Jack Keough: Construction Powers HD Supply's Q3 Growth

Jack Keough discusses HD Supply's latest strong quarterly earnings, released Tuesday, along with CEO Joe DeAngelo's comments about how the Construction & Industrial business segment was the driving force.

HD Supply’s solid third quarter in which profit quadrupled from last year was aided by its Construction & Industrial Business-White Cap, a trend that the company expects to continue in 2016.

Joe DeAngelo, chairman, CEO and president of the Atlanta-based company, said that revenue for its Construction and Industrial Business (C&I) recorded $451 million in sales for the quarter, up $40 million or 10 percent.  Net overall sales for HD Supply’s business groups for the quarter were up 5 percent.

"We are pleased with the performance of our Construction & Industrial business, which is growing well despite a difficult third quarter 2014 comparable growth rate of nearly 17 percent," DeAngelo told financial analysts during a conference call Tuesday.

He said that C&I  is benefiting from the company’s focus on its 15 priority markets and "relentless desire to drive customer success."

HD Supply was No. 4 on Industrial Distribution's 2015 Big 50 List.

DeAngelo said that the company’s view of its end markets are unchanged from its September expectation.

"We believe the construction end market continue to be solid. In particular, non-residential demand continues to be strong in our priority districts. We continue to see cranes across the skyline in most of our major markets and our Construction & Industrial teams are executing well. We believe the projects represent multi-year opportunities," he said according to a transcript of the call as provided by www.seekingalpha.com

"I think the C&I’s performance obviously speaks for itself. If you look at all of our priority districts, the sentiment and the customer activity continues to be good," he said during the call.

Earlier this year, C&I opened three new locations in Boston, Los Angeles and Killeen, Texas to capture a larger share of those cities expanding construction business.

 The new locations provide industrial, commercial and residential contractors with an extensive inventory, combined with will-call, site delivery and direct ship options.

For 2016, HD Supply expects  the residential construction market and non-residential sectors to each increase approximately by mid single-digits.

That forecast seems to be in line with what several economists covering the construction industry predict to see next year following a successful 2015 for many builders and others serving the market.

Much of the non-residential construction activity this year can be traced to a number of massive projects including Apple’s new $5 billion headquarters, several Amazon fulfillment centers as well as large projects from Home Depot and Walmart. But there was also a tremendous amount of activity along the Gulf Coast for large liquefied natural gas terminals as well as growth in construction for schools and institutions. Many of those projects will continue into 2016.

HD Supply’s two other business units also saw a sales increase in Q3. Facility maintenance sales grew 8.7 percent while Waterworks increased 1.4 percent.

The company is not forecasting significant increases in those businesses in 2016. It expects the municipal water market, for example, to be down single digits to up low single-digits and for the MRO market to increase approximately 1 to 2 percent.

For its fourth quarter, HD Supply anticipates revenue to be in the range of $1.615 billion and $1.665 billion.

HD Supply’s profit for the third quarter was also improved by redeeming $675 million of debt The company used the proceeds from the sale of its power solutions business unit, which was sold to Anixter International for $825 million, a deal that was completed in October.

HD Supply also disclosed in September a restructuring charge of approximately $10 million to $20 million over a 12-month period consisting primarily of severance, relocation and related costs as the company  "realigns our leadership to functional support teams as part of our transformation."

The company expects a payback on the overall charge through a permanent reduction in cost within 2 years. "We are on track with our realignment and we have incurred approximately $4 million in the third quarter of fiscal 2015," DeAngelo said.

DeAngelo also noted that Jim Rubright is the new independent Lead Director for the company. Rubright previously served as Chairman and Chief Executive Officer of RockTenn Company from 1999 until his retirement in October 2013. He also served as an Executive Officer of Sonat, a publicly traded energy holding company from 1994 to 1999 in various capacities. Prior to 1994, he was a partner in the law firm King & Spalding.