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 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 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.