Q4 2019 Earnings Call
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We're standing by and welcome to the HD supply fourth quarter earnings Conference call. At this time all participants are in listen only mode. After the speaker presentation. There will be a question answer session to ask a question. During the session you need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your speakers today Charlotte Mclaughlin. Please go ahead ma'am.
Thank you Josh.
Good morning, ladies and gentlemen, and welcome to the HD supply Holdings 2019, full quota and full year earnings call.
As a reminder, some of our comments today, maybe forward looking statements.
Based on management's beliefs and assumptions and information make her currently available to management at this time.
These beliefs are subject to known and unknown risks and uncertainties, many of which maybe beyond our control.
Including those detailed in our periodic SEC filings.
Please note that the company's actual results may differ materially from as anticipated.
Undertake no obligation to update these statements.
Reconciliations of certain non-GAAP financial metrics with a corresponding GAAP measures are available at the end bus slide presentation and in our 2019 full quota and full year earnings release, which is available on <unk> IR website.
W.W. dot HD supply dotcom.
Joe D'angelo, a CEO will lead todays cool with Brad Olsen president facilities maintenance, providing some other color around the parent business initiatives.
Evan Levitt, Oh, CFO will provide additional information in our recent financial performance.
There will be an opportunity for today for those participating please limit your amount to one question and one follow up if necessary.
Thank you for your continued interest in HD supply and with that I would like to 10 the color the teacher deangelis.
Thank you Charlotte Good morning, everyone. Thank you for joining us today for our fourth quarter full year 20, Nike Inc. earnings call.
As always is my privilege to share company results with you on behalf of the over 11580 supply associates, who work hard every day as one team driving customer success and value creation.
Turning to page three.
Good by addressing the current Corona virus outbreak.
We sympathize with those around the world directly impacted by this extreme events.
We are focused on doing everything we can to keep our associates and their families date, while providing assistance or customers need during this difficult period.
We have put in place a robust action plan and formed by World Health organization guideline.
The CDC in Atlanta, and local and state authorities.
And we are regularly updating our communications to associated to ensure that they have all the relevant information to stay healthy.
Our cross functional response team has implemented and improve various infection control and our facilities, including increased pleadings a distribution centers of vehicles additional hand, sanitizer stations and heightened precautions for drivers and customer facing employees.
Our communications outreach in Internet site keeps our associates updated with news as it happened.
Including future actions that we may need to take 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 work from home and giving associates, who may need to sell quarantine the resources do so safely without fear being done lots.
We have restricted non essential business travel and I've asked or associates to take the necessary necessary precautions when they do travel.
Marriages across the organization are receiving tool kit and we are advising all of our customers to reach out there designated HD supply contact for uptick.
The current situation has overshadowed our solid finish to 2019 strong start 2020 as detailed on page four.
Adjusted for the impact of fiscal 2018, 50, Threerd week in the fourth quarter fiscal 2019, we delivered 3.2% year over year sales growth.
Facility maintenance delivered sales growth of 2.8% and constructed industrial delivered sales growth of 3.8%.
During full year fiscal 2019, we generated $571 million the 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 one 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 support our customers need 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've completed three 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 Tenbfive one plan.
Our teams are also continue to work towards the separation of our two business units, making good progress on talent alignment in information system requirement right.
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'm pleased to see both of our businesses generating momentum as we get closer to our separation were each business in solely focused on the respective customers and markets.
I will provide some closing comments bonds today, we'll now turn the call over to Brad Paulson will provide an update on our facilities maintenance business.
Thank you Joe Good morning, I would like to begin by thanking our nearly 6000 associates for the service in value they provide to our customers each day.
I want to also Echo Joe's comments and reiterate the HD supply is taking every necessary precautions to ensure the risk to our customers an 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 the 100% website app and support system availability to allow our customers to execute their orders anyplace anytime 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 material outbreak of the current a virus.
Along with this our local delivery teams are working with our customers to customize delivery and drop off procedures, the 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 experienced short term supply issues for select hand, sanitizer cleaning chemicals safety gloves, and protective masked items due to the unprecedented spike in demand experienced in recent weeks.
Overall, I'm very proud of our teams planning and preparedness and I'm confident we will deliver the service our customers will require to successfully manage their properties from the current environment.
Of the four sales verticals, we support the hospitality vertical is the most likely to see its normal demand negatively impacted by the reduction in hotel in motel occupancy due to the current of Iris. 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 us to persist until more normal occupancy levels return.
Turning now to our recent performance I'm very encouraged by the progress made in the fourth quarter of 2019, we continue to take share from our competitors and now look forward to execute our 2020 growth initiatives.
I would allow outs fusemail 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 and 2019, we implemented over 40 enhancements to our online ordering the web site experience, while also launching our third generation mobile app.
These updates and tools are perfect example of our focus on providing solutions to simplify the daily tasks for the maintenance professional.
We have also significantly improved our marketing execution and customer connectivity as we work to develop a more personalized relationship with our property level of 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 100000 skews 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 number one need our distribution network of over 40 Dcs in 1000 drivers continue to execute our next day delivery value proposition at a high level.
We plan to continue investing in our supply chain, both and talent and technology in order to provide a fulfillment experience that meets the evolving needs of our customer.
Im equally excited about this team's efforts to execute our peak season of 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.
So expanded the penetration of our value added services, such as property improvement and 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 and 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'll now hand, the call over to Evan.
Thank you Brad and good morning.
I'd like to start by turning to page six and share that we're making good progress on the separation of our businesses into two separate standalone public companies.
We're on track to complete the separation through a tax free distribution of the construction and industrial business to our shareholders in mid fiscal twentytwenty subject to market conditions.
Our teams are hard at work ensuring that both businesses are aligns the talent and information technology infrastructure to support our current operations and expected future growth.
We continue to believe that a two to three times net debt to adjusted EBITDA leverage range is appropriate for both companies with a construction and 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 two to three times 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 Standalone costs of approximately 50 to 100 basis points of sales for each business in line with historical comparatively size separation transactions.
As we continue to work on our separation, we can refine our original estimate of incremental standalone costs to now be an estimated 50 to 80 basis points for construction and industrial and an estimated 30 to 60 basis points for facilities maintenance.
Now before we review the fourth quarter results on page seven 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 50 threerd week, which occurs every four or five years.
You can find further information on the impact of the extra week in the appendix of our yearend earnings presentation.
Net sales decreased $61 million were 4.2% to $1.385 billion in the fourth quarter fiscal 2019, as compared to $1.446 billion in the fourth quarter 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 fiscal 2018.
Sales growth on a 13 week basis in the fourth quarter fiscal 2019 was 3.2% as compared to the fourth quarter fiscal 2018.
Gross profit decreased $27 million or 4.7% to $545 million for the fourth quarter fiscal 2019, as compared to $572 million for the fourth quarter fiscal 2018.
Gross profit was 39.4% of net sales for the fourth quarter 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 fiscal 2019, as compared to $187 million in the fourth quarter fiscal 2018.
Adjusted EBITDA was 12.9% of net sales for the fourth quarter fiscal 2019 flat as compared to the fourth quarter 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 fiscal 2018.
Turning to page eight I'll review, the full year fiscal 2019 performance.
Net sales grew to $6.1 billion, an increase of $99 million were 1.6% as compared to the full year fiscal 2018.
Organic sales growth on a 52 week basis for the full year fiscal 2019 was 3%.
As compared to the full year 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 fiscal 2019, a decrease of approximately 20 basis points from 39.3% in the full year 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 nine I'll discuss the specific 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 fiscal 2018.
Sales growth on a comparable 13 week basis for the fourth quarter fiscal 2019 was 2.8%.
Adjusted EBITDA decreased $10 million were 8.1% to $114 million for the fourth quarter 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 fiscal 2018.
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 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 fiscal 2019, as compared to $3 billion $89 million for the full year 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 fiscal 2019 as compared to the full year fiscal 2018.
The 50 Threerd week in fiscal 2018 contributed approximately $10 million to adjusted EBITDA.
Adjusted EBITDA was 17.4% of net sales for the full year fiscal 2019 down approximately 30 basis points from 17.7% for the full year of fiscal 2018.
Moving to the construction and industrial business.
Net sales for our construction and industrial business were $685 million during the fourth quarter of 2019 as compared to $711 million for the fourth fourth quarter fiscal 2018.
Sales growth on a comparable 13 week basis in the fourth quarter fiscal 2019 was 3.8%.
Adjusted EBITDA increased to $2 million or 3.2% $65 million for the fourth quarter fiscal 2019, as compared to $63 million for the fourth quarter of fiscal 2018.
The additional weak in the fourth quarter fiscal 2018 contributed approximately $3 million to adjusted EBITDA.
Adjusted EBITDA was 9.5% of net sales in the fourth quarter fiscal 2019.
Up approximately 60 basis points from 8.9% for the fourth quarter of fiscal 2018.
During the fourth quarter fiscal 2019, construction and industrials gross margins improved approximately 10 basis points as compared to the fourth quarter fiscal 2018.
During the full year fiscal 2019, construction and industrials 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 fiscal 2019 as compared to $2.961 billion for the full year fiscal 2018.
Organic sales growth on a comparable 52 week basis for the full year of fiscal 2019 was 2.9% as compared to full year fiscal 2018.
Adjusted EBITDA increased $2 million or 0.6% to three hundreds to $327 million for the full year fiscal 2019 as compared to $325 million for the for the full year of fiscal 2018.
The 50 Threerd 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 fiscal 2018.
Turning to page 10 in the last 12 months, we generated $571 million a 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 and capital expenditures in the fourth fourth quarter of 2019 and $106 million for the full year of fiscal 2019.
During full year fiscal 2019, we've paid cash taxes of approximately $53 million, including several Canadian and us state taxes.
$18 million of which was paid in the fourth quarter fiscal 2019.
During the fourth quarter 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 in 71 cents per share.
During the full year fiscal 2019, we acquired.
Or 9.6 million shares of our common stock for a total of 370.
$5 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 reach repurchase program authorized by our board of directors.
At the end of fiscal 2019, our net debt to adjusted EBITDA leverage was 2.4 times conservatively within our targeted range of two to three times.
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 shifts 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 Onest 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 and industrial.
There were 27 days in both February 2020 and February 2019th.
We're pleased with the strong start fiscal 2020 from both of our businesses.
Our facilities maintenance business saw a positive year over year growth in each of its four main sales verticals multifamily hospitality healthcare and institutional.
Our construction and 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 two weeks of March.
We remain committed to a 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 Corona virus 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 non essential commercial activity.
Our number one 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 a 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.
Thank you as a reminder to ask a question. Please press star one on your telephone to withdraw your question press the pound Keith Please stand by only compiled Likhyani roster. Our first question comes from Keith Hughes with Suntrust. You May proceed in your question.
Thank you.
My question is on.
Hi business I understand the job sites are starting to slow down.
Looks like that's such a virtuous really starting to pick up can you can you talk about where there are certain areas of certain regions, where you're seeing that business starting to come back.
So keep the the strength through the month of February and really into the two first two weeks of March was broad based across the country. We saw nice growth in the northeast in the California regions.
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Broad based across the country and across very significant large jobs that we saw combat just just this week as as you indicated we have seen some closures.
Some slowdown in activity announcements by cities, such as as Boston and in the Bay area I will continue to monitor those to understand what that means for our business and our customers and we stand ready to help our customers as anything they need but certainly we are we're going to comply with all local.
State and federal requirements to either curve activity to it or to assist.
In that containment of the current events.
Okay and.
You referred to ramping up acquisition activity at the beginning of a call.
In our are used in our near term at a wait and see mode of how this works out before you might engage in transactions or feel comfortable about follow on a deals are joanne completed.
Yes, Thats certainly depends on the on the opportunity that's before us certainly.
The level of uncertainty in the marketplace has has placed I.
I'd say, a higher return hurdle on on any acquisition right now.
But we are 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 it's now or or after this crisis subsets.
Okay. Thank you.
The.
Thank you. Our next question comes from David Manthey with Baird. You May proceed with your question.
Thank you good morning, guys.
First of I'm not sure. If you said that John is on the call or not but instrument to comment on.
The 2020, non res outlook did seem to Brighton 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 rate and the long term nature. These projects expected to continue to drive good activity into 20 late 2020, and and then could.
2021.
Yes, the David Thanks, Thanks for the question in jet John is not on the call.
This morning.
And you're right we have seen some some significant increase in construction activity across the country, particularly in the fourth quarter and into February and early March the third party data support that as well when looking at the census Bureau, as construction put in place numbers.
The housing start numbers have all 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 holes. We are just starting to see some some slowed down or delayed as 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.
Okay. Thanks, and then.
Maybe for Brad what percentage of FM revenues, our 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 the business versus any planned maintenance or upgrades that are that are more periodic in implantable.
Sure. So hospitality today represents just under 20% of our business.
When we look at what we what we support that vertical Wayne Rooney divided into two buckets, you've got the housekeeping side of hospitality, which is the consumable portion and then you have the traditional MRO, where a lot less exposed on the housekeeping side, we've grown that further deliberately over the years.
So generally I would think about a 70 525 split between the two.
Okay, and just as a follow on to that the.
The maintenance portion the MRO portion thats still usage, driven or or occupancy driven for the most part as opposed to some kind of a planned upgrades.
Okay, all right. Thanks, very much guys.
Thank you. Our next question comes from Ryan Merkel with William Blair. You May proceed with your question.
Great. Thanks, So first off I know, you're not giving guidance by many peoples Bancorp and head into a recession. The next few quarters at least can you just help us conceptually think about how FM in CNS sales and margins might perform.
Yes, Ryan first on the on the facilities maintenance that.
Brad indicated the hospitality vertical is likely our post.
Exposed vertical or at risk vertical in the current environment.
And in really in any recession as it is more cyclical portion of our business.
The.
Multifamily and the hot are the healthcare verticals.
We expect will hold up fairly well and this is a little bit of an unprecedented transaction on precedent 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 as kids in our home home from school and certainly in the healthcare vertical as we've seen that strong demand and we stand ready to help our customers care for their.
They're 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 and industrial side certainly be impacted by government actions on when we can work in when we can't.
There is a lot of project activity occurring right now.
Some of these are long term projects multi year projects.
The difficult to turn off and walk away from on they can be delayed so we have to see how that how that plays out.
Certainly the team leadership team for both businesses have been through 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 of any M&A opportunities during during recession.
Recession is often an area, where where we can we can gain gain share and grow our business.
In the in the subsequent recovery.
So we're we're not certainly we're not scared of a recession, but we're prepared for essentially if one were to occur although I'd say, we're not ready to call recession, certainly we think there'll be a bit of a pause here.
In in certain economic activity as we get through this crisis, whether that leads to a recession analyses.
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 side are you starting to see share gains and the FM business again as at the conclusion.
Yes, so we feel like we took share throughout 2019, when we look at 20 or the fourth quarter indefinitely incursion and I've been really two buckets. One is no we understand our markets and our customers continue to evolve and we need to have a value proposition, that's differentiated and pair that with no incredible execution on a daily.
Basis, when I look at the fourth quarter.
Really really happy with improvement that we sold our sales and operations execution as I think we've been pretty open sharing that we're going to pursue new customers, which we're also starting to see the benefits of that so between improved execution in the acquisition new customers, it's proven to be a nice recipe for growth.
And just one quick follow up to that thanks for that answer.
Mentioned technology can you just give us some metrics for the mobile App in E. Commerce site user growth sales growth average order sizes and it sounds like you're going to try to emphasize that the customers. During this sort of unprecedented period is that as that right.
Absolutely, we try to focus our efforts and making the life of the living space maintenance professional easier allows him to do a job in the faster manner with more accuracy.
So we did rollout our third generation mobile App and very well received actually with the yesterday were 4.8 stores out of five.
And continue to roll out to all of our customers don't have all the information that yes, we can certainly follow up with that but that has received has been received incredibly well by our customers and write offs emphasize as Brad said about 75% of our transactions our digital based either through the web site or the mobile app.
And we do expect over time that to shift.
Towards mobile App application.
Right now the majority of those transactions occur to upset.
Got it right about that thanks.
Thank you. Our next question comes from Deane Dray with RBC capital markets. You May proceed with your question.
Thank you good morning, everyone.
Morning.
Hey, just really appreciate all the real time updates here and then also I just wanted to say that not giving guidance here. It's completely understandable. We were expecting you to say that this morning, and I think your competitors will be doing the same and that's exactly the way the company's where response.
Beginning in early stages in 2008, so no surprise there.
How about just talk through the supply chain comments from China, what the visibility has banned was there a disruption and its resumed or did you not see much of a reduction and can you measure and may be weeks what kind.
Bob Bob for supplies you have.
Sure. So from an FM perspective, obviously working very closely with our manufacturing partners in China and Okay. 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 the delay if you will really varies by each individual manufacturer ASCO round numbers I would say would be anywhere from three to five weeks.
And given the amount of inventory that we carry for EMCOR items, we don't feel like thats going to present, our yet for the any level disruption to our supply for our customers.
Got it and how meaningful is this disruption on the the sanitary products mass gloves, and so forth can you size for that because this is exactly that kind of products that your customers need right now.
Yes, so I mentioned kind of a new short term supply issues, we continue to receive products from our suppliers and our manufacturer partners. We are in a situation, though 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 normal inventory position.
Probably well into the second quarter.
As far as scoping the opportunity pre Corona virus 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 as an I don't know if you want to any additional color around impact of the business. There, yes, they look our our.
Approach is to support our customers that need that products. So obviously that product is in demand.
Across the the economy, we're going to we're going to.
Focus on selling that product to our customers.
That that we stand by.
And want to help through this through this crisis as Brad said that product is still coming.
At the manufacturers have put us and and all of their customers on allotment. Our allotment is generally more than a full years worth of inventory. So we will be selling more of that product over the course of the year than the ordinarily would but as Brad said being able to stock it in a in a normal in stock position with.
Action centers will take some time.
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 b of the positive cash will impact.
Yes, so certainly receivables bill we were always work hard to collect receivables as timely as as we can.
Business activity slows the receivable balances.
Naturally.
Drop as we as we collect more than.
We're currently creating on the inventory side, we will adjust inventories to have matched demand now will be careful with that because.
This is is a are confident and events driven.
Bob.
Decline or or slow down.
Which could snap back very quickly could snap back with pent up demand that we will want to be able to take advantage of and support our customers when that demand tests. 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.
Sure.
That's very helpful. Thank you.
Thank you as a reminder, please limit yourself to one question on one follow up question.
Our next question comes from Mike Smith, Michael again with Wells Fargo. You May proceed with your question.
Good morning, everybody great quarter.
Okay, all right I was.
Morning, I Wonder if we could walk through the stranded cost estimate they came down materially.
For asset.
The spin related costs, I'm, referring to see and I still kind of in that range and that was expected can you stock through what's changed what you guys have done in the last three months to prepare for this where those are coming down.
Yes, I, mostly been just to.
Should those continue to decline or is this just the this is the best best estimate going forward.
This is our best estimate going forward. So we'll meet 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 of our 50 to 100 basis points estimate.
We're now much further along in identifying the organization structure of both businesses going forward, so that the people needed to run each each business individually as well as the infrastructure.
I believe our costs are a little bit lower than than other comparable companies because we have run the businesses fairly autonomously over the over the years each business has its own separate ERP reduce share a lot of back office functions like a common HR and payroll system a common datacenter.
And those were the cost 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 as I would make the assumption that those are the best estimates that that will occur post separation as well that will actually experience on and if that if that changes. We'll let you know when it does the right now thats the best estimate.
Okay.
Fair enough in moving the free cash flow our 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 concerned scenario now where do your acquisition targets, the LCM looks better than the NTM and you have a more.
Rob.
Kind of incentivize.
Seller.
And then sub subsequently you have are you going to wait for the spends and maybe do a cnine transaction or is this all at them at this point.
Yeah look at different depending on the opportunity we could pursue an M&A transaction.
On either business.
As far as the.
The.
Expectations of the sellers.
It really varies seller by seller certainly if LTM results are higher than than the next 12 months.
Our expectation would be that were paid a lower a lower multiple on on LTM right, we're buying feature future earnings and cash flow stream.
And looking to realize synergies by combining them with our businesses.
Sometimes that aligns with sellers expectations and sometimes.
That often impact whether deal gets done or whether it does but.
But we do have an active pipeline numbers and we're actively pursuing in both businesses.
Okay.
Thanks, Good luck.
Thank you. Our next question comes from John inch with Gordon Haskett. You May proceed with your question.
Thank you good morning, everyone.
Hey.
Morning, guys Evan of there was a big decline in Capex in the fourth quarter sequentially in versus last year was that timing related or is that somehow reflective of hunker down mode and.
Does it have implications for the 2020 capex in terms of attracted.
The fourth quarter Capex was just a matter a timing in terms of project activity that we have internally.
Certainly know intends to hunker down now looking into into 2020, we'll we'll reevaluate.
Our our investment and cash flow profile relative to current market conditions, and what we expect and as as that moves forward and so certainly if we believe that this is a prolonged slowdown we will look to to potentially reduce some of our capex going forward.
Yeah that makes sense, Evan I think it's kind of interesting that you guys are sort of talking up M&A here.
Your leverage is already.
Whatever mid two to three times.
Are you willing to take that number higher or is this somewhat preemptive in anticipation that you think based on sort of market dislocation possible recession that there are just going to be more properties come available for sale and you're just kind of.
Sort of signaling we want to be ready for that how would we interpret that particularly in a certain leverage front and for your already out.
Yes, certainly we want to be opportunistic it to the extent that there there are assets available for sale at attractive pricing.
That being said.
Your your point on leverage and cash flow profiles, an important one. So we are we are looking at our cash flow profile right right now our capsule product profile remains very good we generated $571 million of free cash flow last year, we will continually reassess what that means for 2020.
As as.
Conditions change on the ground.
Right now cash flow is good.
Leverages below our the midpoint of our target and if we have an opportunity to take advantage that and play offense, we will.
If we again believe this is a prolonged slowdown will be a little 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 as others may be more inclined to sell.
No Thats fair just lastly, when the business teams have seen 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 the period, where there is going to be some mandated periods of closure I know a lot of this labor you'd sort of the foreign nationals.
I wonder if this creates or sets up for a longer term issue and so far as if those people are off work for.
Weeks and then they leave the United States wont be able to come back and then we find ourselves even in a bigger labor shortage down. The road you know when business actually does try and snap back I don't know what do you guys. Thanks.
Yes.
We have left CMS plays out.
Certainly there could be far National center in the construction markets today.
On the opposite side, if there is a slowdown in 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 earn a wage rate to put food on the table for their families.
That's great. Thanks, very much like comments guys.
Thank you. Our next question comes from Hamzah Mazari with Jefferies. You May proceed with your question.
Good good morning, just just on the from business could you remind us how much visibility do you happen to that business is it three months six months.
Just any thoughts there would be helpful.
Yes. So hamzah. Your question is how much visibility we have into the into that end demand file our facilities maintenance business.
Yeah, exactly how much inventory or your customer obscuring how much visibility or do you have room to go volume growth within DFM business.
What are the best things about our businesses.
It's pretty predictable.
Obviously the years of data decades of data to support what to expect month by month Rifai, We know our customers as they become more sophisticated around inventory carrying less and less than in many cases, it's just in time.
So we certainly view our roll through this crisis has been essential to helping them put their properties in a well maintain position.
No. The only piece that is a little bit less predictable is obviously property improvement that's tied to the capital investment from our customer so as that decision changes on their side, but certainly impact us but outside of the MRO business or break that part of our businesses is a fairly predictable.
Okay and just a follow up question is private label similar margin drag or for you guys or has that just structurally changed because of.
Tariffs and and and what have you. Thank you.
So so so our private brand products continue to drive margin benefit back to the business.
And our customers, especially in 2013 go quarter going to continue to embrace that because it's a high quality product that can get in the lower price.
So I expect that to continue to grow as we move forward.
Thank you.
Thank you our next call cost comes from Julian Mitchell with Barclays. You May proceed with your question.
Hi, Jason Mccarthy on for Julien.
Maybe just a quick one around for United It sounds like just maybe less by region and more by type of projects and what's driving the demand strength at 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 there a little bit slower to recover once any.
Potential demand headwinds on a macro level subside or from your experience or the do these types of projects sort of get.
Pushed out and then the instant any sort of large headwinds subside they come right back or is it a little bit flow to come off and flow to recover sort of dynamic.
Yes. Good question now this 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 when the crisis of side many of our customers will want to get back to work quickly and catch up from last time to the extent they can.
That being said as if.
Workers or were furloughed.
At and.
Let go it may take time, some time for them to be rehired and to re staff those jobs. So I think it'll be they'll be a.
Incentive to get back quickly and get those jobs completed because the customers don't get paid complete those jobs.
But they've got to have the resources to do so so some of that will depend on how long the delay is.
And.
What some of the government requirements, our to do with furloughed workers.
Got it and then maybe just transition into little bit to the FM business, making sure I have the messaging there are clear.
Clearly some risks the hospitality portion of the business, a little bit less than 20% of sales but.
Potential for offsets in virtually every other end market flash portion of the business. The reticence to give guidance is more just around.
The difficulty and sizing the magnitude of any sort of downturn in hospitality versus offsets and other pockets of the business correct. Those are the sort of puts and takes for if you look at as as I said, we're going a bit of uncharted territory here with this type of crisis, certainly expect multifamily and healthcare.
There 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 to maintenance professional and they're living space. During this time.
So what we just have to play it out and see how how it evolves certainly when everybody gets back to business businesses normalized I do expect from pent up demand in a snap back.
And we are fortunate that that we are a living space provider and and that's where folks are are today. They are they are hunkering down in their living spaces. So we feel good about the Apple we don't know that what that demand patterns and look like understood and then maybe just a quick one at the end on on margin.
This 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 demands environments. What are the puts and takes around due to where it could there be pockets for driving expansion flush driving contraction.
Yes in the next it hurt certainly within within facilities maintenance to the extent that 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 the mix shifts more towards <unk>.
Family and healthcare those are those are higher margin profiles.
As far as.
Construction and industrial the I expect the business to get more competitive as.
As.
Jobsite slowdown.
Then when job sites open back up.
And there is a demand set to catch up from last time.
Folks will be looking for the best service provider to help them catch up.
And be less focused on the on day to day project. So I think Theres Theres. Some is certainly there's financial risk going into this.
Into this environment.
Through the cycle through the environment, I think theres theres opportunity as that the strongest will will survive in health care for 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 this historical period.
Great. Thank you very much.
Thank you. Our next question comes from Andrew Obin with Bank of America. You May proceed with your question.
Okay.
Can you hear me.
Yes, we can hear you Andrew good morning, Hey, just a question I seem to UK Authority is just published the outlook for the Corona virus impacting Labor force I think they sort of expect that for the next several months maybe.
Maybe 10% of the Labor force will be out sort of said 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.
Yes. Good question. This certainly that that is a challenge for for all businesses. If folks are upset catty replaced that that portion of the labor Force certainly overtime, you know any contract labor that's available.
Is utilized as wells augmented with third party.
Services and those are all.
Potentially more expensive than than running your 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 in our facilities as long as possible.
While also allowing them to take the time off to self isolate or to get well if if they're sick. So it is it is a balanced.
Andrew you're right that is a cost risk that that all businesses are going to face that there's going to be some additional incremental labor costs associated with illness and with that absenteeism.
Okay and then the second question.
Are you guys have I think a billion dollar asset backed facility have you guys tapped it over the weekend.
We have we regularly dry and repay on our revolving credit facility on a daily basis, we have not drawn down the entire facility as as you may have heard others 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 staying close touch for them and we're confident at this point that the banks will be able to meet their commitments terrific. Thanks, so much.
Thank you. Our next question comes from Nigel Coe with Wolfe Research you May proceed with your question.
Thanks, Good morning, and thanks for question.
So I am I think you just kind of onto onto my first question, which is.
About maybe four to fund the balance sheet that more than normal.
Touched on the topic of couple deployments.
Also around M&A, but obviously your stock price is 20 bucks you've been pretty aggressive in the past, whereas your mentality right now in terms of deploying capital. This is for fund the balance sheets, and maybe just put them back here, where we go through this this uncertainty.
Well certainly the.
Equity markets have have.
In damaged by the the environment in there.
Certainly may be good opportunity in the equity markets, including our own stock, which we believe is very attractively priced and will weigh that against.
Other investment opportunities as well as.
Ensuring a good cash flow discipline.
In an uncertain environment, but I agree with you certainly the was at where the.
Our stock prices in the stock market is in general there, maybe some opportunities out there.
Okay, Great and then just couple of data points on both FMC and I, but before that can you just kind of double confirm that.
We have no material kind of benefits from pre buy you due to China supply chain, Georgia, So maybe some some pre buy on on the on the on the sense sundry side, but on on FM synergy as sales of healthcare facilities and on Cnine do you have a breakout.
On the non resi side between public and private thanks.
So the your question was what percentage of our revenues is healthcare related for if that has minimal yes on the inside.
So that would be less than 10%.
Okay.
And then I'm sorry, what was your question on on Sina.
Yes, he and I give a breakout on the non resi, which is about 70% of see an idea of a breakout between public and private.
We don't we participate in both and essentially that will vary based upon the activity. That's in the in the marketplace. So right. Now we are we are on a lot of.
Private or a lot of public jobs like road and bridge airport infrastructure, a lot of that activities occurring around the country and then on the private side a lot of activity around sports and entertainment Datacenters.
And distribution centers.
Okay. Thanks.
Thank you. Our next question comes from Patrick Bowman with JP Morgan You May proceed with your question.
Hi, Good morning, everyone. Thanks for taking my question.
So just first I understand you're not seeing you didnt construction, but obviously the market is concerned about downturn. So just wanted to see if you could offer some framework for how you'd expect business to perform if the economy goes into recession, which would presumably drive lower nonresident I guess, what's what's your game plan to deal with that.
And if it comes in terms of costs et cetera.
Maybe we would be helpful riotous framework for thinking about decremental margins.
I don't know white cap sales go down say, 10% to 20% or something like that and that'll be helpful. Thanks.
Yes, there were out we're always prepared for for a downturn in the markets or a recession.
And.
We do have levers that we pull to take to take cost out of the business, whether thats branch consolidation.
Reduction in Noncustomer facing.
Activities.
Elimination of discretionary discretionary spend and potentially slow down to some some investment.
Investment categories.
If if we look at a 10% to 20% reduction in construction activity or within Cnine certainly during that period time, we'd expect to take share. So we'd expect to perform better than the average company.
In that space are better than the overall construction industry.
And when we when we do see that you're right. You typically do you see a more highly competitive environment as as folks are scrambling trying to win that fewer projects that are out there. So we'd likely would see some some margin deterioration.
Difficult to give you a specific percentage every recessions different every downturns different every market is different.
But.
Looking at.
Margin decrements of 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 recoveries, usually a pretty nice.
Bounced back snap back so that you are in 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.
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 Thats our approach in a downturn that the team. This on the field today, John and his team are the same team that navigated the last recession in the navigated at wells came back very very strong.
Makes sense, thanks for the color and real quick one maybe to follow up on Nigels question I think he was asking a question.
You mentioned sanitary products and maybe even safety products is being short and supply I think I think it wasn't FM comment earlier, just curious if you could provide perspective on.
What percentage of the business that represents that salmon.
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.
CST product related sales.
Early early year.
Yes, certainly jet janitorial.
The sanitation and safety products have have grown well.
Over the last month.
As a result of the Corona buyers that Brett.
Jan San is a big category for US, we don't specifically disclosed.
The sales for our individual categories, but its.
I'll say at the top 10 category and has grown on an in an outsize basis over the last several weeks.
Good thing that I would add to that as it includes significantly more items, then what I mentioned as far as having short supply.
It is the top category like Kevin said and when we think about this month performance certainly seemed the outperformance you mentioned, but prior to that again it wasn't a material driver to our performance.
Okay mix makes sense. Thanks, a lot guys appreciate time and good luck.
Thank you.
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 Dangelo for any further remarks.
Well. Thank you for your question. Our teams are focused on keeping our people say and helping our customers navigate a challenging environment. Thanks for your interest in HD supply.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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