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HD Supply Holdings, Inc. (NASDAQ:HDS)
Q4 2017 Earnings Conference Call
March 13, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the HD Supply Fourth Quarter and Full Year 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]

I would now like to turn the conference over to Charlotte McLaughlin, Investor Relations. Please go ahead.

Charlotte McLaughlin -- Senior Manager, Investor Relations

Thank you, Operator. Good morning, ladies and gentlemen, and welcome to the HD Supply Holdings 2017 Fourth Quarter and Fiscal Year End Earnings Call. A copy of the earnings press release and presentation can be found on the Investor Relations tab of the company's website at www.hdsupply.com.

Joe DeAngelo, our CEO, will lead today's call and provide an overview of our 2017 fourth quarter and fiscal year end results, comments on our recent execution and outlook, and give an update on the Facilities Maintenance business unit. Following Joe's remarks, John Stegeman, President of Construction & Industrial, will give an overview of the A.H. Harris acquisition and an update on the recent performance of the Construction & Industrial business units. Evan Levitt, our CFO, will then provide an overview of the main areas of interest from the investment community before going into detail on the 2017 fourth quarter and full year performance, comments on monthly sales, and provide guidance for our 2018 first quarter and full year. We will then conduct Q&A and conclude with Joe's 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 based on management's beliefs and assumptions and information currently available to management and are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that the forward-looking information presented is not a guarantee of future results and that actual results 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 for the fiscal year ended January 28, 2018, 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 metrics, 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.

Thank you for participating on the call and for your continued interest in HD Supply. And with that, I will now turn the call over to Joe DeAngelo.

Joseph DeAngelo -- President, Chief Executive Officer

Well, thank you, Charlotte. Good morning, everyone. Thank you for joining us today for our 2017 fourth quarter and fiscal year end call. As always, it is my privilege to share our company's results with you on behalf of the over 11,000 HD Supply associates who work hard every day as one team driving customer success and value creation.

I am proud of our performance in 2017. The team worked hard to elevate our performance and execute a powerful finish, which I believe sets us up for continued and disciplined success in 2018. Despite the continually competitive environment and a series of natural disasters that have personally impacted a large number of our associates, we delivered profitable growth and achieved several notable milestones.

Turning to the highlights on Page 3 for the full year 2017, we had a strong performance, delivering 6% sales growth, 8% adjusted EBITDA growth, and 54% adjusted net income per diluted share growth versus 2016. Our strategic execution delivered sales growth in excess of our market estimate of approximately 300 basis points for 2017, and that translated into operating leverage of 1.2 times, which was slightly better than our most recent expectations. We also delivered $408 million on of free cash flow in 2017 and finished the year at a net debt to adjusted EBITDA ratio of 2.2 times.

On Page 4, the fourth quarter finished the year with a very strong performance. We achieved 9% sales growth, 25% adjusted EBITDA growth, and 113% adjusted net income per diluted share growth in the fourth quarter. We also continued to see strong cash flow conversion versus prior year.

Turning to Page 5, I'd like to highlight some of our execution achievements from 2017. I'll then discuss the Facilities Maintenance business before handing it over to John, who will walk through the Construction & Industrial achievements. In 2017, we sold our Waterworks business to Clayton, Dubilier & Rice for $2.5 billion in an extremely efficient transaction, and netted proceeds of $2.4 billion after taxes and transaction costs. This transaction allowed us to improve our business mix, gave us greater flexibility to accelerate investment spend for long-term growth, and helped to achieve our targeted capital structure.

In conjunction with the Waterworks sale, we redeemed $1.25 billion of our first priority notes, paid down $700 million of our US revolver, and amended our 5.75% outstanding senior notes and $1.1 billion term loan facilities to enhance our financial flexibility. This brought our financial leverage ratio into our targeted 2-3 times net debt to EBITDA earlier than previously anticipated.

As a result of reaching our targeted capital structure early, we were able to accelerate our investment plans and increase our investment in talent across the business, while continuing to enhance our selling channels and improve our enabling functions, such as debt analytics and category management. I will go into more detail around this shortly.

These actions also enabled us to initiative two $500 million share repurchase programs. On June 6, 2017, we announced the approval of our first $500 million repurchase program, which was completed rapidly. Subsequently, we announced the second repurchase program of $500 million in August 2017. Under these programs, for the full year Fiscal 2017, we repurchased over 17 million shares of stock for about $541 million at an average price of $31.64.

In January 2018, we announced that we had entered into an agreement to acquire A.H. Harris Construction Supplies for approximately $380 million. A.H. Harris will accelerate the growth for the Construction & Industrial business on the East Coast, particularly in the northeast. The deal closed on March 5th and was fully cash financed. John will speak more about this shortly.

When thinking about a long-term strategy around capital allocation, we are committed to allocated capital to the highest return investments available. This past year is a good example of our execution. We repurchased over $500 million in HD Supply stock at an attractive price, and we agreed to acquire A.H. Harris for $380 million. We believe both of these investments will generate strong returns for our shareholders.

2017 also saw a much-needed overhaul of the corporate tax system which, as an North American only company, we welcome. As you know, we are currently utilizing net operating loss carry forward to offset much of our income tax liability. However, as Evan will share, we do get some immediate benefit in our cash taxes in 2018 and we'll get more significant benefit in 2019 when we expect our net operating loss carry forwards to be exhausted.

I am also pleased to announce that we will be sharing the benefit of tax reform with our hourly associates who work hard every day to deliver exceptional service to our customers. We will provide our hourly associates a one-time bonus of up to $1,000.00.

I will now discuss Facilities Maintenance. In 2017, I turned over the day-to-day leadership of the Facilities Maintenance business to Will Stengel, who has been in the role since June. Under his leadership, the Facilities Maintenance business has continued to strengthen and build momentum throughout the year. The move to Atlanta, and the creation of Will's management team, is now complete. Will has overseen the hiring of a new sales leader, a new supply chain leader, and a chief digital officer. His team has now been in place for several months and I believe it is the strongest team in the industry.

With a new sales leader, we have transitioned to a new compensation program, which appropriately awards our sales people for outperformance. We have also substantially completed the transition from geographic sales territories to specific, targeted account assignment. We expect to see the benefit as we enter the 2018 selling season.

As I mentioned before, we accelerated our investment in the Facilities Maintenance business after the sale of Waterworks. We accelerated $10 million of investment in 2017 and we expect to invest an additional $12 million in 2018 in both our selling channels and our enabling functions. Investments within our selling channels are being made in our sales force, our e-commerce site, and our mobile application. Investments within our enabling functions are focused on data analytics, supply chain, and category management capabilities. We are pleased with our progress and we are seeing customers respond favorably.

Other notable improvements in the Facilities Maintenance business include or Property Improvement business, which has returned to outgrowth relative to the Facilities Maintenance average sales growth. With this in mind, I would like to congratulate Will and his team on a great finish to the year and a fantastic start to 2018.

In summary, we enter our Fiscal Year 2018 from a position of strength, with new capabilities, intense focus, and excitingly, we'll be doing so from our new HD Supply Leadership Development Center in Atlanta.

I will provide some closing comments following Q&A. I will now turn the call over to John.

John A. Stegeman -- Executive President, Construction & Industrial

Good morning, everyone, and thank you, Joe. I'm honored to address you on behalf of our Construction & Industrial associates who have worked relentlessly in 2017 to deliver another strong performance.

Continuing on Page 5, 2017 saw the business building from a strong foundation to achieve double-digit sales growth. In January of 2018, we announced the definitive purchase agreement to acquire the A.H. Harris family of companies, including Kenseal and HarMac.

Evan will take a deeper dive into the numbers later in the call, but first I'd like to share some highlights from 2017. We were particularly pleased that our 2017 sales growth accelerated throughout the year, culminating with 16.3% growth in the fourth quarter. This quarterly growth represents our strongest quarter in more than five years.

The significant double-digit growth continued into February, as the business grew 17%, partially helped by dry conditions in California this January and February compared to 2017, that saw significant rain. While year-over-year comparisons will become more challenging as 2018 progresses, our team is off to a terrific start.

Despite a challenging gross margin environment, with strong sales growth and expense leverage, we delivered over 10% EBITDA margin, an increase of 60 basis points over 2016. 78% of our core Construction & Industrial White Cap branches are now performing at a double-digit EBITDA rate, up two percentage points versus prior year. 47 of our core C&I White Cap branches now have in-store contractor purchases making up 40% or more of their sales. As you know, in-store purchases have a higher margin contribution with a lower cost to serve. This service also keeps us very connected with our loyal customer base.

In some of our best performing districts, we saw year-over-year sales growth exceeding 20%. This trend continued in February. Finally, we opened four new locations in priority districts, including Frisco and Aledo, Texas, Corona, California, and Downsview, Ontario.

As a reminder, we have not changed our views on the construction end markets. We continue to believe that our nonresidential construction end market is growing at low- to mid-single digits, and that our residential construction end market is growing mid-single digits. We are seeing broad-based strength across our West Coast markets and Canada.

One year ago, we were concerned that many larger construction projects were nearing completion with a broadening gap in new projects. I am pleased to share that new projects, including sports stadiums, airport expansions, hospitals, care centers, and multitenant buildings have filled this gap. These larger projects are quoted competitively, but provide nice profitable business over a long period of time.

Our biggest headwind for 2017 was rising commodity costs. Steel rebar is being impacted by a reduction in import steel entering the country due to government tariffs. We have been in an inflationary domestic rebar market all throughout 2017 and, with the additional 25% tariffs recently ordered by the President, it appears this will continue well into 2018.

While escalating prices help with revenues, both smaller and mill direct distributors bid future projects utilizing old costs. When you couple the pressure a rising market imposes on our customers, gross margins naturally tighten. In total, rebar unfavorably impacted our Construction & Industrial fourth quarter gross margins by 45 basis points, and our full year gross margins by 37 basis points. We will continue to monitor the government's actions as it relates to future tariffs on import products.

I will now turn to our recently announced acquisition of A.H Harris, which closed on March 5th. We have always had great respect for the A.H. Harris team and their experienced group as they share our passion for customer service and are known as strong concrete accessory distributors. With their 55 locations, this significant business is a perfect fit for HD Supply as it increases our presence in key East Coast markets.

This acquisition will accelerate our customer service efforts in key restoration and construction markets from the Carolinas to Northern New England. Financial profiles are very similar to our C&I White Cap business, and their fabrication, rental, and waterproofing capabilities will leverage well across our existing network. We expect this transaction to be accretive in the first year, and expect synergies in the first 18 months. We are very excited to welcome the more than 600 A.H. Harris associates to our HD Supply family.

In conclusion, we believe we finished 2017 with tremendous momentum, and our team is energized to deliver on a strong 2018. I look forward to any questions you may have at the end of the call and will now hand it over to Evan.

Evan Levitt -- SVP, Chief Financial Officer

Thanks, John, and good morning, everyone. On Page 6, we highlight areas of recent investor focus and share with you our latest perspective on these topics. First is corporate tax reform.

As a result of the passage of the Tax Cuts & Jobs Act, we have recorded a noncash charge to our tax provision of approximately $72 million. This charge reduces the value of our net deferred tax assets, primarily our net operating loss carry forwards, to reflect that they will now shield future income from federal tax at a 21% rate instead of a 35% rate. Our net operating loss carry forwards will still shield the same amount of future income form tax.

As of the end of the fourth quarter, we have approximately $790 million of gross federal net operating loss carry forwards, which are available to offset future taxable income. We expect these federal not operating loss carry forwards to reduce the amount of tax we would ordinarily pay through the middle of 2019. Our future expected GAAP tax rate, previously estimated at 38-39% is now estimated at 25-26% as a result of the recent change in tax law.

Next, is rebar pricing. As John addressed this in his comments, I will move on and leave this open for the question-and-answer session.

Winter weather. As we've stated in the past, whether can have a significant impact on our results as unusually cold and wintery weather can impact outdoor construction activities and our ability to safely deliver product. As a result, the fourth quarter of the year is always our most difficult to forecast. When we provide guidance for the fourth quarter, we assume a normal amount of winter weather across the country, but we obviously don't know when or where it will occur.

This year, we saw an unusually cold January with significant snow and ice across much of the eastern half of the country, including the southeast, which does not normally see a significant amount of winter weather. Our January sales reflect the winter weather impact, as we had distribution centers and branches closed for several days throughout the southeast. Despite the winter weather, we were pleased with our results for the fourth quarter, and with our preliminary sales results in the month of February, the first month of our 2018 first quarter.

Share repurchases. On August 8th, we completed our initial $500 million share repurchase authorization, purchasing approximately 15.9 million shares at an average price of $31.37. On August 29th, we announced that our board of directors authorized a further share repurchase of up to an additional $500 million of HD Supply shares.

Similar to the initial share repurchase, we are executing this additional share repurchase through open market transactions, under a 10b5-1 plan. Through March 12, 2018, under the second repurchase authorization, we have purchased approximately 1.6 million shares at an average price of $35.62, for a total of $55 million. We have approximately $445 million remaining on our existing share repurchase authorization.

The competitive environment. The competitive environment in which we operate remains intense. We have clarity of understanding of our customer needs, defined execution strategies to improve and evolve the customer experience, and will focus on what we can control to extend our differentiation.

Now, turning to Page 7, I'll cover our fourth quarter results. We delivered sales of $1.183 billion, an increase of $98 million or 9% over the fourth quarter of fiscal 2016. Gross profit increased $37 million or 8.6% to $468 million. Gross margin was 39.6%, a 10 basis point decline over the fourth quarter of 2016. Our Construction & Industrial business' gross margin declined 70 basis points in the fourth quarter of 2017 compared to 2016. 45 basis points of the decline was due to increasing rebar input costs and an inability to pass all of increase on to customers due to the competitive environment.

The remaining 25 basis point decline in gross margins at Construction & Industrial is due to the mix of projects we served and products we sold. Our Facilities Maintenance gross margins are up 40 basis points on a year-over-year basis from the fourth quarter of 2016, reflecting strong category management performance.

Our selling, general, and administrative costs were up $11 million or 3.5% over the fourth quarter of 2016. As a percentage of sales, SG&A costs were 27.6%, a decrease of 140 basis points over the fourth quarter of 2016. The favorable SG&A performance was aided by the nonrecurrence of around $6 million of supply chain costs incurred in 2016 and good cost control discipline, partially offset by $2 million of accelerated investments in our facilities maintenance business.

Adjusted EBITDA for the fourth quarter of 2017 was $152 million, up $30 million, or 24.6%. Adjusted net income for the fourth quarter was $91 million, up $44 million, or 93.6% compared with the fourth quarter of 2016. This represents adjusted net income per diluted share of $0.49 compared to $0.23 in the fourth quarter of 2016. The increase in adjusted net income and adjusted net income per diluted share reflects the improvement in EBITDA and the reduction in our interest expense from the improvements in our capital structure following the sale of our Waterworks business. There were approximately 186 million diluted weighted average shares outstanding during the fourth quarter of 2017.

Before I discuss the performance of our individual businesses, I'd like to point out that we have modified the reporting of our business units. We are now allocating 100% of the cost of our corporate function to our businesses based on their estimated actual usage of corporate services. As we restructure our corporate function to reduce cost, we are sharing more resources across our corporate functions and the businesses, making it increasingly difficult to characterize a function as corporate or business unit.

The allocation of all of our corporate cost to our business better reflects the way we are managing our business going forward and makes each of our business units more comparable to their peers. In order to aid historical comparisons in our press release, we have provided the revised quarterly business unit adjusted EBITDA for the last three years, reflecting the full allocation of corporate costs. I want to emphasize, there is no change our historically reported consolidated financial results.

I will now discuss the performance of our individual business units in more detail, starting on Page 8. Revenue for our Facilities Maintenance business were $642 million during the fourth quarter of 2017, up $22 million, or 3.5% from the fourth quarter of 2016. For Fiscal Year 2017, revenue for Facilities Maintenance was $2.847 million, up $85 million, or 3.1%. We estimate that the MRO market grew approximately 100-200 basis points in the fourth quarter and the full year of 2017.

Facilities Maintenance's adjusted EBITDA for the fourth quarter of 2017 was $102 million, up $14 million, or 15.9%. This improvement in EBITDA is benefited by the nonrecurrence of $6 million of supply chain costs, partially offset by $2 million of accelerated investment. For the full year of Fiscal 2017, adjusted EBITDA was $499 million, up $17 million, or 3.5%.

Revenue for our Construction & Industrial business was $542 million during the fourth quarter of 2017, up $76 million, or 16.3%. For Fiscal Year 2017, revenue for our Construction & Industrial was $2.279 billion, up $216 million, or 10.5%. We estimate the market was up approximately 400-500 basis points for the quarter and approximately 400 basis points for the year. We estimate Construction & Industrial grew approximately 1100 basis points in excess of the market for the fourth quarter and 600 basis points for the full year of 2017.

Construction & Industrial's adjusted EBITDA for the fourth quarter was $50 million, up $16 million, or 47.1%. For the full year adjusted EBITDA, $232 million, up $34 million, or 17.2%.

Now, turning to Page 9, as of the end of the fourth quarter 2017, our federal gross net operating loss carry forwards approximate $790 million. On a tax-effected basis, at a 21% federal tax rate, our federal and state net operating loss carry forwards are approximately $250 million, representing the majority of our net deferred tax assets. We expect these net operating loss carry forwards to continue to reduce the amount of cash taxes we pay going forward through the middle of 2019.

During the fiscal year 2017, we paid cash taxes of approximately $29 million, primarily associated with Canadian taxes, US state taxes, and federal AMT, including $13 million associated with the sale of Waterworks. We estimate that we will pay cash taxes of approximately $2-4 million in the first quarter of 2018 and $11-13 million during Fiscal 2018. Reflecting the benefit of the Tax Cuts & Jobs Act, we expect our GAAP tax rate to be around 25-26% in Fiscal 2018.

We will see the majority of the cash flow benefit of the reduction in corporate tax rates when we become a regular taxpayer during the 2019 fiscal year. However, we have lowered our 2018 cash tax estimates by approximately $11 million as a result of the elimination of the corporate alternative minimum tax as part of the new tax law.

During Fiscal 2017, we generated $408 million of free cash flow. We expect to deploy our free cash flow in the most attractive return opportunities available. These include organic investments in the business, opportunistic tuck-in acquisitions, and return of cash to shareholders, currently through our share repurchase authorization.

2017 is a good example of our cash allocation priorities. In 2017, we repurchased shares worth $541 million and signed a definitive agreement to acquire A.H. Harris for $380 million. We believe both the share repurchases and the A.H. Harris acquisition will generate a strong shareholder return. We invested $29 million in capital expenditures in the fourth quarter of 2017, and $94 million, or approximately 1.8% of sales, for the full year of Fiscal 2017.

We estimate our ongoing annual capital expenditure requirements to be approximately 1.8-2% of annual sales. As of the of the fourth quarter, our net debt to adjusted EBTIDA leverage is 2.2 times, or 2.6 times on a proforma basis for the acquisition of A.H. Harris, which closed on March 5, 2018.

In Fiscal 2017, we began a restricting effort to reduce the cost profile of HD Supply and realign talent following our divestiture of Waterworks. We incurred $6 million of restructuring charges comprising primarily severance, relocation, and related costs. In total, we expect to incur $10-15 million under the plan and expect the plan to deliver a payback in approximately two years through a reduction in ongoing costs. We expect to complete the restructuring activities in the fall of 2018.

On Page 10, we provide fourth quarter 2017 monthly sales trend performance, as well as the 2016 comparable. In November 2017, we delivered sales of $372 million, an increase in average daily sales of approximately 9.8% versus November 2016. In December 2017, we delivered sales of $390 million, an increase in average daily sales of approximately 10.9% versus December 2016. In January 2018, we delivered sales of $421 million, an increase in average daily sales of approximately 6.8% versus January 2017.

In both years, there were 18 selling days in November, 20 selling days in December, and 23 selling days in January. February 2018, the first month of our fiscal first quarter 2018, ended February 25th. So, we can provide our preliminary sales results. We will not comment on February results beyond sales. There were 20 selling days in both February 2018 and February 2017.

February sales were approximately $391 million, which represents average daily sales growth of approximately 11.7% versus 2017. Average daily sales growth versus prior year by business was approximately 17.3% for Construction & Industrial and approximately 7.1% for Facilities Maintenance.

In 2017, Facilities Maintenance held its national sales meeting in February. In 2018, we will hold our national sales meeting in March. During the week of the sales meeting, many of our sales professionals and operations leaders are participating in the conference. We estimate a negative impact during the week of the conference to be approximately $3-4 million. February 2018 benefited from the change in conference timing, while March 2018 will likely be unfavorably impacted by a similar amount.

On Page 11, we continue to use our framework that includes end market growth expectations in addition to our estimate of growth in excess of market to illustrate our current perspective on the full year sales outlook. To inform our end market perspectives, we look at various data points, including customer, supplier, competitor, other publicly available data, and most importantly, our own field intelligence within our 15 priority districts.

We saw market sentiment improve throughout 2017, and we remain optimistic that our end markets will continue to perform through 2018 at similar levels. Although we will continue to refine our view as the year progresses, our current views for 2018 are for residential construction to increase mid-single digits, nonresidential construction to increase low- to mid-single digits, and the MRO market to remain stable, increasing 1-2%. These combined end market estimates imply an approximate 2-3% end market growth estimate for HD Supply's end market in 2018.

On Page 12, we share our perspective for the full year of 2018. For the full year of 2018, we anticipate net sales to be in the range of $5.760-5.910 million, with the midpoint of the range translating into approximately 14% growth versus the full year of 2017.

Our sales guide begins with our core growth of 300 basis points in excess of our 2-3% end market growth estimate. To that, we add the estimated sales from our recent acquisition of A.H. Harris, from the March 5th acquisition date through the end of the fiscal year. We believe A.H. Harris will contribute approximately $360 million of net sales to our Fiscal Year 2018 results.

Our Fiscal Year 2018 contains 53 weeks. Our 53rd week occurs within our fiscal calendar once every five or six years. This additional week will be reflected in our fourth quarter results and net of a holiday shift will add approximately $75 million to full year 2018 net sales.

We anticipate the full year 2018 adjusted EBITDA to be in the range of $815-855 million, with the midpoint of the range translating into approximately 14% growth versus full year 2017. Our EBITDA guide begins with our core business growth and our 1.5 times operating leverage target. To that, we have added the favorable comparison of the $7 million in nonrecurring supply chain costs that we incurred during Fiscal 2017.

We then add the estimated contribution from our A.H. Harris acquisition from the date of acquisition through the end of the fiscal year. We believe A.H. Harris will contribute approximately $40 million of EBITDA to our Fiscal Year 2018 results. The 53rd week net of the holiday shift will add approximately $7 million to EBITDA.

Finally, we consider our previously announced accelerated investment spend in Fiscal 2018 at an estimated $12 million. As always, seasonality, cyclicality, and one-time headwinds or tailwinds may result in a variation in performance on a quarterly basis. The resulting adjusted net income per diluted share is expected to be in the range of $2.99-3.21. Our adjusted net income per diluted share range assumes a fully diluted weighted average share count of approximately 186 million and does not contemplate additional share repurchases.

Our expectation for free cash flow for the full year of 2018 is around $500 million. This considers net working capital needs of approximately 18% of incremental sales and capital expenditures estimated at around 1.8-2% of annual sales. We expect to pay approximately $115-120 million in cash interest and approximately $11-13 million in cash taxes.

On Page 13, we share our perspective on our first quarter 2018 guidance. For our first quarter 2018, we anticipate net sales to be in the range of $1.325-1.275 billion, adjusted EBITDA in the range of $174-184 million, and adjusted net income per diluted share in the range of $0.60-0.66. Our adjusted net income per diluted share range assumes a fully diluted weighted average share count of approximately 186 million and does not contemplate additional share repurchases. At the midpoint of the ranges, our first quarter sales and adjusted EBITDA translate into approximately 11% and 14% growth respectively versus 2017.

The A.H. Harris acquisition closed on March 5, 2018, therefore our guidance includes A.H. Harris from this day forward. A.H. Harris' contribution to the first quarter is estimated at $50 million for net sales, $5 million for adjusted EBITDA, and $0.02 for adjusted net income per diluted share.

On Page 14, we consolidate our outlook views. The left-hand side of the page summarizes our first quarter 2018 outlook and the righthand side of the page summarizes our current full year 2018 observations. To summarize, we had a good finish to 2017 and we have strong momentum as we enter 2018.

...

I'd like to thank you for your continued interest in HD Supply. I would now like to turn the call over to the operator for our question-and-answer session.

Questions and Answers:

Operator

[Operator instructions] Our first question is from Ryan Merkel with William Blair. Your line is now open.

Ryan Merkel -- William Blair -- Analyst

Thanks. Good morning and nice quarter. First, I want to start with the outlook for 2018 as it relates to the core business because it was a little bit better than I was thinking. Can you confirm that Facilities Maintenance is back to a mid-single digit grower for the full year? And, how are you offsetting rebar pressure to get to the core operating leverage of 1.5 for 2018?

Evan Levitt -- SVP, Chief Financial Officer

First, on the Facilities Maintenance question, we're very pleased with our progress. We had a good fourth quarter, and the month of February had a 7% sales growth. Very encouraging. We do caution everyone that the 7% does reflect very favorable weather conditions we had in February and the shift in our national sales conference. It is our expectation that Facilities Maintenance show grow mid-single digit as we enter the selling season, which for us starts in the April timeframe, generally when the weather warms.

As far as your question on Construction & Industrial, and offsetting the gross margin pressure from rebar, you're absolutely right. Gross margin will continue to be pressured by rebar. It's our job to offset that through category management in other areas, to manage the rebar exposure as best we can, and to leverage our SG&A as we grow at a minimum 300 basis points in excess of market. That's our intent, and that's reflected in our guidance.

Ryan Merkel -- William Blair -- Analyst

Got it. The $12 million in accelerated investment in 2018. Should we still be thinking of that as front half loaded?

Evan Levitt -- SVP, Chief Financial Officer

No, the $12 million investment I would estimate as roughly $3 million a quarter. We're going to push through it as fast as we can, but there is only so much we can do and absorb in any one quarter and do it effectively. For modeling purposes, I would assume $3 million a quarter.

Ryan Merkel -- William Blair -- Analyst

Got it. Thanks. I'll pass it along.

Operator

Our next question is from Deane Dray with RBC Capital Markets. Your line is now open.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone. Since we have John on the line, I'd love to hear a little bit more about A.H. Harris, the attraction of the business. A bit more about what new supplier agreements or relationships might be brought in with this company, any kind of best practices as you see looking forward into the integration.

John A. Stegeman -- Executive President, Construction & Industrial

Sure. When you look at the Harris opportunity for our business, they are set up very similar to us in many respects. They are definitely a very strong concrete and concrete accessory house, which is core to our business and our Construction & Industrial White Cap business. They have very little overlap with their 55 locations. We have a little bit in four smaller markets that we will address. The talent of their people fits our model very, very well and we're very excited to be able to have them on the team.

From a supplier perspective, they actually bring a little bit more credibility and opportunity for us, particularly on the waterproofing side of the business. Several years ago, they acquired the Kenseal business, which is one of the premier waterproofing companies across the United States. We're going to be able to leverage that across our businesses and build on that strength with our other suppliers as you look at the concrete business. They also have some forming and shoring opportunities for us we can take advantage of as we grow that business down the balance of the East Coast and then across the West Coast.

So, it could not fit our model better. They were a very strong competitor of ours, and we're very excited to have them on the team.

Deane Dray -- RBC Capital Markets -- Analyst

That's all good to hear. For Joe, you didn't call this out in terms of it being disruptive, but oftentimes when you through an account reassignment -- going from the geographic to a more targeted basis -- there can be disruptions. Is that all behind us now or is there any sort of ripple effect into 2018?

Joseph DeAngelo -- President, Chief Executive Officer

No, I feel great about it. I think all the specific accounts -- we really worked hard to get that right. Jeff Howe did a tremendous job over the last four months of getting it in everybody's hands. And for the balance of the week I'll be with that sales team, and I haven't heard a peep about something being out of place. So, everybody's very focused on the accounts they own. Those are the accounts they'll get paid on, and I believe that's the absolute right way to run the business.

Deane Dray -- RBC Capital Markets -- Analyst

Great. Lastly, a comment for Evan. I thought all of the commentary about the guidance and the puts and takes on the week, on the conference, timing, and all of that was really helpful and makes it easier for modeling purposes. We don't often see companies give it with that degree of clarity, so we appreciate it. Thank you.

Evan Levitt -- SVP, Chief Financial Office

Great. Thanks for the feedback, Deane.

Operator

Our next question is from Joe Ritchie with Goldman Sachs. Your line is now open.

Joe Ritchie -- Goldman Sachs -- Analyst

Hey, good morning, guys. Joe, can we just start on this announcement regarding putting corporate in the segments? Clearly, you made this big acquisition of Harris, and C&I filled some gaps geographically and from a product standpoint. Are you guys signaling anything from a strategic standpoint, fully burdening the segments with corporate?

Joseph DeAngelo -- President, Chief Executive Officer

Joe, we're not trying to signal anything. We're simply just trying to reflect how we're running the business today. We previously had a corporate function that, when you go back a few years, was supporting seven or eight businesses. Today, it supports two businesses. So, we're rightsizing that corporate function to support our businesses better and we're moving our support functions closer to the businesses and sharing resources. For instance, our chief digital officer that Joe mentioned has responsibility for e-commerce and marketing within our Facilities Maintenance business. But, he's also got responsibility for some enterprise wide applications.

So, whether to call that individual a Facilities Maintenance associate or a corporate associate -- you could go either way. Rather than try to slice it that thin with all of the folks that are supporting multiple businesses or functions, we determined the best approach was to fully allocate our corporate costs to our businesses. We only have two main businesses at this point. It does make our businesses more comparable then to their peers.

John A. Stegeman -- Executive President, Construction & Industrial

And closer to the field is always better.

Joe Ritchie -- Goldman Sachs -- Analyst

Got it. Fair enough. Evan, following up, I don't think you specifically gave us a guidance for the rebar impact. I think we were expecting something like 40-50 basis points on gross margins for C&I for 2018. Is that still a fair number? Has that number ticked up at all?

Evan Levitt -- SVP, Chief Financial Officer

For the last couple of quarters, rebar has been impacting the Construction & Industrial business unfavorably by about that 40-50 basis points. I would expect that to continue at about that pace, although there is a bit of uncertainty out there now with the President's recent announcement on his intent to increase tariffs, not knowing what countries will be exempt and what countries will not yet.

Joe Ritchie -- Goldman Sachs -- Analyst

Got it. Thanks, guys.

Operator

Our next question is from David Manthey with Baird. Your line is now open.

David Manthey -- Robert W. Baird & Co. -- Analyst

Thank you. Good morning, everyone. This question is also for John. Over the past year, I know you've had some big projects come to completion and you've also had some other big ones come online. You mentioned a couple of large airports and the LA football stadium. When you look at C&I overall, approximately what percentage would you attribute to that type of large project, just to give us an idea of how to scale that? And, when you look at this quarter versus a year ago quarter, are you seeing the growth being driven by these large projects or is it more day-to-day demand for small and medium sized ones?

John A. Stegeman -- Executive President, Construction & Industrial

It's very difficult to put a number on what we get out of a particular project because it's very contractor driven. There may be multiple subcontractors on a job, where we get part of a big project, but we may lose another piece because of a relationship that goes somewhere else. It's very difficult for us to track that, although I will tell you the majority of the product that we sell is delivered in perhaps the first stages of the job. We do deliver some product all the way to the very finish out part of a project, the majority of it goes as they're putting in the concrete and all of the accessories that go with that.

Of course, there are safety products and things like that, that are sold all throughout the job. I think the Apple project is a very good example of that. We sold a lot of material on the frontend and then we sold quite a bit as that project neared completion. When you look at growth out there in the market, I love that our business is not only job driven. We have a lot of customers that come in and pick up their emergency needs every day from our locations. The importance of having locations in big markets where customers come in -- and they pick up stuff that they need that particular day, or we deliver product they need that particular day.

So, we have a good mix of that. That helps with our margin quite a bit, and it makes the business very exciting every day.

David Manthey -- Robert W. Baird & Co. -- Analyst

Thank you. Switching over to FM, the new catalogue doesn't have any prices in it and there was a letter that went out talking about the dynamic pricing on the website. Clearly, the app now serves up customer specific pricing. Joe or Will, can you discuss any metrics that will outline successes you've been having with this dynamic pricing initiative, or anything else you could share with us regarding that?

Joseph DeAngelo -- President, Chief Executive Officer

I think the biggest success metric is what's happening with the gross margins. We're very pleased with where our gross margins are for Facilities Maintenance. That's an all in category management execution. Being able to get the right line logic, price appropriately in the marketplace, and to get the right cost structure is an ongoing process. Every day, in our building, we have suppliers coming through and we make sure we're getting better and better working with them to make sure that we deliver the absolute best product at a competitive price and we overdeliver on the service. That's the metric. Are you getting the growth and the gross margin? I believe we're getting both.

I feel really good about the catalogue release. I really love the fact that we can cover anybody however they want to deal with us. We find typically a customer uses two or three modes to place an order with us and consult with us to get the right product. So, they're always getting the best value by dealing with us versus someone else.

David Manthey -- Robert W. Baird & Co. -- Analyst

So, it's safe to say that historically, when you had more constant pricing, you probably saw some slippage as it relates to sales or margin. And now you feel you're picking that up. What stage of the game are you at now? Is that fully implemented? Is what we're seeing today reflective of what we should see going forward? Is there more of that impact fully yet to come?

Joseph DeAngelo -- President, Chief Executive Officer

No, it's implemented. Category management's going to be a daily activity that makes us better every day. We're also dealing in a very competitive environment. I think the thing to realize is the majority of the customers that we deal with weren't buying at the list price in the catalogue anyway. We didn't take anything away from those customers. They always had a call for price or a way of accessing their own personal price. It was a very smooth transition.

There are certain things the catalogue does really well. It has real sizes. You can take a cartridge stem out of a faucet and you can lay it right on top of the picture and it's the actual size. You know you get the right one. I can't do that digitally today. So, there is an effective use for everything. We feel really good about where we are, we'll continue to evolve, and we're clearly the leader in the space for getting the right information in the right hands in the easiest process so they can execute their project.

Evan Levitt -- SVP, Chief Financial Office

And our mobile app works really well with the catalogue. As the customer's flipping the catalogue, using it as a reference tool, they take out their phone and they can scan an item or page in the catalogue and it'll pull up their contract pricing. The interplay between the two channels gets us closer to the customer.

David Manthey -- Robert W. Baird & Co. -- Analyst

Yeah. Okay. Thanks, guys.

Operator

Our next question is from Robert Barry with Susquehanna. Your line is now open.

Robert Barry -- Susquehanna International Group -- Analyst

Good morning. About the outgrowth in C&I -- very impressive an accelerating. I think it's gone from three points to four to eight to 11 over the past four quarters. Could you just dig in a little more into what's driving that and how much room there is, if any, to further accelerate? In particular, last quarter there was also some discussion of maybe trading some price for volume. Could you touch on that?

John A. Stegeman -- Executive President, Construction & Industrial

I'll talk about the growth first. Last year, if you look at our numbers, we had a lot of larger projects that were coming to a close. We found a gap and it started off our fiscal year a little slow from a sales perspective. The diversity of projects that we're involved in currently has really helped us find more opportunity to grow. We have a very aggressive group of account managers out there that are very focused on building trusting relationships with contractors. They continue to take market share. We feel good about the projects that we have on the work that's right in front us. We also feel better about the opportunity as we scale as a company to take market share with the capabilities we have as a business.

Crossing multiple trades -- 14 different trades in our business -- the opportunities to grow in many of those trades is very strong. Certainly, the combination of A.H. Harris in the northeast will give us a platform very similar to the 40-year platform we have on the West Coast. Our West Coast and Canadian operations right now are very, very busy. They're continuing to grow. We are leveraging the concrete accessory business that we've developed here in the United States across our Canadian platform. There is still significant opportunity to grow there from just their historical fastener business. That's the reason why Canada has been getting more involved in larger projects.

It does come at the expense of some margin. But, with strong sales growth and strong expense management, we still can deliver strong operating leverage, as evidenced in the fourth quarter of the year. Very excited about or opportunity.

Robert Barry -- Susquehanna International Group -- Analyst

Got it. On the margin, I know it's early days, but is there a similar sized headwind from tariffs in '18 versus '17? Should the right base case be to assume that you'll see that hit the gross margin? Or, do you think given the growth is so strong there, that maybe there is some better opportunity to stand firmer and get some price?

John A. Stegeman -- Executive President, Construction & Industrial

I feel, with the amount of distraction that's out there in the market today, we may have a better opportunity, because it is so dramatic, to capture more price increase with customers. But, having said that, it's controlled by competition. We don't control what our competitors do, how they buy their steel product, and in what quantities they buy it. The competitive dynamics are very, very strong. We will do our job in our niche, which is smaller sized rebar orders, to be able to generate the proper margin. But, I think, with the amount of turmoil that's been created by the President's announcement, and also major steel mills announcing yesterday that they were increasing costs even further, it may provide a process opportunity for our business to capture more margin.

Robert Barry -- Susquehanna International Group -- Analyst

Got it. Thank you.

Operator

Our next question is from Ryan Cieslak with Northcoast Research. Your line is now open.

Ryan Cieslak -- Northcoast Research -- Analyst

Thanks. Good morning. For Joe, thinking about the upcoming spring and summer selling season, what's you view on the recent changes you've made at the sales force within FM with regard to compensation structure? Should we be thinking about that ultimately as an opportunity going into the selling season? Is it too soon to see some of the benefits from that this year and maybe we should anticipate that as more of a next event?

Joseph DeAngelo -- President, Chief Executive Officer

I think it's an opportunity. We need to see the empirical evidence on it. We'll spend an enormous amount of time training up our sales team to win out there, and we're fully focused on it. Let us get in season and, if we're coasting, we'll hit it this year. If we need to adjust, we'll hit it next year. All in all, we're committed to make sure that we're delivering that mid-single digit execution that really makes this business a spectacular business and a leader in the space.

Evan Levitt -- SVP, Chief Financial Officer

And, it's a dynamic process. We're always iterating as we go, making adjustments to account assignments as necessary, and reflecting that in compensation and incentives. So, you'll continue to see us refine the model.

Ryan Cieslak -- Northcoast Research -- Analyst

Great. In terms of the multifamily rental market today, some of the data points are less positive. Rental rate growth is slowing a little bit -- vacancy rates and what have you. What are you guys seeing specifically in your core markets? Is there anything out there that concerns you or you're thinking about differently? What are some of the puts and takes right now in your core rental markets?

Joseph DeAngelo -- President, Chief Executive Officer

The renovation market is one that's customer specific in terms of the amount of investments and the age of property they're dealing with. It's very positive relative to the larger customers. Clearly, they know they need to have an ongoing process for refreshing the space, and they need to work with a qualified partner to be able to do that. So, I feel good about it. Like we reported, it's growing faster than our normal sales -- our MRO sales -- at the moment, and that's where it should be. I don't see any indications that that's going to change over the next year to 18 months.

Ryan Cieslak -- Northcoast Research -- Analyst

Great. Evan, how do we think about some of the corporate cost savings into the guidance that you laid out? What are you assuming there in terms of the year-over-year benefit? Thanks.

Evan Levitt -- SVP, Chief Financial Officer

The restructuring that we talked about, we're expecting $10-15 million total in restructuring costs and we expect to recover that within two years. So, we're talking $5-8 million in annual savings from the restricting efforts across the corporate office so folks are working more closely with the business and more integrated with each of our businesses.

Operator

Our next question is from Keith Hughes with SunTrust. Your line is now open.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you. John, since corporate tax reform has come in, are you starting to see any uptick in quotation activity? Anything like that, a kind of reinvestment back into nonresidential construction by businesses or other entities?

John A. Stegeman -- Executive President, Construction & Industrial

We believe the nonresidential construction market is very productive right now. We see strong demand in new projects across the country, but I think it's too early to determine any impact on incentives with the new tax law.

Evan Levitt -- SVP, Chief Financial Officer

Yeah, folks will start seeing additional cash in their pocket from the new tax law beginning in April when first quarter payments are due. Hopefully, those first quarter payments are lower than they otherwise would be. As you're alluding to, there are incentives in the tax law to accelerate deductibility of certain investments. We'll see how that plays out over the course of the next year. But, we're certainly hopefully that does have a positive impact.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Within C&I, what was the impact of rebar inflation on revenue? How many points of the revenue roughly was rebar inflation?

Joseph DeAngelo -- President, Chief Executive Officer

We grew our sales 7.2% in rebar last year and our gross profit was reduced by $4 million. So, you can play with that math. It plays into a lot. It depends on how we buy and when we bought, but inflation added -- we're thinking it added about 11%, the number we think it impacted our business by.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

And that's for the full year?

Joseph DeAngelo -- President, Chief Executive Officer

That's for the full year.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

I'm showing no further questions. I would now like to turn the call back to Joe DeAngelo for any further remarks.

Joseph DeAngelo -- President, Chief Executive Officer

Great. Well, thank you for your questions. 2017 was a great year for the team and I'm confident that we're entering the 2018 selling season from a position of strength. As I mentioned before, in April we will move into our new Leadership Development Building in Atlanta. I'm pleased to announce that we'll be inviting you to join us there on June 21, 2018, to attend our first Investor Day, where our extended leadership team will share additional insight in our businesses.

In summary, on Page 16, the team's performance strengthened throughout 2017, and I believe that we have the best team in the industry, relentlessly focused on extending our momentum throughout 2018, to continue to deliver first class service to our customers and value creation to our investors. Thank you.

...

Operator

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone, have a great day.

Duration: 62 minutes

Call participants:

Charlotte McLaughlin -- Senior Manager, Investor Relations

Joseph DeAngelo -- President, Chief Executive Officer

John A. Stegeman -- Executive President, Construction & Industrial

Evan Levitt -- SVP, Chief Financial Officer

Ryan Merkel -- William Blair -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Robert Barry -- Susquehanna International Group -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Ryan Cieslak -- Northcoast Research -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

David Manthey -- Robert W. Baird & Co. -- Analyst

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