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Edited Transcript of HDS earnings conference call or presentation 17-Mar-20 12:00pm GMT

Q4 2019 HD Supply Holdings Inc Earnings Call

Atlanta Mar 17, 2020 (Thomson StreetEvents) -- Edited Transcript of HD Supply Holdings Inc earnings conference call or presentation Tuesday, March 17, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley Paulsen

HD Supply Holdings, Inc. - President of HD Supply Facilities Maintenance

* Charlotte McLaughlin

HD Supply Holdings, Inc. - IR Officer

* Evan J. Levitt

HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer

* Joseph J. DeAngelo

HD Supply Holdings, Inc. - Chairman & CEO

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Conference Call Participants

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* Andrew Burris Obin

BofA Merrill Lynch, Research Division - MD

* David John Manthey

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Deane Michael Dray

RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment

* Hamzah Mazari

Jefferies LLC, Research Division - Equity Analyst

* John George Inch

Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials

* Keith Brian Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Michael Lawrence McGinn

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Nigel Edward Coe

Wolfe Research, LLC - MD & Senior Research Analyst

* Patrick Michael Baumann

JP Morgan Chase & Co, Research Division - Analyst

* Ryan James Merkel

William Blair & Company L.L.C., Research Division - Research Analyst

* Takeheiko Makishi

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the HD Supply Fourth Quarter Earnings Conference call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Charlotte McLaughlin. Please go ahead, ma'am.

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Charlotte McLaughlin, HD Supply Holdings, Inc. - IR Officer [2]

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Thank you, Josh. Good morning, ladies and gentlemen, and welcome to the HD Supply Holdings 2019 Fourth Quarter and Full Year Earnings Call. As a reminder, some of our comments today may be forward-looking statements based on management's beliefs and assumptions and information currently available to management at this time. These beliefs are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those detailed in our periodic SEC filings. Please note that the company's actual results may differ materially from those anticipated, and we undertake no obligation to update these statements.

Reconciliations of certain non-GAAP financial metrics with their corresponding GAAP measures are available at the end of our slide presentation and in our 2019 fourth quarter and full year earnings release, which is available on our IR website, at www.hdsupply.com. Joe DeAngelo, our CEO, will lead today's call; with Brad Paulsen, President of Facilities Maintenance, providing further color around the current business initiatives; Evan Levitt, our CFO, will provide additional information on our recent financial performance. There will be an opportunity for Q&A. (Operator Instructions) Thank you for your continued interest in HD Supply.

And with that, I would like to turn the call over to Joe DeAngelo.

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Joseph J. DeAngelo, HD Supply Holdings, Inc. - Chairman & CEO [3]

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Well, thank you, Charlotte. Good morning, everyone. Thank you for joining us today for our fourth quarter and full year 2019 earnings call. As always, it is my privilege to share the company's results with you on behalf of the over 11,500 HD Supply associates who work hard every day as one team, driving customer success and value creation.

Turning to Page 3. I'll begin by addressing the current coronavirus outbreak. We sympathize with those around the world directly impacted by this extreme event. We are focused on doing everything we can to keep our associates and their families safe while providing the assistance our customers' needs during this difficult period. We have put in place a robust action plan, informed by World Health Organization guidelines, the CDC in Atlanta and local and state authorities. And we are regularly updating our communications to associates to ensure that they have all of the relevant information to stay healthy.

Our cross-functional response team has implemented and improved various infection controls in our facilities, including increased cleanings in distribution centers and vehicles, additional hand sanitizer stations and heightened precautions for our drivers and customer-facing employees. Our communications outreach and intranet sites keeps our associates updated with news as it happens, including future actions that we may need to take to keep our associates safe. We have business continuity plans in place to minimize any disruption to day-to-day business, which includes allowing many associates to work from home and giving associates who may need to self-quarantine the resources to do so safely and without fear of being penalized. We restricted nonessential business travel and have asked our associates to take the necessary precautions when they do travel. Managers across the organization are receiving toolkits, and we are advising all of our customers to reach out to their designated HD Supply contacts for updates.

The current situation has overshadowed our solid finish to 2019 and strong start to 2020, as detailed on Page 4. Adjusted for the impact of fiscal 2018's 53rd week, in the fourth quarter of fiscal 2019, we delivered 3.2% year-over-year sales growth. Facility Maintenance delivered sales growth of 2.8%, and Construction & Industrial delivered sales growth of 3.8%. During full year fiscal 2019, we generated $571 million of free cash flow, an increase of 22% over full year fiscal 2018. Our performance continued to improve in February, our first month of fiscal 2020, delivering year-over-year average daily sales growth of 8.8%. Facilities Maintenance delivered average daily sales growth of 4.1%, and Construction & Industrial delivered average daily sales growth of 14.2%. Although this represents just 1 month, we're excited about our strong start to 2020 and look forward to executing our growth strategies. We will focus on execution in 2020 to support our customers' needs with best-in-class service.

On March 12, our Board of Directors authorized an additional $500 million share repurchase program. Through the end of fiscal 2019, we have completed 3 previously issued share repurchase program of $500 million, repurchasing a total 42.2 million shares, reducing our outstanding share count by 21% since the first quarter of 2017. We will continue to opportunistically repurchase shares in the open market pursuant to our 10b5-1 plan. Our teams are also continuing to work towards the separation of our 2 business units, making good progress on talent alignment and information system requirements. We remain on schedule, and expect that our Construction & Industrial business, subject to market conditions, will become an independent public company in mid-fiscal 2020 through a tax-free distribution to shareholders. I am pleased to see both of our businesses generating momentum as we get closer to our separation, where each business can solely focus on their respective customers and markets.

I will provide some closing comments following Q&A, but I will now turn the call over to Brad Paulsen, who will provide an update on our Facilities Maintenance business.

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Bradley Paulsen, HD Supply Holdings, Inc. - President of HD Supply Facilities Maintenance [4]

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Thanks, Joe, and good morning. I would like to begin by thanking our nearly 6,000 associates for the service and value they provide to our customers each day. I want to also echo Joe's comments and reiterate that HD Supply is taking every necessary precaution to ensure the risk to our customers and HD Supply team is minimized.

While we have yet to see any material disruption to our business, our teams are working tirelessly to ensure we are well positioned to support and service our customers' needs during this challenging time. With over 75% of our sales executed over digital platforms, our technical teams are focused on maintaining 100% website, app and support system availability to allow our customers to execute their orders any place, any time, regardless of property-level visit restrictions. Our supply chain leadership team has developed contingency plans to allow for continued customer deliveries in the event one of our local market DCs is impacted by a material outbreak of the coronavirus. Along with this, our local delivery teams are working with our customers to customize delivery and drop-off procedures to best fit our customers' needs.

And finally, our category management, global sourcing and supply chain teams have partnered with our supplier community and currently expect minimal disruption to product availability for our proprietary brand products sourced from China. We will, however, experience short-term supply issues for select hand sanitizer, cleaning chemicals, safety gloves and protective mask items due to the unprecedented spike in demand experienced in recent weeks. Overall, I am very proud of our team's planning and preparedness, and I'm confident we will deliver the service our customers will require to successfully manage their properties in the current environment.

Of the 4 sales verticals we support, the hospitality vertical is the most likely to see its normal demand negatively impacted by the reduction in hotel and motel occupancy due to the coronavirus. Our team is working closely with our hospitality customers to support their immediate products and service needs, but we do anticipate a drop in property-level demand at some point in the first quarter. We're not yet able to quantify the potential financial impact, but do expect this to persist until more normal occupancy levels return.

Turning now to our recent performance. I am very encouraged by the progress made in the fourth quarter of 2019. We continued to take share from our competitors and now look forward to executing our 2020 growth initiatives. I would now -- I would like to now provide commentary on key focus areas for our team. First is our customer experience. We continued to tailor our customer experience to the needs of our core customer, the living space maintenance professional. In 2019, we implemented over 40 enhancements to our online ordering and website experience while also launching our third generation mobile app. These updates and tools are a perfect example of our focus on providing solutions that simplify the daily task for the maintenance professional. We've also significantly improved our marketing execution and customer connectivity as we work to develop a more personalized relationship with our property-level customers. This will allow us to deliver the most relevant solutions and offers needed by the respective properties.

Finally, we continue to expand our online product assortment, which is now nearly 100,000 SKUs, to augment our stock SKU offering to ensure we provide our customers the broadest range of professional products needed to execute daily repair and to replace tasks. Second is order fulfillment. Service dependability continues to be our customers' #1 need. Our distribution network of over 40 DCs and 1,000 drivers continue to execute our next-day delivery value proposition at a high level. We plan to continue investing in our supply chain, both in talent and technology, in order to provide a fulfillment experience that meets the evolving needs of our customer. I am equally excited about this team's efforts to execute our peak season readiness plans. The teams are on schedule, and I do expect each of our DCs to be well positioned operationally to support our customers' needs during the upcoming peak selling season.

Third is national accounts. As the only national distributor solely focused on the living space maintenance professional, we are confident we have a differentiated value proposition for our national account customers. We remain focused on working closely with this customer to drive property-level purchasing compliance while also expanding the penetration of our value-added services, such as property improvement, in-unit delivery and installation. Our hard work is paying off, and we are pleased with the improvements made in our sales growth and customer feedback from this critical customer segment. We expect this improved execution plus our plans to aggressively pursue new national account customers in 2020 to be a key driver to this year's sales growth.

Finally, M&A will be a top priority for our team in 2020. We see great value in expanding our presence in core geographies and increasing our available product and service offering. We continue to develop and monitor a robust pipeline of opportunities and expect to be active in the coming year.

Thank you for your time and continued support. I will now hand the call over to Evan.

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [5]

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Thank you, Brad, and good morning. I'd like to start by turning to Page 6 and share that we are making good progress on the separation of our businesses into 2 separate stand-alone public companies.

We are on track to complete the separation through a tax-free distribution of the Construction & Industrial business to our shareholders in mid-fiscal 2020, subject to market conditions. Our teams are hard at work, ensuring that both businesses are aligned with talent and information technology infrastructure to support our current operations and expected future growth. We continue to believe that a 2 to 3x net debt to adjusted EBITDA leverage range is appropriate for both companies, with the Construction & Industrial business likely on the lower end of that range, whereas the Facilities Maintenance business can support a leverage ratio at the higher end of the 2 to 3x range. This level of leverage, along with the cash flow profile of each business, will provide both companies with the ability to pursue a bolt-on or tuck-in M&A strategy.

We previously outlined our expectations for incremental stand-alone costs of approximately 50 to 100 basis points of sales for each business, in line with historical comparably sized separation transactions. As we continue to work on our separation, we can refine our original estimate of incremental stand-alone costs to now be an estimated 50 to 80 basis points for Construction & Industrial and an estimated 30 to 60 basis points for Facilities Maintenance.

Now before we review the fourth quarter results on Page 7, I'd like to remind you that the fourth quarter of fiscal 2018 contains an extra week as compared to the fourth quarter of fiscal 2019. Fiscal 2018 contains a 53rd week, which occurs every 4 or 5 years. You can find further information on the impact of the extra week in the appendix of our year-end earnings presentation.

Net sales decreased $61 million or 4.2% to $1.385 billion in the fourth quarter of fiscal 2019 as compared to $1.446 billion in the fourth quarter of fiscal 2018. As I just shared, the fourth quarter of fiscal 2019 consisted of 13 weeks as compared to 14 weeks during the fourth quarter of fiscal 2018. Sales growth on a 13-week basis in the fourth quarter of fiscal 2019 was 3.2% as compared to the fourth quarter of fiscal 2018. Gross profit decreased $27 million or 4.7% to $545 million for the fourth quarter of fiscal 2019 as compared to $572 million for the fourth quarter of fiscal 2018. Gross profit was 39.4% of net sales for the fourth quarter of fiscal 2019, down approximately 20 basis points from 39.6% in the fourth quarter of fiscal 2018.

Adjusted EBITDA decreased $8 million or 4.3% to $179 million in the fourth quarter of fiscal 2019 as compared to $187 million in the fourth quarter of fiscal 2018. Adjusted EBITDA was 12.9% of net sales for the fourth quarter of fiscal 2019, flat as compared to the fourth quarter of fiscal 2018. On a 13-week basis, adjusted EBITDA growth was 2.9% in the fourth quarter of fiscal 2019 as compared to the fourth quarter of fiscal 2018.

Turning to Page 8, I'll review the full year fiscal 2019 performance. Net sales grew to $6.1 billion, an increase of $99 million or 1.6% as compared to the full year of fiscal 2018. Organic sales growth on a 52-week basis for the full year of fiscal 2019 was 3% as compared to the full year of fiscal 2018. Gross profit increased $28 million or 1.2% to $2.403 billion in the full year fiscal 2019 as compared to $2.375 billion in fiscal 2018. Gross profit was 39.1% of net sales in the full year of fiscal 2019, a decrease of approximately 20 basis points from 39.3% in the full year of fiscal 2018.

Adjusted EBITDA increased $2 million or 0.2% to $873 million in fiscal 2019 as compared to $871 million in fiscal 2018. Adjusted EBITDA was 14.2% of net sales in fiscal 2019, a decrease of 20 basis points from 14.4% in fiscal 2018. On a 52-week basis, adjusted EBITDA growth was 1.7% in fiscal 2019 as compared to fiscal 2018.

On Page 9, I'll discuss the specific performance of our individual business units. Net sales for our Facilities Maintenance business were $702 million during the fourth quarter of 2019 as compared to $736 million for the fourth quarter of fiscal 2018. Sales growth on a comparable 13-week basis for the fourth quarter of fiscal 2019 was 2.8%. Adjusted EBITDA decreased $10 million or 8.1% to $114 million for the fourth quarter of fiscal 2019 as compared to $124 million for the fourth quarter of fiscal 2018. The additional week contributed approximately $10 million to adjusted EBITDA during the fourth quarter of fiscal 2018. Adjusted EBITDA was 16.2% of net sales for the fourth quarter of fiscal 2019, down approximately 60 basis points from 16.8% for the fourth quarter of fiscal 2018. As expected, Facilities Maintenance gross margins declined 50 basis points against a difficult year-over-year comparison from the fourth quarter of 2018. For the full year of fiscal 2019, our Facilities Maintenance gross margin rate declined approximately 30 basis points from the full year of fiscal 2018. The decline throughout the year was reflective of the additional tariffs imposed on Chinese imported products.

Net sales increased $41 million or 1.3% to $3.130 billion in the full year of fiscal 2019 as compared to $3.089 billion for the full year of fiscal 2018. Sales growth on a comparable 52-week basis for fiscal 2019 was 3.1% as compared to fiscal 2018. Adjusted EBITDA was flat at $546 million for the full year of fiscal 2019 as compared to the full year of fiscal 2018. The 53rd week in fiscal 2018 contributed approximately $10 million to adjusted EBITDA. Adjusted EBITDA was 17.4% of net sales for the full year of fiscal 2019, down approximately 30 basis points from 17.7% for the full year of fiscal 2018.

Moving to the Construction & Industrial business. Net sales for our Construction & Industrial business were $685 million during the fourth quarter of 2019 as compared to $711 million for the fourth quarter of fiscal 2018. Sales growth on a comparable 13-week basis in the fourth quarter of fiscal 2019 was 3.8%. Adjusted EBITDA increased $2 million or 3.2% to $65 million for the fourth quarter of fiscal 2019 as compared to $63 million for the fourth quarter of fiscal 2018. The additional week in the fourth quarter of fiscal 2018 contributed approximately $3 million to adjusted EBITDA. Adjusted EBITDA was 9.5% of net sales in the fourth quarter of fiscal 2019, up approximately 60 basis points from 8.9% for the fourth quarter of fiscal 2018. During the fourth quarter of fiscal 2019, Construction & Industrial's gross margins improved approximately 10 basis points as compared to the fourth quarter of fiscal 2018. During the full year of fiscal 2019, Construction & Industrial's gross margin declined approximately 10 basis points as compared to fiscal 2018.

Net sales increased $58 million or 2% to $3.019 billion in the full year of fiscal 2019 as compared to $2.961 billion for the full year of fiscal 2018. Organic sales growth on a comparable 52-week basis for the full year of fiscal 2019 was 2.9% as compared to the full year of fiscal 2018. Adjusted EBITDA increased $2 million or 0.6% to $327 million for the full year of fiscal 2019 as compared to $325 million for the full year of fiscal 2018. The 53rd week in fiscal 2018 contributed approximately $3 million to adjusted EBITDA. Adjusted EBITDA was 10.8% of net sales for the full year of fiscal 2019, down approximately 20 basis points from 11% for the full year of fiscal 2018.

Turning to Page 10. In the last 12 months, we generated $571 million of free cash flow, inclusive of federal income tax payments made subsequent to the full utilization of our federal net operating loss carryforwards and other federal tax credits. We invested $17 million in capital expenditures in the fourth quarter of 2019 and $106 million for the full year of fiscal 2019. During full year fiscal 2019, we paid cash taxes of approximately $53 million, including federal, Canadian and U.S. state taxes, $18 million of which was paid in the fourth quarter of fiscal 2019.

During the fourth quarter of fiscal 2019, we completed our third $500 million share repurchase authorization. We acquired 1.5 million shares of our common stock during the fourth quarter for a total of $59 million at an average price of $39.71 per share. During the full year of fiscal 2019, we acquired 9.6 million shares of our common stock for a total of $375 million at an average price of $38.87 per share. As Joe indicated, we will continue to opportunistically repurchase shares in the open market, pursuant to the March 2020 repurchase program authorized by our Board of Directors. At the end of fiscal 2019, our net debt to adjusted EBITDA leverage was 2.4x, conservatively within our targeted range of 2 to 3x. We have no near-term debt maturities and maintain liquidity in excess of $600 million.

On Page 11, we provide fourth quarter 2019 monthly sales trend performance as well as the 2018 comparable. In November of 2019, we delivered sales of $436 million, an increase in average daily sales of approximately 2.5% versus November of 2018. In December 2019, we delivered sales of $403 million, a decrease in average daily sales of approximately 6.8% versus December of 2018. In January 2020, we delivered sales of $546 million an increase in average daily sales of approximately 12.7% versus January 2019. There were 18 selling days in November, 19 selling days in December and 24 selling days in January of fiscal 2019 compared to 18 selling days in November, 20 selling days in December and 28 selling days in January of fiscal 2018. Both December and January sales growth were impacted by a shift in our fiscal calendar, whereby Christmas fell in January during fiscal 2018 and in December during fiscal 2019. The combined December-January sales growth in 2019 over 2018 was approximately 4%.

February 2020, which ended on March 1, was the first month of our fiscal first quarter 2020, and we have provided our preliminary sales results. We will not provide information on February results beyond sales. Preliminary net sales in February 2020 were approximately $460 million, which represents year-over-year average daily sales growth of approximately 8.8%. Preliminary February year-over-year average daily sales growth by business segment was 4.1% for Facilities Maintenance and 14.2% for Construction & Industrial. There were 20 selling days in both February 2020 and February 2019.

We are pleased with the strong start to fiscal 2020 from both of our businesses. Our Facilities Maintenance business saw positive year-over-year growth in each of its 4 main sales verticals: multifamily, hospitality, health care and institutional. Our Construction & Industrial business continues to recover nicely, posting double-digit growth for the month of February, supported by expanding construction activity across several large projects and geographies. The month of February saw a fair amount of rain across the country. The weather was actually favorable when compared to February of 2019, contributing to our strong performance. Our favorable year-over-year sales trends have continued into the first 2 weeks of March.

We remain committed to the long-term mid-single-digit sales growth target, both on a combined basis and by individual company. However, due to the uncertainty created by the coronavirus and its disruption on economic activity, we will not be providing 2020 guidance at this time. To date, we have not seen a reduction in demand within our Facilities Maintenance end markets, including hospitality. But given the severity of the crisis, this can change quickly. Just this week, we are beginning to see construction job sites in certain locations temporarily shut down as cities around the country intentionally curb nonessential commercial activity. Our #1 priority is to help our associates and their families as needed and to maintain business readiness, so that we can continue to provide our customers with the critical products and services needed to maintain their facilities, care for their residents and operate and maintain safe job sites and work environments.

Thank you for your continued interest in HD Supply, and I'd now like to turn the call over to Josh for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Keith Hughes with SunTrust.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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I guess my question is on the C&I business. I understand the job sites are starting to slow down, but it looks like, as you referred to, it's really starting to pick up. Can you talk about were there certain areas or certain regions where you're seeing that business starting to come back?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [3]

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So Keith, the strength through the month of February and really into the 2 -- first 2 weeks of March was broad-based across the country. We saw nice growth in the Northeast, in the California regions, broad-based across the country and across very significant large jobs that we saw come back. Just this week, as you indicated, we have seen some closures, some slowdown in activity, announcements by cities such as Boston and in the Bay Area. We're continuing to monitor those to understand what that means for our business and our customers, and we stand ready to help our customers with anything they need. But certainly, we are going to comply with all local state and federal requirements to either curb activity to -- or to assist in the containment of the coronavirus.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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Okay. And you referred to ramping up acquisition activity at the beginning of the call. Are you near term in a wait-and-see mode of how this works out before you engage in transactions? Or do you feel comfortable enough on a deal to go ahead and complete it?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [5]

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So that certainly depends on the opportunity that's before us. Certainly, the level of uncertainty in the marketplace has placed, I'd say, a higher return hurdle on any acquisition right now. But we are actively in the market. We do have an active pipeline for both businesses for M&A activity. And we do -- we would like to complete M&A activity, whether it's now or after this crisis subsides.

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Operator [6]

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Our next question comes from David Manthey with Baird.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [7]

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First off, I'm not sure if you said that John is on the call or not, but if someone could comment on -- the 2020 non-res outlook did seem to brighten as we got later into 2019 and into the New Year. But just recently, I know these things tend to move slowly, have you seen any projects come off the boards for White Cap in the past few weeks here? Or are the low rates and the long-term nature of these projects expected to continue to drive good activity into late 2020 and into 2021?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [8]

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Yes. So David, thanks for the question. And John is not on the call this morning. And you're right, we have seen some significant increase in construction activity across the country, particularly in the fourth quarter and into February and early March. The third-party data supports that as well when looking at the Census Bureau construction put in place numbers. The housing start numbers have all firmed up somewhat in the fourth quarter and into the first part of 2020. We were encouraged by that. As I said, a lot of large construction jobs underway. We have not seen any significant construction jobs pulled. We are just starting to see some slowdown or delayed as a result of some of the government actions taken to curb commercial activity. But these jobs haven't been canceled, they've been delayed.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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And then maybe for Brad, what percentage of FM revenues are hospitality today? And of that percentage, could you give us an estimate of what you think -- your business, how much of it is related to kind of usage-related break-fix business versus any planned maintenance or upgrades that are more periodic and plantable?

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Bradley Paulsen, HD Supply Holdings, Inc. - President of HD Supply Facilities Maintenance [10]

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Sure. So hospitality today represents just under 20% of our business. When we look at what we support in that vertical, we really divide them into 2 buckets. You've got the housekeeping side of hospitality, which is the consumable portion; and then you have the traditional MRO. We're a lot less exposed on the housekeeping side. We've grown that fairly deliberately over the years. So generally, I would think it's about a 75-25 split between the two.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [11]

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Okay. And just as a follow-on to that. The maintenance portion, the MRO portion, that's still usage-driven or occupancy-driven for the most part as opposed to some kind of a planned upgrade?

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Bradley Paulsen, HD Supply Holdings, Inc. - President of HD Supply Facilities Maintenance [12]

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Correct.

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Operator [13]

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Our next question comes from the line of Ryan Merkel with William Blair.

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Ryan James Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [14]

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So first off, I know you're not giving guidance, but many people think we're going to head into a recession in the next 2 quarters at least. Can you just help us conceptually think about how FM and C&I sales and margins might perform?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [15]

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Yes. So Ryan, first, on the Facilities Maintenance side, as Brad indicated, the hospitality vertical is likely our most exposed vertical or at-risk vertical in the current environment and really in any recession as it is the more cyclical portion of our business. The multifamily and the -- or the health care verticals, we expect will hold up fairly well. Now this is a little bit of an unprecedented situation that we're in right now, so we're monitoring and learning along with everybody else. But as folks are spending more time at home, home maintenance may become more important, as kids are at home, home from school, and certainly in the health care vertical, as we've seen that strong demand, and we stand ready to help our customers care for their residents that are some of the most vulnerable during this crisis in our senior care living centers. So we expect that business to hold up fairly well. On the Construction & Industrial side, it certainly be impacted by government actions on when we can work and when we can't. There is a lot of project activity occurring right now. Some of these are long-term projects, multiyear projects, difficult to turn off and walk away from. They can be delayed. So we have to see how that plays out. Certainly, the team -- the leadership team for both businesses have been through a recession before, and are prepared to take the actions necessary to navigate a recession, to gain share through any recession and to take advantage of any M&A opportunities during a recession. Recession is often an area where we can gain share and grow our business in the subsequent recovery. So we're not -- certainly, we're not scared of a recession, but we're prepared for a recession, if one were to occur. Although I'd say we're not ready to call a recession. Certainly, we think there'll be a bit of a pause here in certain economic activity as we get through this crisis, whether that leads to a recession or not, let's see.

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Ryan James Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [16]

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Got it. That was very helpful, Evan. And then turning to FM, it looks like the sales growth trend line is starting to improve. Economy aside, are you starting to see share gains in the FM business again? Is that the conclusion?

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Bradley Paulsen, HD Supply Holdings, Inc. - President of HD Supply Facilities Maintenance [17]

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Yes. So we feel like we took share throughout 2019. When we look at 20 -- or the fourth quarter, definitely encouraged, and I'd put that in really 2 buckets. One is, we understand our markets and our customers continue to evolve, and we need to have a value proposition that's differentiated and compare that with incredible execution on a daily basis. And when I look at the fourth quarter, really, really happy with the improvement that we saw in our sales and operations execution. And I think we've been pretty open saying that we're going to pursue new customers, which we're also starting to see the benefits of that. So between improved execution and the acquisition of new customers, it's proven to be a nice recipe for growth.

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Ryan James Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [18]

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And just one quick follow-up to that. You mentioned technology. Can you just give us some metrics for the mobile app and the e-com site, user growth, sales growth, average order sizes? And it sounds like you're going to try to emphasize that to customers during this sort of unprecedented period. Is that right?

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Bradley Paulsen, HD Supply Holdings, Inc. - President of HD Supply Facilities Maintenance [19]

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Absolutely. We try to focus our efforts on making the life of the living space maintenance professional easier, allow them to do their job in a faster manner with more accuracy. So we did roll out our third generation mobile app. It's been very well received. Actually looked at it yesterday, and we're at 4.8 stars out of 5 and continue to roll out to all of our customers. Don't have all the information that you asked, we can certainly follow-up with that, but has received -- has been received incredibly well by our customers.

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [20]

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And Ryan, I'll just emphasize. As Brad said, about 75% of our transactions are digital-based, either through the website or the mobile app. And we do expect over time that to shift towards a mobile app application. But right now, the majority of those transactions occurred through the website.

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Operator [21]

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Our next question comes from Deane Dray with RBC Capital Markets.

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Deane Michael Dray, RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment [22]

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Just really appreciate all the real-time updates here. And then also, I just wanted to say that not giving guidance here is completely understandable. We were expecting you to say that this morning, and I think your competitors will be doing the same. And this is exactly the way the companies were responding in early stages of 2008, so no surprise there. How about just talk through the supply chain comments from China, what the visibility has been. Was there a disruption and it's resumed? Or did you not see much of a reduction? And can you measure in maybe weeks what kind of buffer supplies you have?

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Bradley Paulsen, HD Supply Holdings, Inc. - President of HD Supply Facilities Maintenance [23]

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Sure. So from an FM perspective, obviously, working very closely with our manufacturing partners in China. And I'd tell you, we were very pleased with the percent of our orders that were filled in February. We had fairly low expectations and those were exceeded. Have also been really encouraged by the progress that the manufacturers have made as far as ramping up to 100% capacity. The delay, if you will, really varies by each individual manufacturer. To go with round numbers, I would say, it would be anywhere from 3 to 5 weeks. And given the amount of inventory that we carry for import items, we don't feel like that's going to present any -- yes, present any level of disruption to our supply for our customers.

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Deane Michael Dray, RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment [24]

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Got it. And how meaningful is this disruption on the sanitary products, masks, gloves and so forth, can you size for that? Because I mean, this is exactly the kind of products that your customers need right now.

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Bradley Paulsen, HD Supply Holdings, Inc. - President of HD Supply Facilities Maintenance [25]

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Yes. So when I mentioned kind of short-term supply issues, we continue to receive products from our suppliers and our manufacturer partners. We are in a situation of as we receive it, we sell it. I don't expect the demand is going to subside for the next few months. So I don't expect to get back to a normal inventory position probably well into the second quarter. As far as scoping the opportunity pre-coronavirus, I would say it would be almost immaterial. Obviously that's ramped up a bit over the last few weeks. But again, we continue to sell that product as we receive it. Evan, I don't know if you want to add any additional color around the impact to the business there.

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [26]

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Yes, I'd say, look, our approach is to support our customers that need that product. So obviously, that product is in demand across the economy. We're going to focus on selling that product to our customers that we stand by and want to help through this crisis. As Brad said, that product is still coming. The manufacturers have put us and all of their customers on allotment. Our allotment is generally more than a full year's worth of inventory. So we will be selling more of that product over the course of the year than we ordinarily would. But as Brad said, being able to stock it in a normal in-stock position within our distribution centers will take some time.

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Deane Michael Dray, RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment [27]

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That allotment comment was really helpful. And then just last question from me. Evan, is there any expectation that in the first half you'll be taking working capital down at all with the anticipation of reduced demand, and what might the cash flow impact be -- the positive cash flow impact be?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [28]

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Yes. So certainly, receivables -- we always work hard to collect receivables as timely as we can. If business activity slows, the receivable balances naturally drop as we collect more than we're currently creating. On the inventory side, we will adjust inventories to match demand. Now we'll be careful with that because this is a -- I'll call it, an event-driven decline or slowdown, which could snapback very quickly and could snapback with pent-up demand that we will want to be able to take advantage of and support our customers when that demand hits. So we'll be monitoring it very closely so that we can make our determination as we go, is this short-term event-driven or is this a longer-term downturn.

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Operator [29]

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(Operator Instructions) Our next question comes from Michael McGinn with Wells Fargo.

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Michael Lawrence McGinn, Wells Fargo Securities, LLC, Research Division - Associate Analyst [30]

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Great quarter. I was wondering if we could walk through the stranded cost estimate. They came down materially for FM, the spin-related costs I'm referring to. C&I still kind of in that range, but that was expected. Can you talk through what's changed, what you guys have done in the last 3 months to prepare for this where those are coming down?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [31]

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Yes. So it's mostly been...

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Michael Lawrence McGinn, Wells Fargo Securities, LLC, Research Division - Associate Analyst [32]

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Is this a -- should those continue to decline or just the -- this is the best estimate going forward?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [33]

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This is our best estimate going forward. So when we originally stated the 50 to 100 basis points of sales, we were just getting started in the separation of the businesses. We were looking at comparable transactions and that was really the basis of our 50 to 100 basis point estimate. We're now much further along in identifying the organization structure of both businesses going forward, so the people needed to run each business individually as well as the IT infrastructure. I believe our costs are a little bit lower than other comparable companies because we have run the businesses fairly autonomously over the years. Each business has its own separate ERP. We do share a lot of back-office functions like a common HR and payroll system, a common data center. And those were the costs that we really needed to get further along to determine what would be the ongoing cost for each business. And so we shared our best estimates as of today. I would make the assumption that those are the best estimates that will occur post-separation as well that we'll actually experience. And if that changes, we'll let you know when it does. But right now, that's the best estimate.

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Michael Lawrence McGinn, Wells Fargo Securities, LLC, Research Division - Associate Analyst [34]

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Okay. Fair enough. And moving to free cash flow or free cash flow uses, it sounds like you have several irons in the fire there with the new authorization, still reaching for M&A. Is this -- are you in a scenario now where your acquisition targets, the LTM looks better than the NTM and you have a more kind of incentivized seller? And then subsequently, do you have -- are you going to wait for the spin to maybe do a C&I transaction? Or is this all FM at this point?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [35]

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Yes, look, depending on the opportunity, we could pursue an M&A transaction on either business. As far as the expectations of the sellers, it really varies seller by seller. Certainly, if LTM results are higher than the next 12 months, our expectation would be that we're paid a lower multiple on LTM, right? We're buying future earnings and cash flow stream and looking to realize synergies by combining them with our businesses. Sometimes that aligns with seller expectations and sometimes it doesn't, and that often impacts whether a deal gets done or whether it doesn't. But we do have an active pipeline, and we're actively pursuing it in both businesses.

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Operator [36]

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Our next question comes from John Inch with Gordon Haskett.

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [37]

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Evan, there was a big decline in CapEx in the fourth quarter sequentially and versus last year. Was that timing-related? Or is that somehow reflective of a hunker down mode? And does it have implications for the 2020 CapEx in terms of the trend?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [38]

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The fourth quarter CapEx was just a matter of timing in terms of project activity that we have internally. It was certainly no intent to hunker down. Now looking into 2020, we'll reevaluate our investment and cash flow profile relative to current market conditions and what we expect and as that moves forward. And so certainly, if we believe that this is a prolonged slowdown, we will look to potentially reduce some of our CapEx going forward.

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [39]

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Yes, that makes sense. Evan, I find it's kind of interesting that you guys are sort of talking up M&A here. Your leverage is already, whatever, mid 2 to 3x. Are you willing to take that number higher? Or is this somewhat preemptive in anticipation that you think based on sort of market dislocation and possible recession that there are just going to be more properties come available for sale and you're just kind of -- you're sort of signaling that you want to be ready for that? How would we interpret that, particularly on the leverage front and for you already out?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [40]

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Yes, certainly, we want to be opportunistic to the extent that there are assets available for sale at attractive pricing. Now that being said, your point on leverage and cash flow profile is an important one. So we are looking at our cash flow profile. Right now, our cash flow profile remains very good. We generated $571 million of free cash flow last year. We will continually reassess what that means for 2020 as conditions change on the ground. Right now, cash flow is good. Leverage is below our -- the midpoint of our target. And if we have an opportunity to take advantage of that and play offense, we will. If we, again, believe this is a prolonged slowdown, we'll be a little more conservative in terms of cash flow usage and leverage, but that may also create additional opportunistic avenues for us to pursue M&A as others may be more inclined to sell.

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [41]

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No, that's fair. Just lastly, one of the themes of C&I had been labor shortage in terms of sort of holding the business back. And I guess now that if we -- sort of rolling into this period where there's going to be some mandated periods of closure, I know a lot of this labor is sort of -- they're foreign nationals, I wonder if this creates or sets up for a longer-term issue insofar as if those people are off work for weeks at end, they leave the United States, won't be able to come back and then we find ourselves even in a bigger labor shortage down the road when business actually does try and snap back. I don't know, what do you guys think?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [42]

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Yes. We have -- we'll have to see how that plays out. Certainly, there could be foreign nationals that are in the construction markets today. On the opposite side, if there's a slowdown and some of these folks are furloughed for a period of time, they really may need to get back to work because they need to earn a wage rate to put food on the table for their families.

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Operator [43]

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Our next question comes from Hamzah Mazari with Jefferies.

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Hamzah Mazari, Jefferies LLC, Research Division - Equity Analyst [44]

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Just on the FM business, could you remind us how much visibility do you have into that business? Is it 3 months, 6 months? Just any thoughts there would be helpful.

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [45]

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Yes. So Hamzah, your question is how much visibility we have into the demand profile of our Facilities Maintenance business?

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Hamzah Mazari, Jefferies LLC, Research Division - Equity Analyst [46]

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Yes, exactly. How much inventory are your customers carrying? How much visibility do you have into your volume growth within the FM business?

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Bradley Paulsen, HD Supply Holdings, Inc. - President of HD Supply Facilities Maintenance [47]

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One of the best things about our business is it's pretty predictable. And obviously, we've got years of data, decades of data to support what to expect month by month, week by week. Our customers, as they become more sophisticated around inventory, are carrying less and less, and in many cases, it's just in time. So we certainly view our role through this crisis as being essential to helping them put their properties in a well-maintained position. The only piece that is a little bit less predictable is obviously property improvement. That's tied to capital investment from our customers. So as that decision changes on their side, it would certainly impact us. But outside that, the MRO business, a great part of our business is fairly predictable.

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Hamzah Mazari, Jefferies LLC, Research Division - Equity Analyst [48]

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Okay. And just a follow-up question. Is private label still a margin driver for you guys? Or has that just structurally changed because of tariffs and what have you?

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Bradley Paulsen, HD Supply Holdings, Inc. - President of HD Supply Facilities Maintenance [49]

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So our private brand products continue to drive margin benefit back to the business. And our customers, especially in 2019 and going forward, are going to continue to embrace that because it's a high-quality product that they can get at a lower price. So I expect that to continue to grow as we move forward.

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Operator [50]

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Our next call comes from Julian Mitchell with Barclays.

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Takeheiko Makishi, Barclays Bank PLC, Research Division - Research Analyst [51]

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It's Jason Makishi on for Julian. Maybe just a quick one around C&I. It sounds like -- just maybe less by region and more by type of projects and what's driving the demand strength, it all sounds like large project realization that maybe got pushed out from late last year into early this year. I guess are these the types of projects that once they come off the board or once they start getting delayed and pushed out, they're a little bit slower to recover once any potential demand headwinds on a macro level subside? Or from your experience, do these types of projects sort of get pushed out, and then the instant any sort of large headwind subside, they come right back? Or is it a little bit slow to come off and slow to recover sort of dynamic?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [52]

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Yes, it's a good question. Now this crisis is a little different than what we've seen in the past. So we're a bit in uncharted territory here. Certainly, when the crisis subsides, many of our customers will want to get back to work quickly and catch up for lost time to the extent they can. That being said, if workers are -- were furloughed and let go, it may take some time for them to be rehired and to restaff those jobs. So I think there'll be an incentive to get back quickly and get those jobs completed because our customers don't get paid if they don't complete those jobs, but they've got to have the resources to do so. So some of that will be dependent on how long the delay is and what some of the government requirements are to do with furloughed workers.

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Takeheiko Makishi, Barclays Bank PLC, Research Division - Research Analyst [53]

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Got it. And then maybe just transitioning a little bit to the FM business, making sure I have the messaging there clear. Clearly some risk to the hospitality portion of the business, a little bit less than 20% of sales, but potential for offsets in virtually every other end market/portion of the business. The reticence to give guidance is more just around the difficulty in sizing the magnitude of any sort of downturn in hospitality versus offsets in other pockets of the business, correct? Those are the sort of puts and takes for FM?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [54]

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Yes, look, as I said, we're in a bit of uncharted territory here with this type of crisis. Certainly, we expect multifamily and health care to hold up better than hospitality in the current environment. Folks are spending more and more time at home and things are likely to get -- to be broken and torn up in homes as kids are home from school. At the same time, we don't know what the demand is going to look like for people to want a maintenance professional in their living space during this time. So we just have to play it out and see how it evolves. Certainly, when everybody gets back to business, business has normalized, I do expect some pent-up demand and a snapback. And we are fortunate that we are a living space provider, and that's where folks are today. They are hunkering down in their living spaces. So we feel good about that, but we don't know exactly what that demand pattern is going to look like.

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Takeheiko Makishi, Barclays Bank PLC, Research Division - Research Analyst [55]

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Understood. And then maybe just a quick one at the end on margins into 2020. To the extent that you can give context as what gross margin dynamics have historically looked like in these types of maybe temporary demand environments? What are the puts and takes around where could there be pockets for driving expansion/driving contraction in the next...

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [56]

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So certainly, within Facilities Maintenance. To the extent that hospitality slows, hospitality is generally a lower-margin vertical. To the extent that property improvement or renovation slows, that's generally a lower-margin service offering. So to the extent the mix shifts more towards multifamily and health care, those are higher-margin profiles. As far as Construction & Industrial, I expect the business to get more competitive as job sites slow down. Then when job sites open back up, and there's a demand to catch up for lost time, folks will be looking for the best service provider to help them catch up and be less focused on day-to-day price. So I think there's some -- certainly, there's financial risk going into this environment. Through the cycle, through the environment, I think there's opportunity as the strongest will survive and help their customers continue to perform. And we stand ready to support our customers and gain share and gain profitable business as we go through this historical period.

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Operator [57]

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Our next question comes from Andrew Obin with Bank of America.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [58]

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Can you hear me?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [59]

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Yes, we can hear you, Andrew.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [60]

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Just a question, I think the U.K. authorities just published their outlook for the coronavirus impacting labor force. I think they sort of expect that for the next several months, maybe 10% of the labor force will be out sort of sick on a permanent basis. So the question is, have you guys considered what are the staffing levels at which you can continue to run your operations efficiently without material hit to margin on inefficiencies?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [61]

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Yes, it's a good question. Certainly, that is a challenge for all businesses. If folks are out sick, how do you replace that portion of the labor force. Certainly, over time, any contract labor that's available is utilized as well as augmented with third-party services, and those are all potentially more expensive than running your business with your own people. So our goal is to keep our people as healthy and safe as possible, to keep them on the job site in our facilities as long as possible, while also allowing them to take the time off to self-isolate or to get well if they're sick. So it is a balance. And Andrew, you're right, that is a cost risk that all businesses are going to face that there's going to be some additional incremental labor costs associated with illness and with absenteeism.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [62]

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Okay. And then the second question. I know you guys have, I think, a $1 billion asset-backed facility. Have you guys tapped it over the weekend?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [63]

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We have -- we regularly draw and repay on our revolving credit facility on a daily basis. We have not drawn down the entire facility, as you may have heard others have. We are keeping a buffer of cash in our account, more so than we used to, but we have not drawn down the entire facility. We've got good relationship with our banks. We stay in close touch with them, and we're confident at this point that the banks will be able to meet their commitments.

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Operator [64]

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Our next question comes from Nigel Coe with Wolfe Research.

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Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [65]

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So Evan, I think you just kind of answered my first question, which is about maybe fortifying the balance sheet a bit more than normal. We touched on the topic of capital deployments, more so around M&A. But obviously, your stock price is $28. You've been pretty aggressive in the past. Where's your mentality right now in terms of deploying capital versus fortifying the balance sheet and maybe just put them back here while we go through this uncertainty?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [66]

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Yes. Well, certainly, the equity markets have been damaged by the environment, and there certainly may be good opportunity in the equity markets, including our own stock, which we believe is very attractively priced. And we'll weigh that against other investment opportunities as well as ensuring good cash flow discipline in an uncertain environment. But I agree with you, certainly the -- where the -- our stock price is and the stock market is, in general, there may be some opportunities there.

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Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [67]

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Okay. Great. And then just a couple of data points on both FM and C&I. But before that, could you just kind of double confirm that February had no material kind of benefits from prebuy, either due to China supply chain shortages or maybe some prebuy on the foundry side? But on FM, what percentage of your sales is health care facilities? And on C&I, do you have a breakout on the non-resi side between public and private?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [68]

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So your question was what percentage of our revenues is health care-related for Facilities Maintenance?

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Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [69]

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Yes, on the FM side.

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Bradley Paulsen, HD Supply Holdings, Inc. - President of HD Supply Facilities Maintenance [70]

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So that would be less than 10%.

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Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [71]

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Okay.

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [72]

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And then I'm sorry, what was your question on C&I?

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Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [73]

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Yes, C&I, do you have a breakout on the non-resi, which is about 70% of C&I, do you have a breakout between public and private?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [74]

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We don't. We participate in both. And essentially, that will vary based upon the activity that's in the marketplace. So right now, we are on a lot of private -- or a lot of public jobs like road and bridge, airport infrastructure, a lot of that activity is occurring around the country. And then on the private side, a lot of activity around sports and entertainment data centers and distribution centers.

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Operator [75]

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Our next question comes from Patrick Baumann with JPMorgan.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [76]

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So just first, I understand you're not seeing it yet in construction, but obviously, the market is concerned about the downturn. So just wanted to see if you could offer some framework for how you'd expect the business to perform if the economy goes into recession, which would presumably drive lower non-resident. I guess, what's your game plan to deal with that kind of environment, if it comes, in terms of costs, et cetera? Maybe it would be helpful if you could provide us a framework for thinking about decremental margins if -- I don't know, if White Cap sales go down, say, 10% to 20% or something like that, that would be helpful.

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [77]

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Yes. So we're always prepared for a downturn in the markets or a recession. And we do have levers that we pull to take cost out of the business, whether that's branch consolidation, reduction in noncustomer-facing activities, elimination of discretionary spend and potentially a slowdown of some investment categories. If we look at a 10% to 20% reduction in construction activity within C&I, certainly, during that period of time, we'd expect to take share. So we'd expect to perform better than the average company in that space or better than the overall construction industry. And when we do see that, you're right, you typically do see a more highly competitive environment as folks are scrambling, trying to win the fewer projects that are out there. So we likely would see some margin deterioration. Difficult to give you a specific percentage. Every recession is different. Every downturn is different. Every market is different. But looking at margin decrements of a couple hundred basis points certainly aren't out of the question, and we try to mitigate that as best we can. And the key is to take share during that period of time. So that when you get the recovery, the recovery is usually a pretty nice bounce back, snapback so that you are in a good position to take additional share in the recovery because many of smaller, lesser-capitalized companies don't have the credit lines or the ability to invest in receivables and inventory coming out of a downturn to support customers' needs. So we focus on being able to take advantage of those environments. We do look at reducing cost. We typically do not exit markets, so we may consolidate branches, but we don't exit markets. And that's our approach in a downturn. The team that's on the field today, John and his team, are the same team that navigated the last recession and they navigated it well and came back very, very strong.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [78]

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Makes sense. Thanks for the color. And a real quick one, maybe to follow-up on Nigel's question, I think he was asking this question. You mentioned sanitary products and maybe even safety products as being short in supply, I think it was in FM comment earlier. Just curious if you could provide perspective on what percentage of the business that represents at FM? What kind of positive lift you've seen on sales from that stuff? Because we've heard from some other distributors of some positive lift related to safety product related sales early in the year?

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Evan J. Levitt, HD Supply Holdings, Inc. - Senior VP, CFO & Chief Administrative Officer [79]

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Yes, certainly, janitorial, sanitation and safety products have grown well over the last month as a result of the coronavirus outbreak. Jan, san is a big category for us. We don't specifically disclose the sales for our individual categories. But it's -- I'll say it's a top 10 category and it's grown in an outsized basis over the last several weeks.

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Bradley Paulsen, HD Supply Holdings, Inc. - President of HD Supply Facilities Maintenance [80]

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The other thing that I would add to that is it includes significantly more items than what I mentioned as far as having in short supply. It is the top category like Evan said. And when we think about this month's performance, certainly seeing the outperformance you mentioned. But prior to that, again, it wasn't a material driver to our performance.

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Operator [81]

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Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Joe DeAngelo for any further remarks.

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Joseph J. DeAngelo, HD Supply Holdings, Inc. - Chairman & CEO [82]

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Well, thank you for your question. Our teams are focused on keeping our people safe and helping our customers navigate a challenging environment. Thanks for your interest in HD Supply.

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Operator [83]

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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.