Q2 2020 HD Supply Holdings Inc Earnings Call
Standing by and welcome to the HD Supplys second quarter earnings Conference call. At this time, all participants are in listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need the press Star then one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance. Please press Star then zero I.
I'd now like to hand, the conference over to you speaking today Ms. Charlotte Mclaughlin Investor Relations. Thank you. Please go ahead.
Thank you gentlemen.
Good morning, ladies and gentlemen, and welcome to the HD supply Hogan Twentytwenty second quarter earnings call.
As a reminder, some of our comments today, maybe forward looking statements based on management's beliefs and assumptions and information currently available management at this time.
These gleason subject to known and unknown risks and uncertainties, many of which may be beyond our control increasing as detailed in our periodic SEC filings.
Please note that the company's actual results may differ materially from as anticipated and we take no obligation to update these statements.
Reconciliations of certain non-GAAP financial metrics with a corresponding GAAP measures are available at the end of last slide presentation and in our Twentytwenty second quarter earnings release, which is available in IR website at Www Dot HD supply dotcom.
Jodi Angelo our CEO will lead todays call with by Paulson President facilities maintenance, providing further color around market trends.
Evan Levitt, our CFO, who will provide additional information on our recent financial performance.
There will be an opportunity for Q in a way for those participating please limit your remarks to one question and one follow up if necessary.
Thank you for your continued interest in HD supply and with that I'll now turn the color that to show D'angelo well. Thank you Charlotte Good morning, everyone. Thank you for joining us today for our second quarter 2020 earnings call.
As always is my privilege to share our company's results with you on behalf of the over 11000, HD supply associates, who work hard every day as one team driving customer success and value creation.
Turning to page three I will begin this morning by offering our sympathies and support to everyone affected by Hurricane Laura in Louisiana, and Texas and those have continued to be affected by the coded 19 pandemic.
HD supply will continue to lead by living our unwavering commitment to the protection in safety of our associates and their families.
And I want to thank the entire team, especially our frontline drivers in branch and distribution center team.
A reversion to the daily challenges and safely operate in this time of adversity to continue to help our customers and local communities thrive.
I'm always amazed and proud of their dedication in spear.
Our second quarter performance has dramatically improved from the end of the first quarter.
Our facilities maintenance team has done an incredible job, we anticipating the needs of our customers as they move to safely restart operations.
Our merchandising sales and marketing teams have led the way in training and communication of how to reopen with confidence.
We have provided the critical product, we believe are needed to operate safely living and working environments, including disinfectant sanitizers personal protective equipment and touchless products.
Our teams continue to deliver on our customer promised despite the difficulty in sourcing cobot 19 related product durable goods shortages in transportation is shipping delays.
Our performance improved throughout the second quarter building on a momentum that we reported back in June.
Sales, while down 4.4% year over year for the quarter improve sequentially each one for the quarter for both businesses.
We are encouraged by our second quarter in August performance, and we are confident they were earning market share performing better than on underlying markets across all of our sales verticals.
We continue to generate strong free cash flow, but $190 million during the quarter, we paid down a revolving credit facility in its entirety and we ended the quarter with a combined liquidity of nearly $1 billion, an increase of $198 million from the ended the first quarter of fiscal 2012.
Right.
Radnet and we'll provide more color around our second quarter performance later on the call.
I'd now like to turn the second half of the year.
Within our facilities maintenance business, our multifamily healthcare and institutional verticals all delivered positive sales growth during the month of August the first one of our fiscal third quarter and our hospitality business was down approximately 14% compared with hospitality industry trends down.
Close to 50%.
We are confident there were earning share across our sales verticals as our customers search for the most reliable vendor partner that can help them.
Key business running and keep their associates and their customers safe.
We have every expectation to maintain expand the market share gains have realized thus far in 2020.
We expect that our end markets will continue to improve throughout the remainder of the year.
However, we recognize that there may be additional volatility as cobot 19 continues to be addressed.
Due to the uncertainty we will continue to withhold guidance for the third quarter and full year of fiscal 2020.
In June we spoke about being on track with the planned separation of our businesses into two separately traded public companies.
In fact, we were targeting a third quarter 2020 span over construction industrial business, we were approached by Clayton Dubilier in rice regarding their interest in acquiring the business.
After negotiations and discussions with our board of directors, we determined that the sale to the company will be in the best interest of our shareholders and associates.
The sales process progressed rapidly and on August 11, we announced the sale of our construction industrial business for a purchase price of $2.9 billion.
We expect net proceeds from the transaction after taxes and transaction costs to approximate two and a half billion dollars.
Proceeds will be used to repurchase shares of HD supply.
Paid down existing debt pursue our M&A strategy within the MRO living space market and continue to invest organically in our business with near term capital expenditures estimated at 2% of annual revenues.
We are incredibly excited about the sale.
The speed with which we were able to act allows us to focus all of our attention on accelerating the growth of our facilities maintenance business and further differentiating the customer experience we provide.
With the construction industrial sale expected to close in October I want to thank John segments and his entire team for the leadership in service HD supply shareholders associates and customers.
Over the past 10 years, our construction industrial businesses sales have nearly tripled.
And adjusted EBITDA has drove nearly 30 fold.
We believe that this transaction will allow the construction industrial team to continue to profitably grow their business and we wish them the best of luck.
I will conclude by highlighting our teams continued commitment to our communities.
During the third quarter, we donated an additional $6 million of inventory to those in need including organizations, providing shelter for victims of domestic violence and those in need of transitional ore affordable housing.
We are proud of our HD supply associates dedication, giving back during uncertain times.
I'll now turn the call to brag Paulson who'll provide an update on our facilities maintenance business.
Thank you Joe and good morning, I'd like to start for thanking our team of nearly 6000 associates for their hard work and commitment to delivering credible service to our customers across the United States in Canada.
We continue to prioritize health and safety of our associates and to date has had no meaningful disruptions to any of our distribution centers call centers or leadership development Center.
This has allowed our team to be there for our customers and provides a level support they required to confidently reopened in safely operate through living space properties.
Turning to page four we saw steady improvement in our performance throughout the second quarter. Despite continued pressure in our end markets.
Our sales recovery took a significant step forward in August the first months for our fiscal third quarter by delivering year over year preliminary sales growth.
The focus for our customers during the second quarter was the safe reopening in operating as they are living space properties.
This focus led to continued increases in demand for safety and infection control products, along with essential MRO items like appliances, eight facts and water heaters.
Our broad product assortment competitive pricing and excellent sales and service execution were key drivers to each of these categories grew faster than the company average.
We continue to be encouraged by the initiation deferred maintenance by our customers, but has seen demand for less critical MRO items, such as hardware electrical enlightening recover slower than the previously mentioned categories as properties are executing their highest priority maintenance needs first.
We do believe this is a short term trends and expect all of our MRO categories will return to normal demand levels as properties execute more of their deferred maintenance backlog.
Our property improvement team made solid gains throughout the quarter. Despite operating in an environment, where unit turns demand was down significantly year over year. We believe we believe the profit improvement market will remain below prior year levels for the remainder of 2020 and into 2021 as it continues its moderate recovery.
I was especially proud of the responsiveness in execution speed our team demonstrated to provide the support our customers required during the quarter.
Our category management supply chain partnered closely with our supplier partners across the globe to ensure product availability on the key products needed to reopen living space facilities.
Our marketing and customer trade groups responded quickly to the challenges facing our customers and developed helpful online tools and virtual training to provide critical know how to help with the safe operations of their facilities and finally, our sales team and drivers provide his incredible onsite support to ensure each property.
I would I wouldn't needed to provide a clean and safe living environment to its residents.
These efforts along with many others across our organization resulted in our team recording one highest ever voice of the customer scores during the quarter.
Moving on to page five I will now discuss our performance across our four sales verticals.
Our multifamily business saw a significant performance improvement throughout the second quarter with July and August delivered positive year over year sales growth despite facing the headwinds associated with lower summer unit turned demand. This verticals recovery was driven by consistent year over year order growth and strong sales execution that accella.
Raise our average order value improvement as deferred maintenance was gradually initiated we continue to be encouraged with the rate at which properties welcome our sales team back in sight in resins become more comfortable with maintenance professionals entering their living space.
The hospitality industry continues to show signs of improvement with the latest year over year growth in revenue per available room numbers regions better than minus 50% for the first time since March.
Our hospitality team has done an outstanding job, providing best in class sales support and service to our customers, which has resulted in clear market share gains.
We have every intention of retaining this customer share and are fully committed to supporting our hospitality customers recovery, which we think will extend well into 2021.
We're also excited to announce our newest supplier partnership with Ecolab, the global leader in water hygiene and infection prevention solutions and services.
This partnership will position our team to better provides the products and solutions are hospitality and healthcare customers require to clean and sanitizer properties.
Our health care team delivered a solid quarter. Despite seeing some of the lowest all time resident occupancy rates in senior care living facilities I applaud our team for pivoting quickly in the coated environment and providing the service and solutions needs by other customers.
This quarter, we have also share the results of our institutional vertical which is now similar size to healthcare in terms of sales.
Our institutional vertical primarily serves military housing housing authority the student housing customers, who have similar MRO needs is our multifamily vertical.
This team has performed incredibly well throughout the Kobin crisis, delivering approximately 2% growth during the second quarters and 14% in August.
It is clear that our value proposition is a good fit for this customer segment and we look forward to expanding our presence in the sales vertical.
I'm very encouraged by our improved results through August our team has made tremendous progress and remains fully committed supporting our customers and our communities. During this recovery with that I'll now hand, the call over to Heaven.
Thank you Brad and good morning, everyone.
I'd like to start by addressing our announcement made on August 11 in regards to the sale of Arkansas construction and industrial business.
We currently expect the sales to close by the end of October subject to regulatory approval.
The results of our construction and industrial business, we will be reflected as a discontinued operation beginning in the third quarter of 2020, including the month of August.
We are excited about the ability to completely focused on our facilities maintenance business.
Which has always been our most profitable and highest return business.
We expect to use the estimated 2.5 billion dollar net after tax and transaction cost proceeds from the sale of our construction and industrial business to pay down debt fund M&A opportunities within the MRO living space market and to repurchase the stock of HD supply.
Which we continue to believe is attractively priced.
Turning to our second quarter results on page six.
Net sales decreased $72 million or 4.4% to $1.552 billion in the second quarter of fiscal 2020.
As compared to $1.624 billion in the second quarter fiscal 2019.
Gross profit decreased $37 million or 5.8% to $596 million for the second quarter fiscal 2020, as compared to $633 million for the second quarter of fiscal 2019.
Gross profit was 38.4% of net sales for the second quarter fiscal 2020.
A decrease of approximately 60 basis points from 39% for the second quarter fiscal 2019.
I will discuss the change in gross margin during the business unit discussion.
Adjusted EBITDA decreased $6 million or 2.5% to $238 million for the second quarter fiscal 2020.
As compared to $244 million for the second quarter fiscal 2019.
Adjusted EBITDA was 15.3% of net sales for the second quarter fiscal 2020.
An increase of approximately 30 basis points from 15% in the second quarter fiscal 2019.
On page seven I will discuss the specific performance of our individual business units in more detail.
Net sales for our facilities maintenance business were $761 million during the second quarter fiscal 2020.
As compared to $830 million for the second quarter fiscal 2019.
The sales decline was 8.3% as compared to the second quarter fiscal 2019.
Adjusted EBITDA decreased $17 million or 11.4% to $132 million for the second quarter fiscal 2020, as compared to $149 million for the second quarter fiscal 2019.
Adjusted EBITDA was 17.3% of net sales for the second quarter fiscal 2020.
Down approximately 70 basis points from 18% for the second quarter fiscal 2019.
Facilities maintenance gross margin declined by 120 basis points for the second quarter of fiscal 2019.
The decline in gross margin rate was primarily a result of a shift in product mix with an unfavorable impact of approximately 90 basis points.
And to a lesser extent, a highly competitive environment with customers carefully monitoring maintenance budgets.
Our improving sales performance is being led by appliances.
Hvdc.
Janitorial and safety categories currently generating strong double digit growth.
These product categories are in high demand and we are working tirelessly to ensure adequate supply to support our customers reopening activities.
However, all four of these product categories have margins lower than the company average.
The more traditional break fix and MRO categories of electrical lighting hardware faucets and window coverings continued to see a decline in year over year demand.
The maintenance involving these items is deemed to less critical in the current environment.
And as being deferred as customers tightened their budgets.
And limit tenant interactions.
We continue to believe that these categories will recover, albeit at a slower pace as deferred maintenance has worked and as unit turns improves.
Moving to the construction and industrial business net sales for our construction and industrial business were $793 million during the second quarter fiscal 2020, as compared to $795 million for the second quarter fiscal 2019.
The sales declined in the second quarter of fiscal 2020 was 0.3% as compared to the second quarter fiscal 2019.
Adjusted EBITDA increased $11 million or 11.6% to $106 million for the second quarter fiscal 2020, as compared to $95 million for the second quarter fiscal 2018.
Reflecting both enhancement of gross margin rate and disciplined cost control.
Adjusted EBITDA was 13.4% of net sales for the second quarter of fiscal 2020 up approximately 150 basis points from 11.9% for the second quarter fiscal 2019.
During the second quarter fiscal 2020, construction and industrials gross margins improved approximately 30 basis points as compared to the second quarter fiscal 2019.
Gross margin was benefited by favorable year over year, rebar margins and the mix of product categories, including the sale of safety products, which are higher margin category for our construction and industrial business.
Turning to page eight.
In the 12 months, we generate in the last 12 months, we generated $645 million of free cash flow.
An increase of 15% year over year.
In the second quarter of 2020, we generated $190 million in free cash flow.
We invested $12 million in capital expenditures in the second quarter fiscal 2020.
And we continued to estimate our ongoing annual capital expenditure for requirements to be approximately 2% of annual sales.
Although our expectation for fiscal 2020 is to spend less in light of the coated environment.
In the second quarter, we paid cash income taxes of around $36 million.
This included payments made in July for the first and second quarters of 2020 as the cares Act provided for a deferral of the estimated first quarter income tax payment until July.
Our effective tax rate for the second quarter was approximately 25%.
We expect that our ongoing effective tax rate will be approximately 26%.
As of August 2nd 2020, HD Supplys combined liquidity of $995 million was comprised of $71 million in cash and cash equivalents.
And $924 million of additional available borrowings.
During the second quarter, we repaid all outstanding borrowings on our revolving line of credit.
Weve increased our liquidity by $367 million from the started the year entirely through operations, demonstrating our ability to generate strong cash flow even in a challenging economic environment.
We have not entered into any new or expanded any existing credit facilities during fiscal 2020.
Our net debt to adjusted EBITDA leverage is 2.1 times.
We did not purchased any shares in the second quarter under our most recently authorized $500 million share repurchase program.
The full $500 million authorization remains available for us to execute.
As I stated, we intend to use a significant portion of the cash proceeds from the sale of our construction and industrial business for share repurchase activity.
Our strong liquidity of nearly $1 billion and current repurchase authorization enables us to begin repurchasing shares prior to the close of the construction and industrial sale.
On page nine we provide second quarter 2020 monthly net sales trend performance as well as the 2019 comparable.
In May of 2020, we delivered sales of $431 million.
A decrease in average daily sales of approximately 7.3% versus may of 2019.
In June of 2020, we delivered sales of $495 million a decrease in average daily sales of approximately 4.8% versus June of 2019.
In July of 2020, we deliver sales of $626 million a decrease in average daily sales of approximately 2% versus July of 2019.
There were 19 selling days on May 20, selling days in June and 24 selling days in July of fiscal 2020 and fiscal 2019.
August 2020, which ended August Thirtyth was the first month of our fiscal third quarter 2020, and we have provided our preliminary sales results.
We will not provide information on August results beyond sales.
Combined to preliminary net sales in August of 2020 were approximately $518 million, which represents year over year average daily sales decline of approximately 0.7%.
Preliminary August year over year average daily net sales by business segment.
It wasn't approximately 1.1% growth in facilities maintenance.
As an approximately 2.5% decline in construction and industrial.
There were 27 days in both August 2020, and August 2019.
We have seen a steady improvement in our end markets.
However, as Brad pointed out we expect a relatively slow improvement in hospitality and property improvement markets throughout the remainder of the year and into 2021.
We will continue to strive for outgrowth in all of our end markets and we intend to retain for the long term market share gains earns during the pandemic.
However, at this time, we will not be providing formal guidance.
We believe there is still too many uncertainties as a result of the cobot 19 environment.
We will continue to share what we see an hour business and in our markets, but we will not provide specific guidance until we see more stability.
Looking ahead as a simpler one line of business company, we are committed to enhancing our industry, leading return on invested capital and free cash flow generation as well as demonstrating consistent sales and earnings growth.
Our number one priority continues to be the health and safety of our associates and their families.
As well as our customers.
We will continue to support our customers and communities by providing the critical products and services needed to maintain their facilities.
Care for their residents.
And operate and maintain safe job sites and work environments.
I'd like to thank you for your continued interest in HD supply and I'd now like to turn the call over to the operator for questions.
Thank you as a reminder to ask a question you will need to press Star then one on your touched on telephone to withdraw your question from the Q. Please press the pound key and the interest of time, we ask that you keep yourself to one question and one follow up question before rejoining the queue again as Star then one if you'd like to ask a question.
One moment, while we compile the Q and a roster.
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Our first question comes from Nigel Coe with Wolfe Research. Your line is now open.
Oh, Thanks, good morning.
[music].
And recognizing that still love uncertainties and see the yields you have no guidance, but.
The improvement.
In Fms sales in July August.
Looking staying hedging is there anything.
Kind of unsustainable within those results Mike.
Sales back into negative territory in the back half of the year and I'm thinking here, but maybe hospitality.
Could pull back from where it was and oldest and perhaps.
Thank you said you will kind of help in building of getting a pad.
No.
Is there anything that's.
Thank you to believe that maybe that.
Thats helpful active growth might not the sustained through the back half of the.
Nigel Good morning, this is Brad.
We look back in the quarter are kind of success equations was pretty straight forward.
And the fact that we really focus on providing the service that our customers are going to require derm was probably the most challenging time, we've seen in the last decade at least.
And we never pulled back on our service for sales of four until we had a relatively very very strong cross availability and incredibly consistent next day execution and positioned ourselves as the here what I call. The safest most dependable option in our space and because of that we were able to generate positive order growth.
Through the quarter I wish to me is the signal that we're picking up customer share.
And then what we also saw is the end markets starting to improve they didnt get all the way back to great, but they started improving our customers started tackling some of that deferred maintenance. So between the order growth that we saw in our through really strong sales execution to help accelerate that average order value recovery. It was easy to see or it is easy to see why we saw that improvement through the course.
For the quarter now when we look at the rest of the year.
We're certainly moving forward and very cautious manner.
Some of those things are Washington from a macro perspective, and you'd have a couple of them occupancy and hospitality and healthcare, especially hospitality post labor day.
I think everybody has seen there has been a nice improvement with summer travel, but now the kids are back in school.
We'll see how that plays out.
And then healthcare healthcare continues to have pretty serious headwinds as far as people, leaving senior care living facilities. So feel really good overall, though I would tell you about our ability to drive growth in our break fix business is generally about 80% of our sales and the team in all of our non hospitality vertical it really doesn't access.
On job again in a really really tough environment due to last headwind that I would call out is property improvement as I shared in my prepared remarks, we definitely feel like that's going to continue to be down year over year in our last caller said, we lost a lot of the kind of prep windows first get on site bid analysis jobs and now we're at a point.
Where there's just less people moving.
So less opportunity to unit turns and give us over 10% of our business that's going to be another headwind that we're going to have to deal with but I'll tell you overall couldn't be more proud of the team's execution support of our customers during during the past quarter.
Great well, thanks spread Thats very helpful Information and then my follow on question is really around the.
FM on a go forward basis and thinking about the leverage.
Right now your 2.1 times range is 2.2 to three times.
And with a higher margin business the scope of spending with southern capital I was thinking about the leverage ratio for FM on a go forward basis.
Yes, the Nigel the two to three times as you know is a net debt to EBITDA ratio, obviously, the sale of construction and industrial we will receive quite a bit of cash over the coming months and so on a net debt to EBITDA basis, we will be well below the two to three times.
Until we can deploy that cash.
We outlined on the call that we expect to deploy that cash we will pay down some some debt some gross debt.
And then we'll also look too.
Fund, our M&A opportunities on pan repurchase repurchase stock.
Have a good portion of the cash proceeds will be used to repurchase stock and that will be over time, so we'll be below or asset the bottom end to that two to three times net debt to EBITDA for a period of time here looking longer term.
We still think the two to three times is about the right.
Range, where we want to beat on certainly we are comfortable at the higher end of two to three times with predictable cash flow of our facilities maintenance business as evidenced by the cash flow, we were able to generate in the first half of this year.
But we also.
Our not afraid to keep some dry powder.
To remain opportunistic.
For opportunities that present themselves or that we want to pursue.
Okay. Thanks.
Thank you and our next question comes of Keith Hughes with Truest. Your line is now open.
Thank you.
There's been a lot of on again off again talk on stimulus.
For consumers really impacts lower end consumers, which will be more end year.
Multifamily.
Multifamily occupancy are you are you hearing any more commentary from your multifamily customers about job.
Rising delinquency on payments that impact on spending any sort of big picture view on that market you give would be would be helpful.
So so Keith we've certainly seen.
A slight uptick in the timeliness of rent payments.
That's been been well published throughout the second quarter and then.
In August in particular, the most recent data that we've got available.
Ray collections were down about 200 basis points year over year. So we we continue to monitor this year, you're correct that much of the stimulus that was put in place.
By the federal government in the first half.
Has run its course there is some additional.
Unemployment benefits various state by state at this point and.
There is on again off again tops of Washington, So we don't know whether anything will come out of that we do monitor monetary at very closely. The this is likely a headwind that we're seeing in the property improvement business.
That Brad previously mentioned.
Certainly customers will.
Tighten their maintenance budgets and look at discretionary spend with property improvement is a discretionary spend.
In that type of environment.
That being said we've been we've been relatively pleased thus far with the reaction of our customers as well as the quality of our own our receivable portfolio.
As you know in the first quarter, we took a charge too.
Increase that Conservativeness of our reserve for bad debt, we think that was still appropriate.
And we still hold on that additional.
Reserve.
But to this point, we've been very pleased with the quality that portfolio, but we're monitoring it just like just like you are as you indicated there we could see some additional headwinds in the back half of the year with less government stimulus is nothing that out with that said I mean this has been a a day to day week to week month to month conversation with our customers really.
Since the onset of cobot and.
The aware at a point now were maintenance needs to be done I think Evans right. I mean people are going to be very cautious to see what's around the corner.
But this work needs to be done and when we talk break fix versus unit turns were were very optimistic about what break fix will look like going forward I think the next few months given its going to be a week to week review when all the customer conversations I've been having 100, having quite a few.
The way that they have been framing that yes.
Yes.
Point of caution, but effects turning out much better than the audit was the three to four months ago. So it's still full steam ahead, we'll watch it closely and you'll continue to provide the service to the customers as they execute that deferred maintenance.
Okay. Thank you.
Thank you. Our next question comes from Hamzah Mazari with Jefferies. Your line is now open.
Hey, good good morning, Thank you.
You had referenced using some of the proceeds.
From Cnine for M&A and the FM business.
Are there any verticals outside of the ones that you already today that are attractive that may have synergies with with your existing markets and you know maybe touch on also how valuations look like for assets as well.
Yes, and I will attacking this question I would say in our core markets that we're in.
Today operated very fragmented markets, new we view that as a great opportunity for us to be active in M&A going forward, we feel like where the natural acquirer given the scale that we have in the customer relationships that were in place and I would say that that description applies to all of the verticals that we operate in today, we feel like there is a number.
Of different fantastic opportunities in front of us as far as new channels as an offer that way through the year with so you can discuss that yes, certainly hounds, though we're looking at acquisition opportunities within our existing channels.
But we do look for opportunities to enhance our position.
Not necessarily in new channels that with new products or new service offerings.
Sure existing customers to better serve them.
We also look for opportunities where we can.
Become more integrated with our customers workflow.
So that we can be more relevant to them. So.
So it is it is a wide variety of the type of acquisitions that we may be looking for.
And in all cases, we look for value. So yet you asked about about value in general we would look to do an acquisition.
For a multiple of lower than that which we trade at of and then look to pay down that multiple further through synergies.
So we're going to buy a company that we think we can add value to and improve either through acceleration in growth reduction in cost or acceleration in enhancement of margin.
Then we also look for reverse synergies where is there an acquisition target that does something particularly well that either we don't do today or don't do as well as we'd like that we can learn from and expand that know how across the balance of our business. So hopefully that gives you a little bit of color about around the type of acquisitions that.
That's very helpful and and just my follow up question just on FM.
Could you maybe comment on how much urban exposure you have within that segment I know you generally stay away from high rise buildings.
Buildings.
Bart I would've thought start in all the brick fixed type work or have picked up a lot more with reopening crimes.
Because it doesnt seem like a massive ticket item.
[music].
I realize you touched on hospitality.
As being depressed and that's sort of apparent but.
But just any color you can give you what would you have talked this sort of picked up a bit earlier and then just any thoughts on you know your urban exposure within.
Within that sounds like you.
Yes, I have that we've got little significant breakout urban versus suburban or rural exposure. However, as easy as you implied.
Our sweet spot is really in at is outside the city centers in the suburban parts of the country. So we do have some some customers that we support in in New York city or or Chicago into high rise in mid rise area, but.
Our that's not our sweet spot our sweet spot is that the garden style apartment complexes two to four stories.
Multiple buildings in a complex.
As far as.
[music].
Your question on on maintenance picking up we are starting to see it pickup and improve.
[music].
Much of the demand that we're seeing in appliances.
And water heaters.
That is is has become a break fix item with people staying at home kids at home those appliances are getting used more than ever and so they are requiring repair and replacement as a break fix item.
Items that may have historically bit required next day repair.
Broken blinds and in the living room.
Drifting fossett some of those repairs are waiting more than a day as our customers prioritize what needs to be done first and as tenants become more comfortable allowing a maintenance professional a professional into their living space.
And so that is is improving folks are becoming more willing to allow somebody into their living space, but it is not back to normal.
Got it thank you so much.
Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is now open.
Hey, good morning, everyone. This is Jack our long for Julian.
Maybe digging deeper into some of the gross margin dynamics, you talk cute with facilities maintenance you mentioned, a competitive environment is kind of serving as a headwind right now.
How much of that is sort of attributed just to the broader environment now versus some of the market share.
Gaining efforts that you guys have kind of talk to you on the call.
And sort of how are you balancing trying to capture more share, which kind of maintaining these margins and then sort of pricing in all thats kind of baking into that.
Yes, so so to unpack that a little bit 40, as we as we shared.
The category the unfavorable category mix is a headwind of about 90 basis points of the 120 basis point.
Total.
We're also seeing about 20 basis points of a carrier headwind, where we havent completely anniversary the tariffs from last year as of the ended the second quarter.
Favorably impacting the.
The margin rate is the mix of hospitality.
The hospitality is a lower margin vertical for us it is still downtime in the month of August about 14% and that's about a 40 to 50 basis point of benefit in.
The margin.
The margin walk or the margin change.
And the difference is primarily the competitive environment and ensuring that were priced right every day and offering comes out compelling value to our customers.
Perfect.
And then is there any update on you know kind of ecommerce I know you mentioned sort of last quarter that 75% of sales are kind of on digital platforms and so on any kind of additional puts and takes there are sort of any headwinds or tailwinds that that might generate.
Now, let's not continues to be a real strength for our business.
We continue to invest in both our web platform and our App I have received really fantastic feedback from our customers as far as saving them time and money and given maintenance on back to the maintenance professional so no headwinds.
And like I said, you definitely something that we're viewing as a competitive advantage I also think digital integration you've done with the customer to help them reopen so the webinars have been sold out the ability for you to provide the value via the knowledge on how to do is right. I think is been highly integrated highly digitized.
Wonderful thank you.
Thank you and our next question comes from Deane Dray with RBC capital markets. Your line is now open.
Thank you good morning, everyone I was hoping to circle back on hospitality again, and just make sure I have the numbers right the down 14% for FM versus down 55 zero per sat for the industry. So you made it sound like this was all share.
Gains, which would be terrific, but if you could provide us some more contacts there on the dynamics have competitor shut down.
Are you could have an edge and providing more services and then is there any benefit from and this was part of Nigels question. Some one time like replenishment that came through in the quarter that would have skew that number.
Favourably so can we start there please.
Sure sure. So the units and then on how to move in as I said in my first answer we haven't pulled back in our service or support to our customers, especially the hospitality customers and I would say that's not the case for other competitors across the business.
And I think when you pair that with a strong in stock position and the ability to deliver consistent next they service really across the country.
It attracted a lot of new customers that we weren't doing business with.
So while we saw relatively good performance from orders.
Order increases average order value didn't increase all that much through the course of the quarter, which is a surprise now there were certainly pops through the quarter as people prepared for different summer holidays and things of that nature.
But we really view this as our team providing a level of service that wasn't being matched by our competition and because of that we picked up on market share.
Now as far as.
Do we see any initial surge orders were still kind of dissecting that as you can imagine the last three months and last four months excuse me in hospitality event. Unlike any of that we've seen over the last five to six years.
But what we're seeing as customers that we didn't do business with a great level are now coming to us.
And asking to.
For our team provide services and products that we just haven't done in the past.
And then with existing customers, let's say, it's slow but steady improvement.
Nothing that nothing that would tell us that the recovery is going to be shorter than what we expected, but what we're really watching is what happens, but like I said earlier post labor day, I think thats going to be really interesting to see.
Both from a select service in the full service.
And see how that customer returns back we're still certainly in the camp of what's going to be mid to late 2021, before we see hospitality returned to normal levels.
Hopefully that answers your question.
It did that was really helpful color and and some of the competitive dynamics I appreciate that and then the second question is on the Cnine divestiture. So first of all congratulations it looks like a favorable outcome for everybody and you're putting it in strong hands with the business is strong and splits Clayton dubilier.
But just the.
And maybe you can take us through a expectations regarding taking out stranded costs, what the timing of that would be and it especially for the third quarter modeling purposes, I know, you're not giving guidance, but how.
Much residual expense might still be in the reported results operating results and what's the plan there. Thanks.
Yes, Thanks, Deane so our expectation is still that the incremental our stranded cost is about 30 to 60 basis points of of revenue.
We do expect to recover that over time as as we grow as we leverage fixed costs and has become more efficient so over the.
Next 12 to 24 month that hope that we would recover that 30 to 60 basis points.
Of incremental cost our stranded costs, but thats 30 to 60 basis points is real and we will see it in the third quarter.
As a reminder to everybody in the third quarter is the first quarter, where we will show.
Construction and industrial business as discontinued operations.
Great and just lastly, it just to comment look this is Ben unprecedented times here and Joe and the team I. Just think your organizational response has been really impressed you guys are really on the front lines and how you've adapted and responded and especially appreciate hearing how you have supported the community with the donate.
During the peak DNA, so just want to add my congrats thanks.
Thanks, very proud of the team. Thank you.
Thank you. Our next question comes from David Manthey with Baird. Your line is now open.
Thanks, Morry, along the same lines on a standalone FM have you given any thought or can you give us any guidance in terms of the split of depreciation and amortization.
And what that might be for the Standalone FM business.
Sure I can give you a little bit a color on that Dave.
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So.
Facility Standalone post.
Post split we will see.
Depreciation amortization of.
One moment here.
About.
$70 million to $80 million year.
Well.
Okay. Thank you.
And second.
Could you describe the status of the information systems infrastructure at S.M.. When you think CRM finance HR WMS are all of the system, 100% consistent and stable at DFM business today or do you have some projects that you need to work on.
Well, our core system within the facilities maintenance and what will be Remainco is sep.
That is a stable stable platform that we've operated for many years and we'll continue to operate.
The work that we're doing right now relative to the separation is more on the back office functions.
Our HR and payroll system.
Currently on on Peoplesoft and.
And we do you need to date is a shared platform right now is facilities maintenance and disruptions in industrial and so we're working on on separating those.
But by and large our systems are are stable within on them for a number of years.
We're always making enhancements and improvements to them, but we'll be doing so in bite size chunks.
So that we were able to adequately test.
And have fallback position should we have any any issues as any changes and improvements in inc.
Great. Thanks, Evan.
Thank you. Our next question comes from Ryan Merkel of William Blair. Your line is now open.
Hey, Thanks for fitting in I guess first off thinking about FM longer term because of the pandemic are you planning to make any changes to the business model in terms of how you go to market product assortment our technology.
Now I'll tell you the one big change that we've made is really building up our safety and infection prevention product assortment pre co that we really didn't have a business that address that nor category management team has done on just a miraculous job in and in a number of new suppliers hundreds of new skews.
And now that really positions us to be the one stop shop for all those products and that's important because I don't think that demand is going to go away I think it may evolve over time, but I think thats going to be a big part of our business going forward.
Yes, I agree okay.
I'd also say that.
Certainly customers today would prefer.
Less interactions and so one truck that has everything on it is a big deal and we're going to really make sure as we re market relaunch and found that we can do everything for you and it's best for you if we do everything for you.
Yeah, So a good point.
Okay. Thank question I know, you're not giving guidance and this is frankly hard to answer by how should we think about FM market growth potential until the economy fully real reopens is flat a reasonable outlook for the next couple of quarters or with pent up demand at the market return to low single digit growth.
Yeah, that's around we're always striving to outgrow the market and we think we're doing that significantly right now it is difficult to estimate where where the market is today and where it's headed.
Additionally, with the hospitality market as as Brad discussed we saw some nice.
Improvement in hospitality over the course of the second quarter as we saw leisure travel pickup. So we saw we saw a full taking their summer vacations driving rather than flying but still it's still traveling close to home and staying away from home business travel has not picked up like leisure travel as supposed labor.
Good day.
That's that's the nature of.
Breads discussion around potential headwinds in the back half.
Difficult to say when that that will come back I think the markets will still be down in the second half.
Again, we will make every attempts to outgrow the market, we were able to deliver a positive comp in August it's our intention to continue to improve as the that the over the course of the year.
But it may not be.
Every month, we may have a setback here in there.
As we are still in very uncertain environment.
And the viruses is still with us and unpredictable.
Yep understood very helpful. Thank you.
Thank you. Our next question comes in Chris tanker with Longbow Research. Your line is now open.
Hey, good morning, guys. Thanks for taking my question.
I guess one year on here, obviously, the Atlantic DC operating very well, but just we speak to customer recovery in the region is that where we wanted to be a year on what's the opportunity to kind of still kind of recapture some of that lost share in that specific region. Just just any thoughts on that dynamic.
So we definitely pleased with the recovery that we've seen in that market.
Absolutely applaud the leadership as FTC have really turned it around an import really short pure timing, providing what I would consider is best in class service for the customers in that region. You know our efforts to recover and also take share earn sharing that market's number over.
And I know, we're going to we're gonna have that mindset everyday and every month going forward.
Yep Yep Fair fair.
And then I guess circling back to Ryan's question, a bit as you move into hopefully growth mode. Here in FM are there any additional initiative to highlight beyond that safety build out are we talking about headcount expansion is a geographic build out I understand there's some competitive intelligence issues here, but just any additional.
Growth initiatives that you would would go to call out here.
No. We're it's a great question and we certainly have the planned product uninsured and full detail on todays call, but I.
I think the first thing that we can do and I mentioned earlier in the call is really establish ourselves as the safest most dependable options in our space and if you talk to our customers Dependability says there are number one need is nothing really comes close to that so our ability to do that on a consistent level. There's lots of goes into that it's easy to say hard to do the.
We can do that on a consistent basis will absolutely pickup share at a property level.
We've also been really opened in saying that we're going to aggressively pursue new national account customers. We think we've got a value proposition is very unique for them.
And we've seen great success really over the last let's say nine to 10 months in that activity, you're looking we're going to continued investment business you haven't called out both evident Joe call a 2% of our revenue would go into investment into the core business to continue to improve our value proposition.
So I'm really excited to see the business evolve certainly in the second half and as we move into 2021, Yes, I think you're seeing very nice just natural extensions of our replaced so that consistent investment bite size chunks to be able to make it make a difference and I think you're seeing that really read through in the VLCC, but you posted to the pandemic. So I think clearly.
Being the safest most reliable option out there is is core and there's just a ton of share to gain by doing that.
Understood. Thanks, so much guys and best of luck into the fall here.
Thank you.
Thank you. Our next question comes from Andrew Obin with Bank of America. Your line is now open.
Hi, good morning.
Brian.
Just a question on our fab just.
As.
Part of the shark tank car was that a lot of people end up paying rents and so I understand Howard course within certain verticals, but just in your core multifamily vertical office buildings.
Those dynamics sort of impacting your customers longer term capex plans, what kind of discussions you're having with them.
So.
It's a conversation we have quite a bit.
With our unit turns business being down property group being down and we're trying to get it pulls for Howard customers are feeling about it you know.
And again as a shared having a lot of conversation with customer right now the expectations that works can we get done their mindset is red delinquency is actually lower than the anticipated a we'll see how it plays out of service a lack of a stimulus that.
That would impact the second half, but right now all communication that we're receiving this this capital investments will happen.
That's very late in 2021, somebody's and sneak into the fourth quarter.
Oh, that's good news.
Im question I know you guys are divestment shannara congratulations on the deal, but I can you just give us I think you did a last time I would just go over key markets, California, Texas, Florida Northeast what are you guys seeing in terms of some big market trends.
Specific to the that construction business if you.
Yeah, certainly happy to see it.
For the entire company, but also specific what percent as well yeah.
So maybe I don't understand Chris I'll take that.
So okay, so well I'll discuss the construction business first so certainly we are seeing.
Very localized trends within the.
The construction business it is a very local market.
Certain markets continue to perform well liked the let the southeast.
Part of the United States.
We're seeing.
Continued strong demand in I'll call it infrastructure type project Road Enbridge airports.
A number of soccer stadiums being built around the country and so these are in in some of the the markets like like in Atlanta like in Nashville.
Chicago Austin.
Remained strong other markets remain.
A little weaker folks that don't have that infrastructure spend.
Maybe a.
A little either slower to reopen or have additional constraints around a job site activity, while a lot of job sites have resumed work on many locations limit the amount of folks that to work on the job site at a time, so we're seeing one or two trades on a job.
At a time and so that slow and progress on those jobs, so really it's very regional.
Regional.
Impact market by market on the construction business.
As far as.
Facilities maintenance, we're seeing nice improvement sequentially month over month as we shared through August.
I'd say right now that the eastern half of the United States as a little head of the western half of the United States in terms of recovery in our markets.
Fascinating.
Thank you very much congratulations great quarter.
We do think entered.
Thank you and our next question comes from Michael Mcgann with Wells Fargo airline is now open.
Hi, Thank you everyone.
Just going back to the average order size I think this in the second quarter. You mentioned this in your prepared remarks, nor any way at frame. This from a year over year perspective, and that maybe how that leads into your freight and route density equation and the way you're looking at maybe gross profit per invoice any commentary there would be great.
Yes, so certainly does put put pressure on cost per delivery and even handling costs within our distribution centers.
When you've got the same number of orders, but theyre, they're smaller orders, there's still an inherent level of of costs that incurred to pick pack close out the order loaded on a truck deliver it.
And then bill and collected.
So you're spot on the debt does put pressure on the financial profile on an average order size has improved as we've moved through the through the year. It was it was down double digit earlier at the end of the first quarter and early second quarter.
It's now back down to single digit so it is improving but it is still below last year.
Okay.
And then just on the margins I think Incrementals you mentioned last quarter, you were targeting a 25% to 30% decremental range I mean with coal costs now on the table.
Is that there are different target are out there any update that you can provide.
Yes, it's hard to provide that had to update given that August was was up slightly up 1%. So we're we're when were around that flat mark.
Incrementals beat or decrementals become become less relevant.
We do expect to see some continued pressure in gross margin. So we saw the 100 basis points plus of gross margin pressure within facilities maintenance, primarily because of mix.
That will likely continue at least into the third quarter as we continue to see.
The high demand categories being that the categories, whose margin is below the company average.
And so there will continue to be some pressure on operating margins as as we work hard to offset that margin pressure and the margin pressure related to mix. We believe is short term that will recover the competitive nature of the marketplace will continue.
Okay, and if I could sneak one more in regarding the multifamily market.
You guys do is to support them job meeting the needs of the class a professionally managed multifamily market.
On the other and do you see a synergistic benefit of operating within a larger organization and able to meet that class b or class C. Multifamily property or are those spending characteristics too dissimilar from each other where it's a non factor.
I'd say lender we cover all the properties you know all the way through and we think that being a very focused business model is the best way to do that because we understand the needs and we understand the degree varying needs.
Based on their property economics, So I think we can cover the the full waterfront and we can cover really really well by being absolutely focused on just that living space market.
Appreciate the time thank you.
Thank you.
Thank you and I'm showing no further questions in the queue at this time I'd like to turn the call back to Joe the Angelo CEO for any closing.
Well. Thank you for your questions over the next couple of months, we will be focused on closing the sale of our construction industrial business.
We will also re launch the ace use glide facilities maintenance story later on this year.
Which will focus on our strong record of return on invested capital and lay out our plans to continue as a distant number one distributor in our living space end market. Please subscribed to our Investor Relations website look for updates from the team for detailed.
Thank you for your continued interest in HD supply.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may now disconnect.
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