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HD Supply Holdings (NASDAQ:HDS)

Q1 2014 Earnings Conference Call

June 10 2014 8:00 AM ET

Executives

Will Stengel - SVP, Strategic Business Development and IR

Joe DeAngelo - Chief Executive Officer

Evan Levitt - SVP and Chief Financial Officer

Analysts

Mike Sang - Morgan Stanley

Hamzah Mazari - Credit Suisse

John Inch - Deutsche Bank

Deane Dray - Citi Research

Winnie Clark - UBS

Keith Hughes - SunTrust

Josh Wilson - Raymond James -

Robert Barry - Susquehanna Financial Group

Operator

Good day, ladies and gentlemen and welcome to the HD Supply First 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 introduce your host for today's conference Mr. Will Stengel. Sir, you may begin.

Will Stengel

Thank you, operator. Good morning, ladies and gentlemen and welcome to the HD Supply Holdings' 2014 first quarter 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 2014 first quarter results as well as commentary regarding the current environment and outlook. Following Joe's remarks, Evan Levitt, HD Supply's SVP and CFO will provide a first quarter financial overview, a preliminary update on May sales results and the outlook for the balance of the year, including expectations for second quarter 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 the actual events may differ materially from those made in or suggested by the 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 as amended for the year ended February 02, 2014 and those described from time-to-time in our 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, everyone. Thank you for joining us today for our 2014 first quarter call. As always it's my privilege to share company's results with you on behalf of the over 15,000 HD Supply associates who work hard everyday to deliver customer success. I was pleased with the solid performance in the first quarter. As we call out on page 3 of presentation, we delivered 6% sales growth representing the 16th consecutive quarter of year-over-year average daily sales growth. Our execution delivered growth in excess of market estimate of approximately 400 basis points. We deliver this performance despite typical weather headwinds throughout February and March. We did however improve performance in April. As environment normalizes and we believe pent up project activity was initiated. Evan will provide more detail on monthly trends and weather impact commentary later in the call.

We invested approximately $15 million in growth initiative during the first quarter 2014 and we are committed to growth. We continue to execute our five core growth strategies as we seek to deliver profitable growth in excess of market including selling more to existing customers, introducing new products and services, expand our channels to reach our customers via catalog, internet, and mobility. Acquiring new customers and opening new locations. These growth plays are ordered by relative risk adjusted return essential. Selling more to existing customers and introducing new products are our best areas of opportunity where we are intensely focused. We run these five growth plays over and over again, enhancing our differentiation and giving better and faster through our ability to rapidly implement best practices across the company.

We delivered gross margin of 29.2% in first quarter, up 20 basis points versus the first quarter 2013. The improvement was driven by execution of our category management initiatives and the mix of product and services. We continue to deepen our relationships in a line of strategic supply partners to provide our local customers the products they need, when and where they need them.

Adjusted EBITDA grew to $190 million, a 15% increase versus the first quarter 2013 representing operating leverage of 2.8x. With the fine operating leverage as adjusted EBITDA growth, provided by total sales growth. We delivered strong operating leverage helped by our proactive cost actions that we took at the beginning of the year, while at the same time maintaining our focus on investing for growth.

Continuing on Page 4, our sales growth, improving gross margins and reduction in interest expense translated into adjusted net income for the first quarter of $39 million, up $53 million versus our first quarter last year. This represents adjusted net income per diluted share of $0.20, an increase of $0.31 per share versus prior year.

Our business unit performed well in the first quarter. Facilities Maintenance, the core of our company increased sales 8% and adjusted EBITDA 9% in the first quarter compared to 2013. Proprietary brands, renovation services, hospitality and health care activities are performing well. During the quarter Facilities Maintenance created two new roles including a chief commercial officer and chief operating officer. These new positions will fill by two of Facilities Maintenances' best leaders, making them larger more focused roles. The realignment will provide enhanced focus and better position us to extend our customer centric model while saving as we grow. There are no financial charges associated with these changes. This is a good example of continuously improving our company by aligning challenge and activities to ensure we deliver on customer need. Facilities Maintenance continues its strong momentum. We believe Facilities Maintenance grew approximately 600 basis points in excess of our estimate of market growth in the first quarter.

Waterworks grew sale 5% and adjusted EBITDA 8% in the first quarter compared to 2013. Despite the weather during the quarter, Waterworks continues to execute well starting new products and services more broadly across the country. Our north region including state such North Dakota, Colorado, Wisconsin and Minnesota are broadly outperforming our estimate of market growth as a result of great execution. In addition, our national fusible piping initiative is gaining strong traction. Our Waterworks team received industry recognition from one of the preeminent manufacturers of fusing equipment as a result of Waterworks' success driving overall growth and adoption of technology in numerous market. As always and like all our businesses, Waterworks is also focused on attracting and developing talent. We are continuously working to make sure outside and inside sales professionals are positioned to be highly effective and productive with the best training in selling tools. Waterworks has positive momentum with encouraging backlog trend coming into the prime selling season. We believe Waterworks grew approximately 400 basis point in excess of our estimate of market growth in the first quarter.

Power Solutions sales and adjusted EBITDA were roughly flat in the first quarter 2014 versus the first quarter 2013. We estimate approximate $5 million sales headwinds associated with foreign exchange. Adjusted for currency impact, Power Solutions sales increased approximately 1% versus prior year. Our prior period sales comparable of 11% reflect a customer project activity in 2013 that did not repeat this quarter. Despite a continuing sluggish end market, we are intensely focused on driving share of wallet with our current customers and we are very pleased with recent wins that continue to validate our strategy and value proposition. Our category management initiatives in Canadian operations also continue to build momentum. We believe Power Solutions performed approximately 200 basis points better than our estimate of market growth in the first quarter on a constant currency basis.

White Cap increased sales 11% and adjusted EBITDA 57% in the first quarter compared to 2013. As of the first quarter 2014, trailing 12 months adjusted EBITDA and an adjusted EBITDA margin is now approximately $70 million and approximately 500 basis points compared to fiscal year end 2011. White Cap continues to make strong progress on its category management initiative, is intensely focused on 16 large priority districts with a $1 billion market opportunity. We launched the spring version of White Cap catalog in addition to introducing a new app that offers mobile purchasing solutions for White Cap customers. Our industry leading team is executing very well and building on a strong momentum. We believe White Cap grew approximately 600 basis points in excess of our estimate of market growth.

Evan will walk you through our specific end market growth outlook, but generally speaking our views on our end market remain unchanged from March earnings call. We remain cautiously optimistic for the balance of 2014 and encouraged by pockets of strength that we are seeing. The weather throughout the quarter makes the data very difficult to interpret. The construction activity levels in our large priority market seem solid and sentiments from our customers continues to be generally positive. For example, we see good non residential activity and momentum in market like Denver, Boston, Washington DC, Baltimore and Miami. Summer activity will obviously be important data point to asses the end market traction. We continue to monitor the residential data closely which is showing recent weakness that we believe is potentially influenced by atypical weather. U.S. Census Bureau March seasonally adjusted single-family starts were 644,000, up only 5% versus 2013. April seasonally adjusted single-family starts were 649,000, up 10% versus 2013 and up less than 1% sequentially. We share the mid -teens 2014 single family start growth estimate during our last earnings call. We do continue to see signs of residential activity in our Waterworks business and backlog trends are improving. We continue to analyze upcoming residential data point and May single-family starts will be released June 17.

Our infrastructure markets remain sluggish while the MRO market remains stable. As always we will stay focused on what we can control. In the quarter, we executed a successful secondary offering that closed on May 7. The transaction represented the sale of approximately 35 million shares including a full exercise of the underwriters' over allotment option. All the shares offered were sold by selling shareholders basically supply, the company did not receive any proceeds from the offering and there is no dilution to existing shareholders. We met with approximately 200 investors on the two day road show and always appreciate the opportunities to share a differentiated HD Supply story with existing and new investors.

As part of our evolution as a public company, we announced the addition of John Alden as our most recent independent director. John retired from the United Parcel Service after 35 years with the company. He served on its board from 1988 to 2000 including serving as its Vice Chairman from 1996 until his retirement in 2000. We are excited to add John to our team and his relevant experience will be highly complimentary to our existing board of directors and leadership.

On Page 5, I am pleased to share our new HD Supply sale in branding to further unify our business units under HD Supply brand, we have refreshed our brand structure with a more compelling and consistent visual representation across the enterprise. This new look portrays our one team culture, the branding is the outcome of listening to our customers and better understand what is most important to them and correspondingly to understand how we can best deliver on our brand promised. This customer centric approach serves as a foundation for our visual brand enhancement and helps to define how we communicate to our customers, the specialize areas of expertise that we provide to them. We are in process of rolling out a disciplined cost new program refresh across our internal and external brand assets with new brand logos and business unit names. The business unit name changes and predominantly on a small businesses as well as our White Cap business which will now be refer to as HD Supply Construction and Industrial. To clarify there are no material operational or financial implications with these changes.

I'll provide some closing comments following Q&A. We will now turn the call over to Evan for review of our 2014 first quarter performance, monthly sales results and our second quarter guidance and our full year 2014 outlook.

Evan Levitt

Thanks, Joe. And good morning everyone. As Joe mentioned we delivered solid results in the first quarter of 2014. I was proud the team was able to execute despite uncontrollable headwinds. We will stay focused and work to continue on our momentum through the remainder of 2014. On Page 6, we detailed our first quarter performance. We delivered first quarter of 2014 sales of $2,161 million which represents an increase of $113 million or 6% over the first quarter of fiscal 2013. We believe this level of growth exceed our estimate of market growth by 400 basis points. We estimate that our growth initiatives accounted for approximately $83 million of our first quarter 2014 sales growth and improvement in our end markets contributed approximately $35 million of sales growth. These improvements will partially offset by approximately $7 million or 40 basis points of unfavorable foreign exchange impact associated with our Canadian business primarily in Power Solutions.

Gross profit increased $38 million or 6% to $631 million. Gross margin was 29.2%, a 20 basis points improvement over the first quarter of 2013. The improvement is a result of our category management initiative and product and services mix. Our selling, general and administrative costs were up $14 million or 3% over the first quarter of 2013. As a percentage of sales, selling, general and administrative cost were 20.7%, the 40 basis points improvement from the first quarter of 2013. The improvement is the result of cost control efforts including the restructuring actions initiated during the fourth quarter of 2013 as well as our ability to leverage fixed costs. As Joe mentioned we invested $50 million in growth initiative during the quarter and remained committed to investing in the business to field growth.

Adjusted EBITDA for the first quarter of 2014 was $190 million, up $25 million or 15% compared with first quarter of 2013. This represents an operating leverage ratio of 2.8x. As we mentioned in our last earnings call, operating leverage on a quarterly basis can be influenced by the nature of low sales volume in our first and fourth quarters, investment timing as well as the mix impact associated with our most cyclical businesses. The over performance in the first quarter is primarily attributable to strong performance and leverage from our construction and industrial business. We remained focused on saving as we grow across the company. Our comment on our 2014 full year operating leverage outlook later in the call.

Adjusted net income for the first quarter of 2014 was $39 million, an improvement of $53 million as compared to adjusted net loss of $14 million in the first quarter of 2013. Our adjusted net income per diluted share for the first quarter of 2014 was $0.20. There were 198.9 million diluted weighted average shares outstanding in the first quarter.

I'll now discuss the performance of our individual businesses in more detail starting on Page 7. Revenue for our Facilities Maintenance business was $604 million during the first quarter of 2014, up $43 million or 8% from the first quarter of 2013. We estimate that MRO market grew approximately 2% in the first quarter of 2013; growth initiatives contributed approximately $31 million of the first quarter work. Facilities Maintenance's adjusted EBITDA for the first quarter of 2014 was $109 million, up $9 million or 9%. This represents operating leverage of 1.2x. Like all of our businesses we continuously to look for opportunities to ensure we save as we grow as Facilities Maintenance.

Revenue for Waterworks business was $551 million during the first quarter of 2014, up $28 million or 5%. We estimate the market grew approximately 1% in the first quarter of 2014. Growth initiatives contributed approximately $21 million of the first quarter growth. Waterworks adjusted EBITDA for the first quarter was $41 million, up $3 million or 8%. This represents operating leverage of 1.5x.

Revenue for our Power Solutions business was $461 million during the first quarter of 2014, down $1 million or less than 1%. An unfavorable foreign exchange impact in Power Solutions' Canadian business resulted in decline revenue of $5 million. Excluding foreign exchange impact, revenues would have increased $4 million or approximately 1%. We estimate the market contracted by approximately 1% in the first quarter of 2014. Power Solutions also had a difficult comparison in the first quarter of 2014 as first quarter 2013 sales grew 11% over 2012. We include additional disclosure on Page 20 of our presentation detailing our business unit prior period comparables. Power Solutions' adjusted EBITDA for the first quarter of 2014 was $18 million, flat when compared to the first quarter of fiscal 2013.

Revenue for our Construction and Industrial Business was $344 million during the first quarter of 2014, up $34 million or 11%. We estimate the margin grew approximately 5% in the first quarter of 2014. Growth initiatives contributed approximately $20 million of the first quarter of 2014 growth, while end market improvement contributed approximately $14 million of growth.

Construction and Industrial adjusted EBITDA was $22 million, up $8 million or 57%. This represents operating leverage of 5.2x.

On Page 8, we detailed that we ended the first quarter of 2014 with net debt of $5.6 billion. We ended the first quarter a typically our highest borrowing level. As seasonal working capital need combined with April semi annual interest payment on our notes to create a usage of cash during the first quarter. During the first quarter of fiscal 2014, we paid cash interest of $206 million. We continue to maintain significant liquidity of approximately $900 million that have no significant debt maturities until 2018. We remained committed to delivering the company which in short term will be accomplished on EBITDA growth and the use of cash from operations to pay down debt. As always, we continue to actively evaluate opportunities to delever and reduce our interest expense.

We paid $1 million in cash taxes in the first quarter primarily for Canadian and U.S. state taxes. As a result of our $2.3 billion pretax Federal Net Operating Loss Carryforwards, we do not expect to pay significant cash tax in short term. Our 2014 annual cash taxes will range from approximately $10 million to $20 million. For your reference, we expect 2014 GAAP taxes to be similar to 2013 $62 million provision as we currently maintain evaluation allowance on our net operating loss carryforwards.

Also, I want to give a quick update on a couple of the one time items we shared with you during our 2013 yearend conference call. We are on track to exceed our execution objectives associated with the strategic disposal of our Litemor operation in Canada. As planned, we still expect the disposal to fully complete by the end of the second quarter. And we are also on track with our restructuring actions that were identified and initiated during the fourth quarter of 2013. We estimated a $5 million charge in the first half of 2014 associated with the actions and took a $3 million charge in the first quarter of 2014. We expect to take an additional $2 million in the second quarter to finalize these activities. We expect the payback period through a permanent reduction in cost of less than one year for these actions. Both activities are good examples of proactive and disciplined execution to focus and save as we grow.

On Page 9, we provide monthly sales trends performance. As we mentioned, the first quarter was impacted by the continuation of severe winter weather. Our February 2014 sales were $609 million, an increase of 4.1% over February 2013. In our March 2014 sales were $659 million, an increase of 4.2% over 2013. As the weather improved, we did see improved financial performance. Our April 2014 sales were $893 million, an increase of 7.5% over April 2013. Although it is difficult to quantify, we believe there was some degree of catch up effect in April for demand that otherwise was postponed by winter weather impact of February and March. May, our fourth month of fiscal year 2014 close June 1, so we can provide preliminary May sales results. We will not comment on May results beyond sales. May sales were $712 million which represents an increase of 9.6% versus prior year. There were [19 seven] days in May in both fiscal 2014 and fiscal 2013. Preliminary May year-over-year average daily sales growth by business was 8.6% for Facilities Maintenance, 12.3% for Waterworks, 6.4% for Power Solutions and 13.7% for Construction and Industrial. We also believe there are some elements of catch up effect in May. As I mentioned it is difficult to accurately quantify but we believe the catch up effect for April and May could represent an approximate 200 basis points tailwinds for the two months. Meaning we believe that HD Supply's February and March average daily sales growth may have been negatively impacted, and April and May have been positively impacted by approximately 200 basis points.

Our comments on our second quarter guidance and our end market outlook shortly.

We aren't prepared to comment on June performance given we only recently finished our first week of the month. The fiscal month ends June 29. As you would expect June and July are impactful month in our second quarter as they historically represent the start of the summer selling season.

Turning to Page 10 for our second quarter 2014, we anticipate revenue to be in the range of $2,350 million and $2,450 million. Adjusted EBITDA in the range of $240 million and $250 million. And adjusted net income per diluted share in the range of $0.42 and $0.49. Our adjusted net income per diluted share range assumes a fully diluted weighted average share count of approximately $200 million. At the mid point of the ranges, our quarterly sales and adjusted EBITDA translate into 7% and 12% growth respectively.

We continue to use our annual framework of end market growth expectations in addition to our estimate of growth in excess of market to illustrate our current perspective on full year sales outlook.

As we see on Page 11, we remain cautiously optimistic as continue recovery of our end markets in 2014. Construction activity seems to be gaining traction. As Joe mentioned, we are closely watching the residential data points as we enter a critical point of the selling season. As of today however our current annual expectations for our end market are unchanged from our March 25 earnings call. We are expecting 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 stable MRO market with a 1% to 2% growth. These specific end markets implied approximate 4% 2014 market growth estimate for HD Supply. As we see on Page 12 and as Joe mentioned, we are executing our five growth plays. We reaffirm our controllable execution target range HD Supply performance of 300 basis points in excess of our estimate of market growth.

On Page 13 we also reaffirm our fiscal year 2014 operating leverage target of 1.5x to 2x. As we have mentioned previously and we saw this quarter, seasonality, cyclicality and investment timing may result in variation in the operating leverage calculation on a quarterly basis. Thank you for your continued interest in HD Supply. And I would now like to turn the call over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions).

Our first question comes from the line of Nigel Coe of Morgan Stanley. Your line is open.

Mike Sang - Morgan Stanley

Hey, guys, it's actually Mike Sang for Nigel, good morning. So I knew you guys have been reluctant to talk about pricing in the past but can you give us a general flavor on where the price environment stands? And if you could give us some granularity by segment that would be helpful.

Joe DeAngelo

Yes. The pricing environment is the same as it was last quarter consistent with what has been through a last that year or so. It is competitive environment out there. And we try every day to our earn value for the reliable service and the product and with the more big businesses that people have more time to price those are obviously more aggressive so I would say Waterworks heavily bid based business, White Cap is bid content, I associate with it Facilities Maintenance to a lesser extent, we have offsetting cycles of those contracts coming and do -- so you see it is variability but in all cases it is a tough, fighting environment and it has been tough fighting environment for at least the last five or six quarters.

Mike Sang - Morgan Stanley

Got it. And then you gave a lot of color on res and non- res in your market breakdown. I know you didn't change your outlook for the structure but it seems like power and muni are going opposite direction. Can you may be talk about that and break that up and what are you seeing specifically in the power and muni end markets?

Will Stengel

Mike, hi, it's Will. Yes, I think we get asked often about sort of improving muni markets, tax receipts seems to be getting et cetera, I believe that despite improvement in tax receipt certainly on the water and construction side, those capital projects tend not to be, those outlaid and so that might be the case, we are not necessarily seen that in the pick up in the end market. There are some markets where we think that muni spending is occurring but that activity tends mostly to be difficult to predict and smaller for its fixed activity but in generally speaking needs of this muni confidence to fund these projects still isn't there yet but we are confident that there is pent -up demand that there will be need to be released at some point there.

Operator

Thank you. Our next question comes from the line of Hamzah Mazari of Credit Suisse. Your line is open.

Hamzah Mazari - Credit Suisse

Hey, good morning, thank you. I realize you guys are targeting 1.5 and 2 two times op leverage this year. May be if you could give us a sense of how operating leverage differs between your business lines? Are there any segments where structurally op leverage is higher than others?

Evan Levitt

Yes. If you take look at Page 21 in the earnings presentation that we release, we show that historical operating leverage for the last three years by business. So certainly what you are going to see is the operating leverage-- there is more opportunity to grow operating leverage in our businesses that are near there improvement from the economic downturn of 2009-2010. So you see our construction and industrial business has been successful in improving operating leverage more so than facilities maintenance which is the more mature business.

Hamzah Mazari - Credit Suisse

Got it. And just a clarification question. On the 200 BP, positive impact in April and May, where do you see that impact specifically? Was that in Waterworks?

Evan Levitt

Certainly our Waterworks business is impacted by weather, so we are seeing that in Waterworks, Construction and Industrial and Power Solutions. This Facilities Maintenance is lesser sale impacted by weather.

Operator

Thank you. Our next question comes from the line of John Inch of Deutsche Bank. Your line is open.

John Inch - Deutsche Bank

Thank you. Good morning, everyone. So Canada, could you guys give us a sense of how your business in a collective performed in Canada because Canada has been a source of drag for other companies I think including distributors and for those who been there, the Toronto, for instance its condo market look like there sort of been a bubble, just what happen in the quarter and then just kind of what's your outlook there?

Joe DeAngelo

I think our biggest operation in Canada is Power Solutions business up there which is just tremendous business for us. We have great market share position and we continue to extend services with those customers up there and a great operator in Gary Walker who has run that business for a number of years. So we feel very good about that business exclusive of the exchange rate, great penetration there. And then we also have our Facilities Maintenance business there that is a direct extension of our business in the state which is doing well and maintenance market and it is hold up pretty well and then our Construction and Industrial business under the brand of Brafasco which is now part of our old White Cap of construction and industrial business is a great industrial fastener based business. So in all cases I think if the quality of business model, quality of leadership as opposed to what's going on in that market place up there but we don't find it to be a bad market for us.

John Inch - Deutsche Bank

So Joe your growth rate in Canada are sort of -- are they narrowing the growth rate for the U.S.? Which would be a pretty big out performance actually on a relative basis?

Joe DeAngelo

Yes. I would say they are doing that. They are similar.

John Inch - Deutsche Bank

Okay. Can I -- you brought the power business. Can I ask you-- you guys took restructuring in the power business, it has been a focal point, looks like the trends are little bit better may be some of that seasonal who knows but your margins are still flat at pretty low levels. Your out margin is 2.6%, do you expect the restructuring benefits something-- when you expect that was to kick in and what sort of the cadence of margin that you would expect given the framework of the top line over the course of the coming quarters?

Evan Levitt

Yes, certainly we give just that the benefits from the restructuring to kick in and to some extent they already have. Our sales were down and were so slightly for the first quarter and the EBITDA was flat so we did offset 100% of inflation, part of that is due to the restructuring actions we -- that have take place. And if we take a look at Power Solutions also, they had a very difficult comp in the first quarter. Their comps relative to 2013 get much easier from the second quarter on.

Joe DeAngelo

And it's the team that has great momentum John. And it just absolute great momentum going to lift their pipeline and their ability to continue to expand their services within their existing customer base. So we are very proud of that team and our execution.

John Inch - Deutsche Bank

So are you -- so I am clear are you suggesting ex the compare, I mean just trying to understand why again are the margins flat? Is it -- are you seeing the compare was difficult and is it just the time to allow the restructuring benefits to flow through or is there something about the quarter or something? Why was the margin -- I realized the outlook is good, despite when the margins little bit better year-over-year, that's one I am trying to understand.

Evan Levitt

Yes. Well, there is always inflationary pressure that we need to offset with productivity and cost savings and certainly done that in the first quarter. We do expect that to pick up as we go through the year and we are working hard everyday to improve our margins.

John Inch - Deutsche Bank

That's fine. One last one, corporate end, other and eliminations was a drag of $5 million EBITDA last year sort of flat, is there something as you kind of peel the onion on that, why the delta of improvement from a sort of drag to flat, because that obviously help your adjusted EBITDA print this quarter.

Evan Levitt

Sure. Certainly we do see some of the benefits from the restructuring in the corporate function as well. They are seeing there as well as our overall effort to save as we grow across all of our businesses including the businesses that are in the other.

John Inch - Deutsche Bank

Okay. So there is one timer that was actually true sort of --it was structural, is that the way you are describing it?

Evan Levitt

That's right. Nothing unusual.

Operator

Thank you. Our next question comes from the line of Deane Dray of Citi. Your line is open.

Deane Dray - Citi Research

Thank you. Good morning, everyone. Hey, I know you are going to be limited in your comments on June but my question is what's your best guess here in terms of the weather snap back? Did it mostly get normalized in May or do you still expect will see catch up in some of these project activities in June?

Evan Levitt

Well, we do think that like I said we definitely got some sense there in April and May from the weather-- at this point in time I think most of that snap back has occurred and we should be reverting back to our more normalized market. So if you look at our first four months February through May, we generated on average about a 7% growth rate. We think that's about kind of our trend or trajectory and that's what implied in our guidance.

Deane Dray - Citi Research

Great. And then on the growth investment. You did $70 million last year, you did $15 million this quarter, what should be kind of linear spend rate, should we expect that for again in the second quarter and how do you expect those funds to flow?

Evan Levitt

Yes. We are certainly continuing to invest in our growth and we are not -- we are not intentionally trying to reduce that investment. As you know much of our investment is in people and one of the gating factors there is identifying and hiring the high quality talented folks with good industry knowledge. So as we identify them we will bring them on board.

Deane Dray - Citi Research

So we should expect the same level of spending linear throughout the balance of the year?

Evan Levitt

Yes. You could see from variation is similar.

Deane Dray - Citi Research

Great. Just one last question for me. Just if you could clarify in the Waterworks' business. Just talk about-- what's the mix between what might be called MRO breaking fix versus project spending? And the ever sense of what the normalized mix is for that business.

Joe DeAngelo

We think it is about fifty-fifty, hard to know but it is about fifty-fifty for us.

Operator

Thank you. Our next question comes from the line of Winnie Clark of UBS. Your line is open.

Winnie Clark - UBS

Good morning. Just to talk a little bit more on the second quarter guidance. I know you believe you benefited from some pent up demand in the April and May timeframe. But with underlying end market improving and what looks like slightly is your comparison over the next couple of months. I am just curious as to why we shouldn't see an improvement at least from that 7% kind of normalized rate that you believe you saw in April and May.

Evan Levitt

Yes, well, like what we said we are cautiously optimistic on the market but for right now we are still expecting a weighted average market improvement for HD Supply of about 4%. And we remain committed to our 500 basis points out growth performance that lead us back to about that 7%.

Winnie Clark - UBS

Okay, great and then on just talking about the out growth with 400 basis points in the quarter specifically, now growth in Facilities Maintenance and White Cap above your targeted range, while you have that long-term ranges you hold out there, is there anyway-- should we think about you are being kind of towards the higher end of the range particularly in those businesses in the near term?

Joe DeAngelo

No. Our targets remain 300 basis points of outgrowth. We work hard everyday to do better than that. But we think 300 basis points is the appropriate target.

Operator

Thank you. Our next question comes from the line of Keith Hughes with SunTrust. Your line is open.

Keith Hughes - SunTrust

Thank you. My question is in the MRO market. Excellent share gain for you this quarter and previous quarters as well. The lower view or the lower growth view of the industry as a whole can you speak more among the different end use of market or what you are seeing there in trends so far this year?

Will Stengel

Keith, it's Will, it is still maintenance, about 60% of business is multi family so looking at occupied staff, vacancy rate et cetera and those are relevant metrics, we find it very difficult to find perfect correlation between end market data and that industry but generally speaking it tend to be a low single digit 1% to 2% grow over year end and year out. And about 50% of the business is hospitality. So looking all the metrics in around revenues per average room et cetera again those all seems to be favorable trends and solid as they have been over the last couple of years. And then lastly, we have about 10% of business in health care which for us is senior care living facilities which has very similar dynamics to occupied stock and across the board all of these markets tend to be stable and solid.

Keith Hughes - SunTrust

Given the -- given how low vacancy rates are in multi family right now, doesn't that create more churn of products as more maintenance work has been done and the more basically full units?

Joe DeAngelo

Well, really need to happen as you need to have people moving out of that facility, that they are churn, you have to have that pick up of that single-family housing or people --that we turn to churn up so we pick up on the residential road and more families are moving in and out of apartment if the turn out in apartment that gives you a bump, the maintenance amount while you stay in the apartment continuous to be stable.

Operator

Thank you. Our next question comes from the line of Josh Wilson of Raymond James. Your line is open.

Josh Wilson - Raymond James -

Thank you for taking my questions. A few housekeeping items here. Could you quantify the specific balances of the federal and state NOLs at the end of the quarter?

Evan Levitt

Yes. On the tax effective basis the federal NOL is worth about $800 million and the states worth about $200 million for a combined $1 billion tax affected NOL.

Josh Wilson - Raymond James -

Thanks, and then as it relates to Waterworks, I know the winter weather was a headwind to activity levels. Are you hearing anything about additional damage or above normal damage to the pipes from freezing pipes, and those sorts of things, or is that not really much of a potential tailwind as we look forward?

Joe DeAngelo

Historically if you go back with the really severe weather particularly, if they just had non delta iron steel pipes that was damaged, we expect there will be a little bit of that but I wouldn't comment as material for us.

Josh Wilson - Raymond James -

Okay. And if I might ask one more again on Power Solutions margins. Given the inflation that you see in your fixed costs and the other puts and takes, how fast does the top line need to grow in that business to expand your margins?

Joe DeAngelo

The actions that-- the reconstruction actions we took were to enable Power Solutions to expand their margins in a low growth environment so if we get a couple of growth it should be -- to begin expanding our margins.

Operator

Our final question comes from the line of Robert Barry of Susquehanna. Your line is open.

Robert Barry - Susquehanna Financial Group

Hey guys, good morning. Just wanted to ask about the operating leverage, very healthy in the quarter. I know it's a weaker volume quarter, so that can move things around a little more, but any -- anything noteworthy to call out on what drove that and then the outlook implies it will take back down into your expected range. Any comments on that?

Evan Levitt

Sure. Again take a look at Page 21 as the reference to look our historical operating leverage. The current quarter was impacted by construction and industrial 5.2x leverage, so that certainly impacted the total company leverage rate favorably. And if you look at the history on Page 21 as you pointed out, quarter one and quarter four provide the best opportunity for out performance based on lesser volumes. So it is easier to increase that EBITDA growth rate percentage. You also see that construction and industrial, if you go back to say couple of years, we got listed it non meaningful because they are comparing years with negative numbers as we get further and further and moved from that down turn it gets -- it does get a little tougher so I would say that construction and industrial really drove the current quarter out performance and we do not expect to see that certainly in Q2 and Q3 of the higher volumes, it will tend -- it should trend back more towards 1.5x to 2x.

Robert Barry - Susquehanna Financial Group

Great, that's helpful. And actually in a follow-up for the question earlier, do you think you could level set us on what that corporate other expense will be through the year?

Evan Levitt

Well, corporate and other obviously included three of our other businesses. So for the year I would expect some improvement versus the corporate and other last year. It should not be net expense.

Robert Barry - Susquehanna Financial Group

Okay. So on the EBITDA line, kind of a modest improvement over the last year?

Evan Levitt

That's right. On EBITDA line of modest improvement over last year and it will be positive.

Operator

And I'm showing we have no further questions in the queue at this time. I would like to turn the call back over to Joe DeAngelo for closing remarks.

Joe DeAngelo

Well, thank you for questions. In summary, I am pleased with our solid performance in the first quarter. The weather makes the data difficult interpret but I believe we are off to good start. We remain cautiously optimistic that our end markets will continue to build on the emerging strength that we are seeing in select geographies. And as always, we will stay focused on controllable execution to continue to deliver profitable growth in excess of market and save as we grow. Our actions will always be centered on understanding and then improving our ability to meet the need of our customers. We will redeploy talent and capital to the areas of this company that believe deliver highest return to our shareholders. Thanks for your continued support.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a wonderful day.

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Source: HD Supply (HDS) CEO Joe DeAngelo on Q1 2014 Results - Earnings Call Transcript
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