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HD Supply Holdings, Inc. (NASDAQ:HDS)

Q4 2013 Results Earnings Conference Call

March 25, 2014 08:00 AM ET

Executives

Will Stengel - SVP, Strategic Business Development and IR

Joe DeAngelo - Chief Executive Officer

Evan Levitt - SVP and Chief Financial Officer

Analysts

David Manthey - Robert W. Baird

Hamzah Mazari - Credit Suisse

Sam Darkatsh - Raymond James

Andrew Obin - Bank of America/Merrill Lynch

Deane Dray - Citi Research

John Inch - Deutsche Bank

Winnie Clark - UBS

Keith Hughes - SunTrust

Ryan Merkel - William Blair

Operator

Good day, ladies and gentlemen and welcome to the HD Supply Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder this conference is being recorded.

I would now like to turn the call over to Will Stengel, Senior Vice President, Strategic Business Development and Investor Relations. Sir, you may begin.

Will Stengel

Thank you, operator. Good morning ladies and gentlemen and welcome to the HD Supply Holdings’ 2013 fourth quarter and full year earnings call. A copy of the earnings press release can be found on the Investor Relations tab of the company’s website at www.hdsupply.com.

Joe DeAngelo, HD Supply’s Chief Executive Officer will lead today’s call and provide an overview of our 2013 fourth quarter and full year results, as well as commentary regarding the current environment and outlook. Following Joe’s remarks, Evan Levitt, HD Supply’s SVP and Chief Financial Officer will provide a fourth quarter and full year financial overview and update on February results, and the outlook for the balance of the year, including expectations for the first quarter of 2014 performance. We will then conduct Q&A and conclude with Joe providing closing remarks.

Please note that some of the information you will hear in today’s discussion will include forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements are subject to known and unknown risks and uncertainties many of which maybe beyond our control. We caution you that the forward-looking information presented is not a guarantee of future events and that actual events may differ materially from those made in or suggested by forward-looking information contained in this presentation.

For more information please refer to our risk factors discussed in our annual report on Form 10-K for the year ended February 02, 2014, filed on March 24, 2014, and those described from time-to-time in our, and HD Supply Inc.’s other filings with the U.S. Securities and Exchange Commission.

Any forward-looking information presented is made only as of the date of this presentation and we do not undertake any obligation to update or revise any forward-looking information.

This presentation contains certain non-GAAP financial metrics for a reconciliation of such metrics to the nearest GAAP metric and other supplemental information, please see our earnings press release and refer to the appendix of the earnings call presentation.

For Q&A, please limit your remarks to one question and one follow-up if necessary. We want to provide an opportunity for as many people as possible to ask a question within our allocated 60 minutes. We appreciate your cooperation and thank you for participating on the call and your continued interest in HD Supply.

With that, I will now turn the call over to Joe DeAngelo.

Joe DeAngelo

Well, thank you, Will. Good morning and thank you for joining us today for our 2013 fourth quarter and fiscal year earnings call. It’s always my privilege to share our company’s results with you on behalf of the over 15,000 HD Supply associates who work hard every day to deliver customer success.

I was very pleased with our solid performance in 2013. We delivered 9% annual sales growth, 8% on an organic basis and 21% adjusted EBITDA growth after adjusting for the impact of last year’s 53rd week and the Crown Bolt contract amendment. Evan will clarify specific details associated with the adjustments in his comments. We delivered this performance despite non-certain and sluggish end market environment, as well as atypical weather throughout parts of 2013.

We stayed focused on what we can control in 2013. Our controllable execution delivered growth in excess of market of approximately 600 basis points, with strength coming from all of our businesses. Consistent with our past, we remain committed to growth, investing approximately $70 million in growth initiatives during 2013. We continue to execute our five core growth strategies, including selling more to existing customers, introducing new products and services, expanding our channels to reach our customers via catalog, Internet and mobility, acquiring new customers and opening new locations. We run these five growth plays over and over again, enhancing our differentiation and getting faster and better through our ability to rapidly implement best practices across the company.

Now turning to our fourth quarter performance; we delivered solid performance with 7% of sales growth and 31% adjusted EBITDA growth versus prior year on an adjusted basis. Similar to many other companies, the adverse winter weather during the quarter was a significant challenge for us, especially impacting performance in our Waterworks, Power Solutions and White Cap businesses, where snow and freezing temperatures affected outdoor construction activity. Our seasoned teams safely executed very well, despite the uncontrollable elements.

We took decisive action in the fourth quarter to enhance our forward momentum. We enhanced our global support center team alignment to accelerate growth, while putting our best talent in larger roles and asking them to do more with fewer focused resources.

We aligned our cost structure to market realities in our Power Solutions business to facilitate increasing our share of wallet with our existing customers. We streamlined our Canadian operations, increased focus on HD Supply Brafasco and accretive growth platform that sells fasteners, tools and safety products to industrial customers throughout Canada.

We will supercharge that growth by combining HD Supply Brafasco with our HD Supply White Cap team. Evan will provide the specifics of financial impact later in the call, but our actions are good example of our commitment to our strategy to fuel growth, align resources that are highest return activities and save as we grow regardless of the uncontrollable environment.

The weather throughout our fourth quarter impacted our visibility into end market data and trend, but I am encouraged by the recent green shoots of construction activity we are seeing in some of our large priority markets. The sentiment from our customers is improving as their backlog seems to be building and projects are being released. For example, we recently spent time at Orlando with our White Cap team. Orlando has strong non-residential project activity including $400 million performing arts projects, new stadium renovations and continuing hospitality construction activity across resort properties.

Similar non-residential activity in Denver, Boston, Miami and Houston are also encouraging. Signs of residential recovery continue to emerge for our Waterworks business as well with pockets of strength in Texas, Florida, South Carolina and more recently in select Pacific Northwest markets which have historically been sluggish.

We believe developed lots in most markets are now largely in equilibrium where more normal supply and demand dynamics should translate into opportunities. Recent residential data requires us to be cautious of a moderating recovery, but we remain hopeful that both residential and non-residential construction momentum will continue to build through 2014.

All of our business has performed well in the fourth quarter. Facilities Maintenance, the core of our company increased sales 7% and adjusted EBITDA 20% in the fourth quarter compared to 2012 on a 52 week basis. We continue to gain good momentum with our proprietary brands. We are excited by our property improvement and renovation services traction and we are delighted with our deployment of mobile sales and marketing tools to deliver rapid solutions to our local customers.

We estimate the Facilities Maintenance to grow approximately 500 basis points in excess of market. Our Waterworks business grew sales 4% and adjusted EBITDA 15% in the fourth quarter compared to 2012 on a 52 week basis. Waterworks continues to execute, selling new products and services broadly across the country. The business is intensely focused on attracting the industry’s best talent and positioning them to succeed.

Since October 2013, the Waterworks team has trained approximately 300 sales and operations associates in advance of our peak selling season. The severe winter weather during the quarter significantly impacted Waterworks more so than any other business with many branches closed for all or part of multiple days throughout the quarter. We expect much of this lost demand to be released throughout the spring and summer selling season. We estimate that Waterworks delivered growth in excess of market of 300 basis points.

Power Solutions increased sales 6% and adjusted EBITDA 27% compared to 2012 on a 52 week basis. The team took proactive cost action in the fourth quarter to realign the market uncertainties. These actions position us to enhance our customer service levels and save as we grow.

I am pleased with our momentum in category management, Canada and MRO sales especially in the context of difficult prior year period comparables of 11% growth. In addition, we also continue to have success selling our unique value of proposition to secure new customers. We estimate the Power Solutions delivered growth in excess of market of approximately 700 basis points.

White Cap sales increased 11% and adjusted EBITDA grew by 100% compared to 2012 on a 52 week basis. White Cap continues to make strong progress on its category management initiative and is intensely focused on 15 large priority districts to take advantage of emerging pockets of construction strength and a strong local relative position. We estimate that these 15 markets alone represent a potential sales opportunity of an incremental $1 billion.

Our industry leading team is executing very well and building on a strong momentum. We estimate that White Cap delivered growth in excess of market of approximately 800 basis points. We are executing. Each business’s unique customer centric strategy is delivering results. And I was very pleased with the fourth quarter performance in the phase of uncontrollable headwinds.

Additionally, we spent the past 6 months listening your input regarding the disclosure of monthly sales performance. We acknowledge that more information is helpful and we will provide monthly sales data by business unit as part of our quarterly earnings disclosure materials. We also may provide monthly sales performance at broker conferences depending on the timing of the conference relative to our fiscal month end.

We also appreciate your feedback regarding forward guidance. We will continue to utilize our previously disclosed flexible framework that provides our view of end market outlook with associated business unit exposures as well as our targeted growth in excess of market estimates by business unit. For fiscal 2014, we continue to target growth in accessible markets by 300 basis points.

In addition, Evan will discuss 2014 operating leverage targets that should provide a tool to help estimate annual adjusted EBITDA values based on your view of end market growth and our growth in excess of market.

To complement our annual framework and help provide quarterly clarity, we plan to provide quarterly guidance ranges on our earnings calls for the next quarter’s sales, adjusted EBITDA and adjusted EPS. Evan will walk you through the specific guidance ranges for our fiscal 2014 first quarter.

In total, we believe our approach provides a high level of transparency as investors and analysts get to know us better in our first year as a public company. We are committed to continuously enhancing our investor communications.

I will provide some closing comments following Q&A. We will now turn the call over to Evan for a review of our 2013 fiscal year and fourth quarter performance as well as year-over-year comparability, considerations, monthly sales results, and our 2014 and first quarter guidance.

Evan Levitt

Thanks Joe and good morning everyone. 2013 was a very good year for HD Supply and we believe our fourth quarter execution sets us up well for another good year in 2014. Before I cover the specific results, I thought it’d be helpful to start by providing some additional clarity regarding items that impact year-over-year comparability, as well as our actual results relative to our previously stated guidance.

From a year-over-year comparability standpoint, we have two items that we previously shared with you that need to be considered; neither of these items will impact comparability in 2014.

First, fiscal 2012 included a 53rd week. This occurs every 5 or 6 years as a result of our fiscal year ending on the Sunday closest to January 31st. In the fourth quarter of fiscal 2012, we generated approximately $147 million in sales and $14 million in adjusted EBITDA associated with the 53rd week. We exclude these amounts from the fourth quarter 2012 when comparing against fourth quarter of fiscal 2013.

Second, during fiscal year 2012, we amended the terms of the supply agreement between our Crown Bolt business and The Home Depot. The new 7 year exclusive contract extended the original contract through January 2020, adjusting pricing levels and eliminated the volume guarantee in fiscal year 2013. In fiscal year 2012, the pricing and the volume guarantee represented net sales, gross profit, and adjusted EBITDA of $23 million in the fourth quarter of 2012 and $41 million for the full year 2012. We exclude these amounts from fiscal 2012 when comparing against fiscal 2013.

Joe referenced earlier our execution to streamline our Canadian operations. In the fourth quarter of 2013, we made the strategic decision to dispose of our Litemor business, a specialty lighting distributor operating approximately 10 branches included within our HD Supply Canada business.

Litemor’s operating results were $82 million of net sales and a loss of $4 million in adjusted EBITDA for fiscal year 2013. As a result of our decision, Litemor is being reflected in our results as a discontinued operation for all periods. Strategically, we’ll redirect our execution and investment focus in Canada towards HD Supply Brafasco, a growing and accretive industrial MRO distributor that specializes in fasteners, power tools and safety products operating approximately 45 branches across seven provinces in Canada.

We will combine Brafasco with our HD Supply White Cap team to enhance the business given the similarity of product expertise and ability to translate best practices across both businesses. To clarify, after including Litemor, our fiscal year results relative to our previously stated guidance are net sales of $8,569 million compared to guidance of $8,500 million to $8,575 million; adjusted EBITDA of $760 million compared to guidance of $755 million, $760 million; and adjusted net income per diluted share of $0.56 compared to guidance of $0.52 to $0.58. Please refer to the appendix of the presentation materials for a reconciliation of non-GAAP items and other supplementary information.

Now with that clarification behind us, let’s turn to the results our teams delivered. I’ll summarize our fiscal year results followed by a more detailed look at fourth quarter performance.

We delivered fiscal year 2013 sales of $8.5 billion, which represents an increase of $732 million or 9% over fiscal year 2012, after adjusting for the impact of the 53rd week and Crown Bolt agreement. On an organic basis, our fiscal year 2013 sales growth was 8%. We believe this level of growth exceeds our estimate of market growth by approximately 600 basis points, above our target to grow 300 basis points in excess of market.

Our 2013 sales growth is attributable to 3 components including one, our growth initiatives that contributed approximately $500 million or approximately 70% of our total growth; two, our end markets that contributed approximately $150 million; and three, the 2012 Peachtree business products and Water Products acquisitions that contributed $105 million.

Adjusted gross profit for the year increased by $258 million or 12% to $2,475 million for fiscal year 2013. Gross margin was 29.2%, a 60 basis point improvement over prior year. Our gross margin expansion is attributable to our category management initiatives and our ability to reach higher vendor rebate tiers as we enhance alignment and grow with our supplier partners.

Reported adjusted EBITDA was $764 million for fiscal 2013, up $79 million or 12% compared to adjusted EBITDA of $685 million for fiscal 2012. After adjusting for the $55 million impact associated with the 53rd week and Crown Bolt agreement amendment, fiscal 2013 adjusted EBITDA increased $134 million or 21%. This translates into operating leverage of 2.3 times. Adjusted net income for fiscal 2013 was $99 million, an improvement of $228 million compared to an adjusted net loss of $129 million in fiscal 2012. Our adjusted net income from continuing operations per diluted share for 2013 was $0.58.

Now I will discuss our fourth quarter execution and associated results. We finished the year strong in the fourth quarter despite sluggish end markets, unfavorable weather conditions and an unfavorable shift in the timing of both the Christmas and New Year’s Day holidays.

As Joe mentioned, we took proactive action to accelerate our forward momentum. We analyzed and took steps that position us to fuel growth, focus our resources and save as we grow all while enhancing our capabilities to deliver customer success.

As a result of our restructuring actions, we have taken a $12 million charge in the fourth quarter of 2013 and expect to take an additional $3 million to $5 million charge in fiscal 2014. These charges reflect the cost of reduction of approximately 158 associates in our Power Solutions business, global support center, and to a lesser extent our other businesses, consolidation of six of White Cap’s branches into three, the relocation of the Facilities Maintenance distribution center prior to its lease termination, and the liquidation of inventory for select skews that Power Solutions will no longer carry.

The inventory liquidation costs to Power Solutions of $3 million are reflected within cost of sales on our income statement. The remaining $9 million charge is reflected within the restructuring line on our income statement. These charges are added back to adjusted EBITDA based on the definition within our credit agreements. And we expect that the cost of these actions will be recovered through cost savings in less than one year.

Our fiscal fourth quarter sales of $1.9 billion represents an increase of $125 million or 7% over the fourth quarter of 2012 after adjusting for the impact of the 53rd week and the impact of the amendment of the Crown Bolt agreement. Our adjusted fourth quarter 2013 gross profit increased $45 million or 9% over the fourth quarter of fiscal 2012.

Gross margin was 29.2% in net sales, an increase of approximately 50 basis points from the fourth quarter of 2012. Adjusted EBITDA was $150 million during the fourth quarter of 2013. This compares to reported adjusted EBITDA of $155 million during the fourth quarter of 2012.

Excluding the $23 million impact of the Crown Bolt contract amendment and the $14 million impact of the 53rd week, fourth quarter EBITDA increased $36 million or 31%. Our adjusted EBITDA performance in the fourth quarter benefited from our sales and margin growth including our ability to earn higher rebate tiers based on the volume of purchases with some of our larger vendors and approximately $6 million of adjustments to our self-insured liabilities reflecting recent favorable claims experience. Adjusted net income from continuing operations for the fourth quarter of 2013 was breakeven compared to a loss of $80 million during the fourth quarter of 2012.

I will now provide some additional color on an individual business perspective. Revenue for our Facilities Maintenance business was $522 million during the fourth quarter of 2013, up $36 million or 7% excluding 2012’s 53rd week. For fiscal year 2013, revenue for Facilities Maintenance was $2.3 billion, up $190 million or 9% excluding the 53rd week.

We estimate that the MRO market grew between 1% and 2% in both the fourth quarter and full year 2013. Growth initiatives contributed approximately $125 million of 2013 sales growth and the 2012 Peachtree acquisition contributed another $30 million in sales growth.

Organic sales growth for Facilities Maintenance on a 52 week basis was 7% in 2013. Facilities Maintenance’s adjusted EBITDA for the fourth quarter was $90 million and for fiscal year 2013 was $434 million. This represents growth for the quarter of 20% and for the year of 14% excluding the 53rd week. Full year operating leverage was 1.6 times.

Revenue for our Waterworks business was $470 million during the fourth quarter of 2013, up $19 million or 4% excluding the 53rd week. On an organic basis, Waterworks grew sales 3%. For fiscal year 2013, revenue for Waterworks was $2.2 billion, up $235 million or 12% excluding the 53rd week.

We estimate the market was roughly flat for the fourth quarter and up approximately 1% to 2% for the year. The abnormally severe winter weather resulted in slower growth in the fourth quarter. For the year, our growth initiatives contributed approximately $170 million in sales growth and the 2012 Water Products acquisition contributed $75 million of sales growth. This growth was partially offset by $33 million of commodity price deflation. Organic sales growth for Waterworks on a 52 week basis was 8%.

Waterworks’ adjusted EBITDA for the fourth quarter was $30 million and for the full year 2013 was $173 million. This represents growth for the quarter of 15% and for the full year of 28% excluding the impact of the 53rd week. Full year operating leverage was 2.4 times.

Revenue for our Power Solutions business was $453 million during the fourth quarter of 2013, up $25 million or 6% excluding the 53rd week. Power Solutions had a particularly difficult comp for the quarter as they delivered 11% average daily sales growth during the fourth quarter of 2012.

For fiscal year 2013, revenue for Power Solutions was $1.8 billion, up $92 million or 5% excluding the 53rd week. We estimate a market decline of approximately 1% for both the fourth quarter and full year 2013.

Power Solutions’ adjusted EBITDA for the fourth quarter was $19 million and for the full year 2013 was $76 million. This represents growth for the quarter of 27% and for the year of 9% excluding the impact of the 53rd week. Full year operating leverage was 1.6 times.

The restructuring actions of Power Solutions that I discussed earlier are intended to allow Power Solutions to continue to leverage its operating results in an uncertain growth environment.

Revenue for our White Cap business was $295 million during the fourth quarter of 2013, up $29 million or 11% excluding the 53rd week. For fiscal 2013, revenue for White Cap was $1.3 billion, up $136 million or 12% excluding the 53rd week.

We estimate market growth of approximately 3% for the fourth quarter and 3% to 4% for the year. As with Waterworks, the abnormally severe winter weather resulted in slower growth in the fourth quarter. For the year, our growth initiatives contributed approximately $100 million in sales growth.

White Cap’s adjusted EBITDA for the fourth quarter was $14 million and for the full year 2013 was $79 million. This represents growth for the quarter of 100% and for the year of 44% excluding the impact of the 53rd week. Full year operating leverage was 3.7 times.

Now turning to the balance sheet; at the end of 2013, net debt totaled $5.4 billion. Net debt to adjusted EBITDA was down two turns from the end of 2012 to approximately seven times. We continued to maintain significant liquidity of approximately $1 billion and have no significant debt maturities until 2018.

We intend to reduce leverage over the short-term by growing adjusted EBITDA and using cash generated by the business to pay down our ABL revolving credit facility. Our extended maturities, recent track record of strong EBITDA growth, and exposure to attractive long-term growth market position us well. We will continue to thoughtfully evaluate options that we believe economically enhance our capital structure and create long-term shareholder value. Our recent term loan re-pricing is a good example of this. In February, we re-priced and extended the maturity of our $985 million term loan. The re-pricing reduced the interest rate spread and the LIBOR floor by 25 basis points each for a total reduction of 50 basis points. This will save us approximately $5 million per year in interest. The maturity of the term loan was extended to June 2018, which effectively extends the maturity of our ABL facility to June 2018 as well.

We continued to have a very favorable tax position which includes federal and net operating loss carry forwards of approximately $2.3 billion as of fiscal year-end 2013. The tax affected amount of our federal and state NOLs is approximately $1 billion. The NOLs are 100% reserved for with the valuation allowance. We expect that our future cash tax payments will be significantly reduced by the utilization of the NOL carry forwards.

During 2013, we paid cash taxes of $8 million primarily associated with Canadian taxes and U.S. state taxes. In 2014, we expect to pay annual cash taxes in the range of $10 million to $20 million. A reasonable simplified assumption would be to spread the annual estimate equally across the four quarters of 2014.

We continued to invest capital for our business including $131 million of capital expenditures made during 2013, which represents approximately 1.5% of sales. These investments consist of new locations, IT system enhancements and building maintenance to support and enhance our ability to grow.

Our sales during the fourth quarter of fiscal 2013 started strong prior to the onset of the severe winter weather. On a monthly basis, sales during the fourth quarter of fiscal 2013 were $627 million in November, $571 million in December and $731 million in January. On an organic basis and adjusted for the impact of the Crown Bolt contract amendment, average daily sales growth was 9% in November, negative 2% in December and 12% in January.

Please consider that the week of Christmas was included in the month of January during fiscal 2012. In 2013 Christmas week fell in fiscal December, making December and January difficult months to compare individually on a year-over-year basis. Average daily sales on a combined basis for December and January during fiscal 2013 increased 5% over fiscal 2012 adjusting for the impact of the Crown Bolt contract amendment.

February 2014, our first month of fiscal 2014 ended March 2nd, so we can provide our preliminary February sales results. We will not comment on February results beyond sales. February sales were $609 million which represents 4% growth over the prior year; there were 20 selling days in February in both fiscal 2013 and fiscal 2014.

Preliminary February year-over-year average daily sales growth by business was 10% for Facilities Maintenance, 2% for Waterworks, negative 4% for Power Solutions and 9% for White Cap. Unfavorable weather conditions continued to negatively impact our results in February.

Overall we are pleased with our February results given these conditions. We continue to see strong growth at Facilities Maintenance and White Cap. Power Solutions has a very difficult comp in the first quarter as they reported 11% growth during the first quarter of 2013, they were also impacted by weather as large investor [own] utility customers, delayed projects during February due to unsafe working conditions. These customers have told us that they will not work overtime to catch up on these projects.

As a result of these headwinds, we expect Power Solutions to report a slight decline in first quarter 2014 revenue versus the prior year. March sales performance is generally trending in line with February; however we have seen improvement over the last week as weather conditions have improved.

We have received broad positive feedback on our annual sales framework that can be adjusted for varying views on end market recoveries, as well as expectations for business unit level growth in excess of market. We will continue to utilize this framework to help provide perspective on our annual sales outlook.

To that end, we remain cautiously optimistic for our end market in 2014. The green shoot activity we see in certain markets is encouraging and momentum seems to be building, but we remain cautious in our full year outlook given the recent weather overhang.

Our current annual expectations for our end markets are an increase in the residential construction market in the mid-teens, low single-digit increase in the non-residential construction market, down low single-digit to flat power and municipal water market and a stable MRO market with growth of 1% to 2%.

These specific end market estimates imply an approximate 4% 2014 market growth estimate for HD Supply. We remain committed to our controllable execution targets for HD Supply of 300 basis points better than our estimates of market. To clarify, 300 basis points would be in addition to the market growth estimates. To help bracket adjusted EBITDA associated with these sales growth rates, we are providing an annual target for 2014 operating leverage defined as a percentage change in adjusted EBITDA divided by the percentage change in sales.

Our 2014 operating leverage target is 1.5 times to 2 times. Due to seasonality, cyclicality of our business and investment timing, this metric may vary on a quarterly basis. We also studied our HD Supply incremental margins, defined as gross margin percent plus variable SG&A percent and believe an 18% incremental margin is another helpful data point that has historically been reliable both on a quarterly and annual basis. As we’ve stated before, our variable SG&A is approximately 50% of our total SG&A.

We plan to complement our [2004] outlook framework with specific quarterly guidance for the upcoming quarter that we will provide on each quarterly earnings call. We believe this will help provide additional quarterly clarity throughout 2014. And as Joe mentioned we reserve the right to reevaluate this approach in the future if needed.

We anticipate our fiscal 2014 first quarter revenue to be in the range of $2.100 billion and $2.175 billion, adjusted EBITDA in the range of $180 million and $190 million and adjusted net income per diluted share to be in the range of $0.14 and $0.21. Our adjusted net income per share range assumes a fully diluted weighted average share count of 198 million. At the midpoint of the range, our quarterly sales and adjusted EBITDA translates into 4% and 12% growth respectively. Our first quarter guidance considers the uncertainty associated with recent weather patterns. However we remain optimistic that end market demand will continue to build momentum through the balance of the year.

Thank you for your time. And I would now like to turn the call over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from David Manthey of Robert W. Baird. You may begin.

David Manthey - Robert W. Baird

Hi, good morning. Thank you.

Joe DeAngelo

Good morning.

David Manthey - Robert W. Baird

First off I was wondering if you could talk about pricing by segment, are there any areas of the business where you are getting positive price.

Evan Levitt

Yes. Pricing is something that we don’t specifically talk about in total or by business, but certainly we do have a holistic strategy on category management, which includes both our sourcing, including the ability to negotiate rebates and other terms with our vendors, as well as pricing to the end markets. But we don’t comment specifically on pricing.

David Manthey - Robert W. Baird

Okay. Thanks and then just one more quick here, as you are looking at the different segments, could you talk specifically about Waterworks, it’s my understanding that that’s vastly municipal spending today, what do you see in terms of the trends, are you seeing a shift towards new construction there at all? And then same, similar question with Power Solution and White Cap on Power Solutions, are there any new contract wins that are going in there if you could talk about those? And then White Cap I guess you addressed the non-res trends, but any additional color you have there to dig a little deeper by segment?

Joe DeAngelo

Sure. So if you look at our Waterworks business, at the peak our Waterworks business is about 60% residential business which will be the new land development and so what we are seeing is we believe the markets are now in just about equilibrium for us, the lots that were previously overdeveloped, if you will. So for the last two years, while the residential market has been up, we have not been enjoying put in place [out for those] [ph] markets because of the fact that they were already facilitated.

We believe the markets are in equilibrium now and now we’re seeing many locations where the residential construction activity is turning net new dirt and that is a good sign for our Waterworks business to be able to be additive relative to their current position in residential. So, that’s very good news for us as we go forward.

If you look at the Power Solutions business, we continue to work on long-term contracts. We won’t comment on specific ones that we have gained, but that’s the market that takes a long time to get a contract. And we have been successful in that marketplace as about all comment on there. But the Power Solutions business, the way we really look at it is for existing customers, how much can we penetrate and do net new business with them and therefore drive this [inaudible] customer success. And we just had as part of our recent monthly reviews, a review of every one of our major contracts that we have. And in all cases we’ve been able to penetrate those contracts deeper. So, if you see any fluctuation in our sales, it’s the result of demand fluctuation at the end customer level, not the loss or gain of a big contract in many cases.

And then if you look at White Cap, we are seeing cranes in many, many cities now. I think it’s one where we are well positioned to be able to take advantage of that. And we commented relative to Orlando, which also have a lot of building down in the bucket area of Atlanta, Houston, Boston I mean every place that has done a good job of creating a good commercial environment they are doing much more non-res work than we saw 6 month ago. So, we think we’re encouraged about those projects. We are going to take a cautious outlook, we see it. But we think that’s a positive sign for the non-res market because we are in those projects and they are good projects.

David Manthey - Robert W. Baird

That’s great, Joe. Thanks for the color.

Joe DeAngelo

Thank you, David.

Operator

Thank you. Our next question is from Hamzah Mazari of Credit Suisse. You may begin.

Hamzah Mazari - Credit Suisse

Good morning. Thank you. Just a question on the restructuring that you are doing across your portfolio, maybe you could give us a sense, is this due to overinvestment in the business and end market demand is weaker than anticipated or is it a loss of share? It seems like within Power Solutions, one of your competitors is growing two or three times as fast as you. And then maybe just remind us of the synergies you would see right now between various businesses in the portfolio. Thank you.

Joe DeAngelo

Okay. So, in no case are we restructuring because of loss of share. The one restructuring we did in Canada was a product offering that was typically a fluorescent based product and the market has moved with a lot of replacement. Once you’re in there and the markets moved to LED, so it’s a technology shift there for that Litemor business, primarily. But relative to Power Solutions, if you look at the stand-up competitor, I believe you are referring to, we had 5% organic growth compared to a zero. So I think that is a [beep] [ph] there. We’re 600 basis points more than market. And as I commented with David, the approach that we take is we have these major contracts and we look at our performance within those major contracts and how much net new service and product offerings we add to those major contracts on an annual basis, in all cases we are moving forward. So, I couldn’t be prouder of the momentum of our Power Solutions team. And I believe that we are singularly positioned to be able to transform that supply chain as we have a full solution all the way through storm response to various digitally integrated assets. So, we feel very good about that.

Hamzah Mazari - Credit Suisse

Great. And just a follow up question. On March, I think you commented March is running in line with February with an improvement over the last week due to weather. Any sense or quantification of how much weather impacted your results in February? Thank you.

Evan Levitt

Yes. Weather is very difficult to quantify and as a result, we included the weather results as part of our estimate of market. We have seen a little improvement in the weather here towards the end of March and we have seen that impacted in results but we are running out of weeks here in the first quarter for that improvement and that’s reflected in our first quarter guidance.

Hamzah Mazari - Credit Suisse

Okay, great. Thank you. I appreciate it.

Joe DeAngelo

Thank you, Hamzah.

Operator

Thank you. Our next question is from Sam Darkatsh of Raymond James. You may begin.

Sam Darkatsh - Raymond James

Good morning Joe, Evan, Will. How are you?

Joe DeAngelo

Good morning, Sam. How are you?

Sam Darkatsh - Raymond James

Well, what is the growth investment spend likely to be in ‘14 versus the $70 million in ’13? And then, we noticed that you had market outgrowth overall holistically of about 600 basis points in the fourth quarter and you are guiding for about 300 basis points of outgrowth in ‘14 and specifically Power Solutions and White Cap, your market outgrowth is considerably lower in ‘14 expected than what you saw in the fourth quarter. Can you explain as to why the fourth quarter outgrowth is not as sustainable in those two particular segments?

Evan Levitt

To answer your first question Sam on the level of investment spending, we are expecting to spend about $70 million again in 2014. As we’ve indicated previously, our strategy is to continue to invest in the company through all cycles. So you’ll see that continue invest and we do attribute that investment to some of our outgrowth. As far as, outgrowth in the fourth quarter and whether that’s sustainable or why is our guidance a little lower than that, as we stated previously, our commitment is to grow 300 basis points in excess of the market. We do everything we can to grow as fast as we can and to beat that 300 basis point commitment but that is our commitment we believe that sets us up well with our best-in-class competitors.

Sam Darkatsh - Raymond James

But specifically in Power Solutions, you’re only looking for zero to 200 basis points of outgrowth in ‘14 and White Cap of 200 to 500 basis points versus 700 or 800 basis points in the fourth quarter. What specifically either was happening in Q4 that is not likely to reappear or is that just being overly conservative in those two particular sub segments?

Joe DeAngelo

There is nothing specific there Sam. What we have done with our 300 basis points in a way we came up with that is we looked at our competitors that were best-in-class and so they’re growing about 300 basis points more than market that’s what we’re going to target and commit to. And every business process we have that’s produced the fourth quarter or the previous three years is consistent going forward.

Sam Darkatsh - Raymond James

Very good. Thank you.

Joe DeAngelo

Thank you.

Operator

Thank you. Our next question is from Andrew Obin with Bank of America/Merrill Lynch. You may begin.

Andrew Obin - Bank of America/Merrill Lynch

Hi guys, good morning. I just have a longer-term question. As I look at your target for EBITDA growth for next year and I just compare it to last year, it’s a pretty meaningful deceleration even as your markets improve. And the follow-up to that if I look where the street is I think collectively we’re modeling and I am just looking at the consensus numbers, EBITDA growth in mid to high teens. And should we structurally recalibrate our long term expectations and why?

Evan Levitt

Our growth in both sales and EBITDA is consistent with the framework we provided you here and that’s consistent with the framework that we’ve used in the past. So…

Andrew Obin - Bank of America/Merrill Lynch

Well that’s not a fair -- well, I don’t think that’s an entirely fair statement because I think by and large the street [realizes] the framework that you have provided in the past, a very broad framework but nevertheless.

Evan Levitt

Well our sales -- our sales growth estimate is based on the 300 basis point commitment, in excess of our view of the end market. Translating that into our EBITDA growth, we’re targeting that 1.5 to 2 times operating leverage. We have been successful in the past in growing that operating leverage at certain businesses faster than that 2 times, and we will continue to try to do that. But as our businesses mature, you will see that our businesses are now operating off of a higher earnings base. And it does get a little more difficult to achieve those, outperformances in operating leverage. So, we do commit to that 1.5 to 2 times. You will see the businesses in what we’ll call, the early innings of the recovery; operate towards the higher end of that 1.5 to 2 times or maybe even slightly above; and our businesses that are more mature and stable will operate towards the lower end of that 1.5 to 2 times.

Andrew Obin - Bank of America/Merrill Lynch

So I just want to understand the guidance for the framework for this year, is that a function of being more -- so the slowdown in to improving macro, is that a slowdown or is that a reflection of maturity of the business or you guys just trying to be conservative and not sort of sticking your neck out on the pace of the recovery given that it’s been so choppy?

Joe DeAngelo

We’re going to be more conservative because it’s been so choppy.

Andrew Obin - Bank of America/Merrill Lynch

Thank you so much.

Joe DeAngelo

Thank you Andrew.

Operator

Thank you. Our next question is from Deane Dray of Citi Research. You may begin.

Deane Dray - Citi Research

Thank you. Good morning everyone.

Joe DeAngelo

Good morning.

Deane Dray - Citi Research

I was hoping to get some color on your 2014 targets with regard to cash and free cash flow. So, do you have a CapEx target that you can share with us this morning versus the $131 million from 2013? And do you have a specific free cash flow target for this year?

Evan Levitt

Yes. We don’t disclose specific free cash targets. Our CapEx will remain similar at about 1.4 to 1.5 times sales. So with that EBITDA and sales growth, you should be able to estimate a cash flow target.

Deane Dray - Citi Research

Great. And then for my follow up, I was hoping you could provide a bit more color on your non-res outlook. And just if we look to your previous guidance, that’s the one end market that has changed, before you were zero or flat to low single-digits and now you are saying single-digits. And I’m sorry to parse this, but that’s a pretty wide range and maybe that’s exactly what you’re trying to communicate here. Is that now 1 to 9 percentage point increase? And so just, I’m not trying to pin you down to a tighter range but just maybe what are the dynamics, what are the projects that you are seeing that could be released? And why have you changed that outlook here today?

Joe DeAngelo

Yes. Well, there is a lot of dynamics out there, the one that clouds it most is the weather and the fact that we weren’t on these sites. But having been on these sites and been traveling around the country, we’re increasingly optimistic about what we’re seeing there in 2014.

It feels like the non-res activity is better, I know that because we’re on jobs and those are real jobs. We talked about the performing arts center in Orlando, but I can go city-by-city as you kind of walk through. And the jobs are real and we are on them. So we feel good about that that they’re going where they are. I mean Atlanta is doing major building, Denver is very active, Boston is real strong and the Waterfront Downtown activity. So it seems like it seems like it is better out there. We don’t want to overestimate the strength at this point, but it is encouraging.

Evan Levitt

Yes. I’ll also clarify that our estimate of non-resi for 2014 is low single-digits. So, you’re right, we changed our outlook from flat to low single-digits to just low single-digits. But it is -- we are -- aren’t going all the way up to a 9%.

Deane Dray - Citi Research

Okay. So that, is the slide wrong because the slide just says single-digit growth?

Evan Levitt

It is low single-digits for non-resi.

Deane Dray - Citi Research

Okay. Thank you.

Joe DeAngelo

Thank you, Dean.

Operator

Thank you. Our next question is from John Inch of Deutsche Bank. You may begin.

John Inch - Deutsche Bank

Thank you. Good morning everyone.

Joe DeAngelo

Good morning, John.

John Inch - Deutsche Bank

Good morning, Joe. So I want to go back to the point of -- I understand the best in class, the 300 outgrowth target. Maybe the way to frame the question is, why then did you do 600 in 2013 and what would be -- potentially the circumstances show that would not allow you to replicate a 600 point outgrowth. For example, were there new low hanging fruit initiatives or new SKU launches or something that just might add a little of color? I understand the conservatism, and that’s not really my question is. It does seem like a big gap down, so just curious in your thoughts.

Joe DeAngelo

Yes. I would say that when you look at our company, John, each business unit has a different level of maturity. And so when you run each of these five growth plays, I mean you get -- you start them off and then you get a lot of traction and then of course they kind of like plateau and you kind of work your way through. But I’d say universally across the company, we are running the same plays with the same level of intensity, we are learning from each other and we’re continuing to penetrate.

So our job is to beat the 300 basis points. Our job is also to make sure that we have numbers out there that when we get chopped in the world that we don’t miss. And so that’s the way that the created; they are kind of broad. But there is nothing systemically that has taken the foot off the gas relative to the execution or that was incredibly easy in 2012 over 2013 that now is much harder as we go into 2014 relatively to our market outgrowth in our five growth plays.

John Inch - Deutsche Bank

So for instance one of the dynamics that seems to be going on is end market growth is getting better. So for example, there is nothing Joe that as markets get better your ability to outgrow somehow diminishes because say competitors apply more pricing or something like that. I am just again just trying to sort of contrast the two years?

Joe DeAngelo

Yes. There is nothing as we look into 2014 that is materially different than ‘13 or ‘12 relative to outperforming in the markets that is causing us an additional headwind.

John Inch - Deutsche Bank

So if I look at the weather and I think it’s legitimate to talk about it. When you guys look at your results and when there were periods, obviously we had pretty severe weather in the U.S. and Canada this winter, if you look at your results during say saw periods, did you see a business kind of snap back or is the nature of the lot of the long cycle in your end markets? Is that that once weather is cold even if you have a very cold week and a warmer week, the projects still kind of get deferred? There are sort of two aspects to this, it’s sort of one giving you the confidence to say that end markets are beginning to inflect higher; and two, is the underlying really kind of better than what we’re all looking at sort of on the print because really the weather is masking those?

Joe DeAngelo

Yes. I think the weather clearly masked it when you look at the outdoor construction activity in White Cap. When it’s nice out, people can do work safely, then we do see that that is materially better. The Waterworks has a little bit more of a lag, a little bit choppier because the ground needs to unfreeze a little bit to be able to do it particularly when it was really severe deep frost. And then our Power Solutions business, we called out specifically although our customers decided not to run cruise and it was the right decision, because it wasn’t safe, they’ve also made the discussion not to work overtime so they won’t catch up. And so you’ve got kind of the continuum there. And for our Facilities Maintenance business, it’s just a function of whether it was the weather so severe that the facility was shutdown and then of course we get it right back. So I think that’s the continuum that you’re kind of working with.

Evan Levitt

And there maybe some pent-up demand, as we get through the end of March here and look at April and May, we’ll get a feel for whether that pent-up demand is released to or whether those projects were deferred indefinitely.

John Inch - Deutsche Bank

One of your customers said, I mean you guys get a lot of field entail. I mean your customer sort of -- your customer is more optimistic now that weather is clear, they want get projects completed. I mean I think…

Joe DeAngelo

I think on a non-res side, John, I’d say the customers are more optimistic; on the residential side, obviously there is clear signs that you’ve got -- it’s very underwhelming. So I think you need to be into this spring selling season before you really know what residential is going to do for us. MRO is no change and the infrastructure markets are sluggish, but I think it’s sluggish for different reasons; they’re more economic or cautious.

John Inch - Deutsche Bank

One last one from me, your debt pay down, are you guys trying to signal, obviously we all know what the potential levers are. I just was curious what your own thoughts are toward further actions toward debt pay down? I realized there is a couple of variables that have to go into that, but you did do it earlier right than we expected. So if there is some sort of an inference that you would be waiting for, something else that helps us think about what you’re thinking, Joe?

Joe DeAngelo

Yes. We’re not trying to signal anything. In the immediate term, our plan to delever is by growing our EBITDA and using cash from operations to pay down the asset-backed revolving credit facility. We will have additional opportunities or flexibility when our higher price debt becomes callable. That will give us additional opportunities if the credit markets remain strong to do some refinancing; restructuring or otherwise, repay debt.

Will Stengel

John, it’s Will Stengel. I think the other thing too is we get a lot of questions on this topic, so we wanted to be explicit in the script, so everybody heard the same thing.

John Inch - Deutsche Bank

Yes, got it. Thank you very much.

Will Stengel

Thank you, John.

Operator

Thank you. Our next question is from Winnie Clark of UBS. You may begin.

Winnie Clark - UBS

Good morning.

Joe DeAngelo

Good morning, Winnie

Winnie Clark - UBS

Could you talk about your first quarter guidance and how we should think about what would put you at the high-end of the range versus the low-end? Obviously, February with the 4% average daily sales comp and the impact of weather weighing on that, but your range is I believe 3% to 6% for the quarter. So how should we think about the trajectory over the next couple of months?

Joe DeAngelo

Yes. I think when you look at it particularly for this quarter we’re running out a week to be able to complete the quarter. So if we do get very positive weather, people can get out there and work and that will be favorable to us. If we continue to get just surprises in job out there, that’s going to put us towards the lower-end of that. But I think that’s the largest uncontrollable variable we have out there.

Winnie Clark - UBS

Okay, great. And then regarding the framework, obviously you brought up that as non-res outlook a bit. I know it’s early in the year, but are there any areas despite that you didn’t change your outlook for other end markets? Is there anything making you more optimistic or potentially even more conservative regarding other exposure you have?

Joe DeAngelo

I think we’re very pleased that we believe that the residential markets or the land development is in equilibrium now, so I think we see new [gear] turning. We’re very cautious that we’ve seen a considerable moderation as we have to get into the season there. There is nothing in our MRO space that we -- cause a change, and there has really been nothing positive in the infrastructure space that would cause us to make a change.

Winnie Clark - UBS

Okay, great. Thank you very much.

Joe DeAngelo

Thank you.

Operator

Thank you. Our next question is from Keith Hughes of SunTrust. You may begin.

Keith Hughes - SunTrust

Thank you. In your markets, end market outlook within MRO is 1% to 2%; can you just talk in more detail what the multifamily would look like versus institutional markets and any differences you see there?

Joe DeAngelo

Yes. Well, the multifamily is by far the lion share of our business and the other segments that we’re participated in healthcare and hospitality and in all cases, they look similar. And so you see a tightness, lack of vacancies in there, and you see rents or hotel room costs accelerating. And that gives us the 1% to 2% growth.

Keith Hughes - SunTrust

Given the lack of vacancies, kind of say I would expect a little bit higher number there as the churn in tiered apartments is higher, but with the lack of vacancy, is there something else going there?

Joe DeAngelo

Yes. I think within our business in that and that space is primarily great fix. So it’s the established number of units are out there. We do see as part of this non-residential encouragement that I talked about a lot of multifamily build out there.

Keith Hughes - SunTrust

Okay, thanks.

Joe DeAngelo

Thank you.

Operator

Thank you. Our next question is from Ryan Merkel of William Blair. You may begin.

Ryan Merkel - William Blair

Thanks. Just a question on the operating leverage framework. So if were at sales growth of 5% to 6%, can you still kind of manage the business to that 1.5 to 2 times leverage?

Evan Levitt

Yes. That is our expectation.

Ryan Merkel - William Blair

Okay. And then just sort of follow-up, why is the leverage so strong in the fourth quarter? Were there some one-time items or can you just, could dig in that a little bit?

Evan Levitt

Yes sure. The fourth quarter, we had a few things that benefited us in the fourth quarter. First was the ability to achieve certain rebate tiers, so we were able to get into those higher rebate tiers that we recognized in the fourth quarter. We also did have a favorable adjustment to our self insurance reserves due to a very strong or very favorable claims here from self insurance perspective; and then mix helped us a little bit as well. Our Facilities Maintenance business, our highest margin business grew faster than the company average.

Also keep in mind that the first quarter and the fourth quarters are lower volume quarters. So when you have some of these types of changes, they get amplified or magnified in terms of overall operating leverage.

Ryan Merkel - William Blair

Makes sense, thanks.

Operator

Thank you. I would now like to turn the conference back over to Joe DeAngelo for closing remarks.

Joe DeAngelo

Well, thank you for your questions. In summary, I am very pleased with our performance of 2013. We delivered a 9% and 21% sales and EBITDA growth respectively versus the prior year on an adjusted basis. Our defined growth strategy in investments built around our differentiated customer centric model continues to deliver profitable growth in excess of market.

Our seasoned teams understand the requirements associated with operating in uncertain markets. And we took decisive action in 2013 to align our resources and cost to market realities. We realigned our teams to put our best talent in larger roles and asked them to do more with less, allowing us to save as we grow and focus our execution on the highest return growth activities.

We also aggressively attracted new talent; talent who joined our team with excitement about the available opportunities associated with HD Supply and who posses our core value of taking care of each other. We continued to enhance our capital structure with our initial public offering, reducing debt, reducing our debt by approximately $1 billion and we opportunistically re-priced our term loan to enhance our flexibility and reduce interest expense. Most importantly and consistent with our historical approach, we remain committed to our investments in growth, investing over $70 million in sales growth to fuel future growth.

I am encouraged with the recent construction Green Shoots. We’ll remain cautiously optimistic for our markets in 2014, given this difficult recent weather. We are very well positioned in large, attractive long-term growth markets. And our scale and growth in excess of market differentiates us versus our primary competitors who are smaller and local. We are in the early innings of realizing our full potential and focused on getting faster and better, running five simple growth plays to take our current number one leadership positions to distant number positions. Thank you for your continued support.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day.

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