units.”

Weather was an issue

“Weather was certainly an issue during the majority of our first quarter. For HD Supply, we estimate approximately 180 branch days were impacted due to full or partial closings in the first quarter 2015. In total, we estimate that HD Supply sales growth was adversely impacted by approximately 100 basis points during the quarter. Waterworks was most impacted as the customers are most sensitive to ground conditions to perform their work. Snow, below freezing temperatures, rain and mud are all not conducive to underground activity.'”