Categories Earnings Call Transcripts, Industrials

HD Supply Holdings Inc (NASDAQ: HDS) Q1 2020 Earnings Call Transcript

HDS Earnings Call - Final Transcript

HD Supply Holdings Inc (HDS) Q1 2020 earnings call dated Jun. 09, 2020

Corporate Participants:

Charlotte McLaughlin — Senior Manager, Investor Relations

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

Bradley Paulsen — President, HD Supply Facilities Maintenance

John Stegeman — Executive President, HD Supply and President, HD Supply Construction and Industrial – White Cap

Evan J. Levitt — Senior Vice President, Chief Financial Officer and Chief Administrative Officer, HD Supply

Analysts:

Deane Dray — RBC Capital Markets — Analyst

Jason Makishi — Barclays — Analyst

Hamzah Mazari — Jefferies — Analyst

Ryan Merkel — William Blair — Analyst

John Inch — Gordon Haskett — Analyst

David Manthey — Robert W. Baird — Analyst

Nigel Coe — Wolfe Research — Analyst

Keith Hughes — SunTrust Robinson Humphrey — Analyst

Michael McGinn — Wells Fargo — Analyst

Patrick Baumann — JPMorgan — Analyst

Andrew Obin — BofA Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the HD Supply First Quarter Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. [Operator Instructions].

I would now like to hand the conference over to your host today, Ms. Charlotte McLaughlin. Thank you. Ma’am, please begin.

Charlotte McLaughlin — Senior Manager, Investor Relations

Thank you, Howard. Good morning, ladies and gentlemen, and welcome to the HD Supply Holdings 2020 First Quarter Earnings Call.

As a reminder, some of our comments today may be forward-looking statements, based on management’s beliefs and assumptions and information currently available to management at this time. These beliefs and subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those detailed in our periodic SEC filings. Please note that the company’s actual results may differ materially from those anticipated and we undertake no obligation to update these statements.

Reconciliation of certain non-GAAP financial metrics with their corresponding GAAP measures are available at the end of our slide presentation and in our 2020 first quarter earnings release, which is available on our IR website at www.hdsupply.com.

Joe DeAngelo, our CEO, will lead today’s call with Brad Paulsen, President and Facilities Maintenance; and John Stegeman, President of Construction and Industrial, providing further color around that business unit. Evan Levitt, our CFO will provide additional information on our recent financial performance.

There will be an opportunity for Q&A. For those participating, please limit your remarks to one question and one follow-up if necessary. Thank you for your continued interest in HD Supply.

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

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

Well, thank you, Charlotte. Good morning, everyone. Thank you for joining us today for our first quarter 2020 earnings call. As always, it is my privilege to share 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.

Turning to Page 3, I want to begin this morning by offering our sympathies to everyone affected by the COVID-19 outbreak. This is a 100-year event that has impacted the world. Also, we are committed to helping heal the communities in which we live and work as they have been damaged by social injustice and unrest.

Throughout these extraordinary times, our most essential activity has been protecting the safety and well-being of our associates and their families, while demonstrating our HD Supply values and stepping forward with creative solutions and good old fashion grid to continue to lead our industries and serve rapidly evolving customer needs.

I want to thank all of our associates, especially our front-line drivers and branch and distribution center teams who safely tackle daily challenges, supporting each other, our customers and our local communities. We have all had to face uncertainty, change our routine and execute in difficult circumstances. I feel very proud of how our associates rally to win together.

As we stated on our March earnings call, we took robust actions to continue operations during the pandemic, which included infection controls in our facilities and heightened precautions for our drivers and customer facing associates. As a result of these practices, all of our Facilities Maintenance distribution centers remained open, and we experienced minimal disruption in our Construction and Industrial branches.

We work closely with our customers to ensure that we understand their needs during this crisis and the team has worked hard to tailor our service to support emerging customer requirements. Our sourcing teams continue to work relentlessly with supplier partners to maximize the availability of high-demand product, including disinfectants, sanitizers and personal protective equipment.

We have onboarded multiple new suppliers and products in order to meet the current and future needs of our customers.

HD Supply was designated in the essential business throughout the shelter-in-place orders. And as part of our commitment to our communities, the team did an outstanding job of identifying ways in which we could give back to our customers and communities.

We were inspired by some of some of our hospitality customers whose businesses were suddenly and severely impacted by the decline in travel. Many of these customers, with a lack of paying guests, opened their properties free of charge to health-care workers and hotspots like New York City, allowing front line health care professionals remain close to their medical facilities without the risk of infecting their families at home. We are proud to support these customers and our medical professionals by donating hospitality supplied to the cause.

During the quarter, we also donated needed supplies to disease research and treatment centers and to support organizations, providing shelter for victims of domestic violence and those in need of transitional or affordable housing. The need in our communities for these services has increased during this crisis, while at the same time, available resources have diminished. Our people step up to support these causes, particularly when the need is greatest.

Before I move on to our recovery strategy, I want to take a moment to reflect on this quarter’s performance. You’ll hear from Brad, John and Evan shortly, but it has been an uneven performance over the course of the quarter. Our performance through mid-March was strong with February sales delivering year-over-year average daily sales growth of 8.8%, and the first half of March trending accordingly. However, beginning in mid-March, our sales were suddenly and severely impacted by the various restrictions placed on economic activity.

During the full fiscal first quarter of 2020, ending May 3, 2020, we saw 6.6% year-over-year sales decline with Facilities Maintenance declining 11.7% and Construction and Industrial declining 1.1%. However, we continued to generate strong free cash flow of $116 million during the quarter, a 13.7% increase over the same period last year and ended the quarter with combined liquidity, $797 million, an increase of $69 million from the end of fiscal 2019.

The start of our 2020 fiscal second quarter has seen sequential improvement in average daily sales during the month of May, in both businesses. We are encouraged by recent results and efforts made to slowly and prudently reopen the economy around the country.

We rigorously follow CDC guidelines and safely conducting operational activities as essential business. We’re providing our associates with the appropriate personal protective equipment, including disposable face masks and sanitizers and gloves. We’ve embedded social distancing and contact barriers into our facilities and operating practices.

We are screening associates for illness at the start of their day and we execute frequent structured and thorough cleaning of facilities and equipment.

As announced earlier this year, we have delayed the separation of our Construction and Industrial business unit into an independent publicly traded company, as we continue to navigate through the crisis. We remain committed to the separation and believe we can complete it in the second half of fiscal 2020 if we continue to see the capital market stabilize. We’re unable to execute the transaction in 2020. We look to complete it in early 2021.

I’ll provide some closing comments on Q&A, but I want to emphasize that we’re excited to enter this recovery period with strength and momentum. We are well capitalized. We continue to generate significant cash flow and we are completely focused on our core markets of Living Space MRO and specialty construction.

We have been able to leverage our deep relationships, scale and cash flow capabilities in prior periods of market stress. We believe that this recovery will provide similar opportunities. There is much work to do, but our May and early June results show signs of recovery and we will continue to work as one team, deliver enhanced results in our two market-leading businesses.

I’ll now turn the call over to Brad Paulsen, to provide an update on our Facilities Maintenance business.

Bradley Paulsen — President, HD Supply Facilities Maintenance

Thank you, Joe, and good morning. I’d like to start off by taking a moment to share how proud I am of our team and the manner in which we responded to the COVID-19 outbreak.

From the outset, our leaders and associates locked arms to ensure the health and safety of our team and customers was non-negotiable and our top priority. Our distribution centers, call centers and leadership development center did not experience any disruptions and provided best-in-class service to our customers across the nation. Our ability to maintain operations and deliver critical support to our customers during this challenging time is a testament to the special group of associates we have at HD Supply, and I cannot be more proud of each and every one of them.

Turning to Page 4. As Joe said, this quarter’s performance was defined by pre- and- post- shelter-in-place orders. Facilities Maintenance had a solid February performance, exceeding our expectations and delivering sales growth of 4.1%, with the first two weeks of March also trending well with approximately 6% sales growth.

The end of March and April, saw a significant decline in sales volume and I will begin by explaining what made this environment so unique. There are two primary issues that impacted our business in the first quarter. First, we faced a perfect storm of headwinds in April, including restrictions on economic activity and general health concerns associated with COVID-19 that caused our customers to either suspend operations or limit maintenance to only emergency repairs. And second, our customer’s product needs changed dramatically in the second half of March and all of April.

As you might expect, product and service to support in general maintenance and unit terms were deemphasized as customers shifted their focus to sanitation, infection prevention and personal protective equipment. These items historically have represented a very small percent of our sales, but our sourcing and category management teams have responded to this changing customer needs and quickly expanded our assortment and inventory availability for disinfectants, sanitizers, disposable face masks, sneeze guards, and other janitorial and safety products.

We have seen our customers responded very favorably to this expanded assortment and expect our increased emphasis on these products to continue beyond 2020.

Our team will continue to expand our product and service offering as we work to become our customers’ preferred destination for all their safety and infection prevention needs.

Moving on to Page 5. The impact from the COVID-19 outbreak impacted every sales vertical and every region in our business. As you would expect, no business vertical was more affected than hospitality, which represents approximately 18% of Facilities Maintenance sales. As business and leisure travel came to a halt, our hospitality customers were severely impacted with many of them temporarily suspending operations.

We saw a strong correlation between our hospitality sales and the decline in the hospitality industries reported revenue per available room of around 75% to 80%, at its worst, and occupancy rates which hit average flows around 20% in April. Not surprisingly, our Hospitality business experienced a similar year-over-year level of decline in revenue of approximately 75% in April.

As economic activity has started to resume, we have seen encouraging improvement in hospitality with year-over-year sales declines of approximately 48% in May. While this is a significant improvement from April, we believe our hospitality vertical will have the longest path to recovery as it is dependent upon the return of more consistent business and leisure travel.

In our multi-family healthcare and institutional verticals, we saw a dramatic change in customer purchasing trends. Beginning in mid-March, demand for low-ticket items like hand sanitizer and protective masks expanded, as our customers prioritized the health and safety of their associates and living space communities.

As part of that prioritization, a very high percentage of these customers elected to only execute emergency repairs in April as many residents did not want maintenance professionals in their living space unless it was absolutely necessary. As a result of the shift in purchasing, we saw order volume remained strong, but average order size dropped significantly as demand for higher ticket items such as appliances and HVAC declined. This drove a 23% year-over-year drop in our non-hospitality sales verticals.

In May, our non-hospitality vertical sales declined approximately 6% year-over-year. I’m very encouraged by our improved results in May. As restrictions on economic activity relaxed, our customers began to prepare for their own return-to-work activities and deferred maintenance was slowly initiated. These improved conditions caused our team to experience a sequential increase in average order size during May from April, while order growth delivered positive year-over-year growth.

We have seen further improving trends in early June and expect a continued recovery as state level and city restrictions are relaxed, and as residents begin to allow for normal maintenance activity to be conducted in their living spaces.

Our team has made tremendous progress and remains fully committed to supporting our customers and our communities during this recovery.

I will now turn the call over to John Stegeman for an update on the Construction and Industrial White Cap business.

John Stegeman — Executive President, HD Supply and President, HD Supply Construction and Industrial – White Cap

Thank you, Brad, and good morning to everyone. Echoing Joe and Brad’s comments, we extend our deepest sympathies to everyone who has been affected by the COVID-19 pandemic.

I’d like to start by thanking the White Cap team for stepping up and adapting the market conditions during this difficult time, delivering exceptional service to our customers, while implementing safety protocols to protect our associates and customers.

Now, turning to Page 6. Our team experienced three distinct periods in the first quarter. We came out of the gates very strong in February, delivering year-over-year growth of 14.2%, highlighting market strength and our ability to deliver value to our customers as a preferred partner.

We entered March, seeing similar trends for the first two weeks. However, by week-three, with shelter-in-place orders escalating, business slowed and decline through the first two weeks of April. We believe, based on current data, that middle of April represented the trough for job delays.

March sales saw a year-over-year growth of 1.4%. April sales declined 13% year-over-year with momentum-shifting positive in the last two weeks of the month as markets began reopening. Our national scale and presence in many markets did help balance sales decline. San Francisco, New York and Boston and New Jersey were very challenged, while our Central, Midwest, Southeast, Southwest and our Home Improvement Solutions business performed admirably.

Being designated an essential business allowed us to continue to sell core products and safety supply to our customer base. While we experienced mild disruption in certain areas of our supply chain, I’m very proud of our sourcing teams who ensured we had vital inventory to supply our customers.

We closed the first quarter with a revenue decline of only 1.1%, a tribute to the tenacity of our team executing on an inventive approach to engage customers while adhering to strict social distancing and safety protocols.

As the pandemic progressed, the team took important steps to protect our associates and our customers to ensure they were doing business safely. We limited customer interaction in our showrooms and focused on technology, customer pickups and deliveries to drive our business.

We currently symptom check all our associates and suppliers as they enter our facilities, ensure we are socially distancing and disinfect our work areas daily. All of our locations are currently open for safe business.

We executed on labor and cost reduction actions during the quarter to adjust our cost structure for our lower revenues. Gross margins improved 70 basis points year-over-year, driven by a focus on safety product sales, a favorable commodity environment and our mix of job work. This was disciplined gross margin progress in a very competitive environment.

During the quarter, a decision was made to also pay out additional bonus dollars to our frontline associates who interacted daily with our customers and to provide supplemental sick leave to associates impacted in any manner by the virus. We also made product donations to hospitals in need of key safety products.

The White Cap team, since May 2020, the first month of our second quarter, down 1.4% when compared to May of 2019. We are very encouraged with sales momentum as delayed project start back up. It is difficult to forecast whether new projects will replace delayed projects as we approach the latter half of 2020, but our customers’ current backlog provides nice opportunity. Ending where we started, I am exceptionally proud of our team and their passion to serve with excellence.

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Thank you for your time today and I’ll now hand the call over to Evan.

Evan J. Levitt — Senior Vice President, Chief Financial Officer and Chief Administrative Officer, HD Supply

Thank you, John, and good morning, everyone. I’d like to start by addressing the announcement we made on March 30, in regards to the separation of our Construction and Industrial business into a separate publicly traded company. We made the decision to temporarily delay the separation due to market conditions, and to allow our management team to focus on navigating the COVID-19 crisis.

Our rationale for separating our two businesses has not changed and we continue to believe it is in the best interests of both businesses to pursue the separation. As such, and dependent upon stability of the financial markets and the broader economy, we currently expect to complete the separation in the second half of 2020 or early 2021.

Now, turning to Page 7. Our net sales declined $98 million or 6.6% to $1,395 million in the first quarter of fiscal 2020 as compared to $1,493 million in the first quarter of fiscal 2019. Gross profit decreased $35 million or 6% to $550 million for the first quarter of fiscal 2020, as compared to $585 million for the first quarter of fiscal 2019.

Gross profit was 39.4% of net sales for the first quarter of fiscal 2020, an increase of approximately 20 basis points from 39.2% for the first quarter of fiscal 2019. I will discuss the gross margin improvements during the business unit discussion.

Adjusted EBITDA decreased $40 million or 19.7% to $163 million for the first quarter of fiscal 2020 as compared to $203 million for the first quarter of fiscal 2019. Adjusted EBITDA was 11.7% of net sales for the first quarter of fiscal 2020, down approximately 190 basis points from 13.6% as compared to the first quarter of fiscal 2019.

The first quarter of fiscal 2020 adjusted EBITDA included an $8 million charge for an increase in expected credit losses and a $1 million charge for the donation of inventory to support our communities during the COVID-19 pandemic.

On Page 8, I’d like to discuss the specific cost actions that have been taken during the second half of the first quarter in light of the current crisis. We implemented a hiring freeze across the company. We reduced hours in our distribution centers and branch locations. Our Chief Executive Officer voluntarily reduced his pay to zero for the rest of the year. We reduced salaries for all salaried associates. Our Independent Directors waived 100% of their cash Board Retainer for the remainder of the year.

We have eliminated or deferred discretionary spending. We’ve reduced our planned capital expenditures from approximately $120 million to $80 million for fiscal 2020. We furloughed or separated approximately 300 associates and we’ve eliminated virtually all travel.

On Page 9, I will discuss the specific performance of our individual business units in more detail. Net sales for our Facilities Maintenance business were $682 million during the first quarter of fiscal 2020 as compared to $772 million for the first quarter of fiscal 2019. The sales decline was 11.7% as compared to the first quarter of fiscal 2019. Adjusted EBITDA decreased $36 million or 26.9% to $98 million for the first quarter of fiscal 2020 as compared to $134 million for the first quarter of fiscal 2019. Adjusted EBITDA was 14.4% of net sales for the first quarter of fiscal 2020, down approximately 300 basis points from 17.4% for the first quarter of fiscal 2019.

Facilities Maintenance gross margin improved 20 basis points from the first quarter of fiscal 2019. The improvement was primarily a result of the approximately 33% drop in sales of our lower margin hospitality verticals. This benefit was partially offset by increased cost from the 2019 tariff increases that had not fully flowed through our supply chain at this time last year.

Moving to our Construction and Industrial business, net sales were $713 million during the first quarter of fiscal 2020 as compared to $721 million for the first quarter of fiscal 2019. The sales decline in the first quarter of fiscal 2020 was 1.1% as compared to the first quarter of fiscal 2019.

Adjusted EBITDA decreased $4 million or 5.8% to $65 million for the first quarter of fiscal 2020 as compared to $69 million for the first quarter of fiscal 2019. Adjusted EBITDA was 9.1% of net sales for the first quarter of fiscal 2020, down approximately 50 basis points from 9.6% in the first quarter of fiscal 2019.

During the first quarter of fiscal 2020, Construction and Industrial gross margins improved approximately 70 basis points as compared to the first quarter of fiscal 2019. The improvement was driven by a reduction in the mix of large jobs as many were temporarily suspended during the COVID crisis. We also saw an improvement in our rebar margins as the cost of rebar has declined year-over-year.

Finally, we benefited from an increase in sales of COVID-related safety products. The safety category is a higher margin category for us.

Now, turning to Page 10. In the last 12 months, we generated $585 million of free cash flow, included $116 million in the first quarter of fiscal 2020. We invested $21 million in capital expenditures in the first quarter of fiscal 2020. We estimate our ongoing annual capital expenditure requirements to be approximately 2% of annual sales. However, we have reduced our expectation for fiscal 2022 to about $80 million, in light of the COVID crisis.

As we have shared, we have fully utilized our federal net operating loss carry-forwards during fiscal 2019. As such, we are now a regular federal income taxpayer. In the first quarter, we did not pay any net cash taxes as our first and second quarter estimated federal income tax payments are due in July 2020. We expect that our ongoing GAAP tax rate will be approximately 26%.

As of May 3, 2020, HD Supply’s combined liquidity of $797 million was comprised of $147 million in cash and cash equivalents and $650 million of additional available borrowings under our revolving credit facility. Our net debt-to-adjusted EBITDA leverage was 2.3 times, comfortably within our targeted range of 2 times to 3 times.

We did not purchase any shares in the first quarter under our most recently authorized $500 million share repurchase program. We decided to instead focus on cash preservation and the enhancement of liquidity. We increased our liquidity by $169 million since the end of fiscal 2019.

We have minimal debt maturities over the next two years, and we believe our strong liquidity positions us well to navigate the uncertain economic environment.

On Page 11, we provide first quarter 2020 monthly net sales trend performance as well as the 2019 comparable. In February 2020, we delivered sales of $461 million, an increase in average daily sales of approximately 8.8% versus February 2019. In March 2020, we delivered sales of $462 million, an increase in average daily sales of approximately 0.5% versus March 2019. In April 2020, we delivered sales of $472 million, a decrease in average daily sales of approximately 22.6% versus April 2019. There were 20 selling days in February, 20 selling days in March, and 25 selling days in April of fiscal 2020 and fiscal 2019.

May of 2020, which ended May 31 was the first month of our fiscal second quarter 2020 and we have provided our preliminary sales results. We will not provide information on May results beyond sales.

Preliminary net sales in May 2020 were approximately $431 million, which represents year-over-year average daily sales decline of approximately 7.3%. Preliminary May, year-over-year average daily net sales by business was an approximately 13.4% decline in Facilities Maintenance, and approximately 1.4% decline in Construction and Industrial.

May’s net sales performance improved throughout the month for both businesses. There were 19 selling days in both May 2020 and May 2019.

On Page 12, I’d like to highlight a change to our adjusted net income per diluted share methodology. In order to move to a more standardized EPS calculation, reflecting that we are now a regular federal income taxpayer, we will provide a net income per diluted share calculation in accordance with GAAP. And beginning in the second quarter, an adjusted net income per diluted share calculation, adjusted only for one-time or unusual items, specifically with taxes now reflected in accordance with GAAP.

We have provided two years of quarterly reconciliations of our historical definition and our go-forward definition of adjusted net income per share in the back of the earnings presentation.

We remain committed to a long-term mid-single digit sales growth target, both on a combined basis and by individual company. However, due to the uncertainty created by the COVID-19 pandemic and its disruption on economic activity, we will not be providing formal guidance at this time. We believe the April was likely the most severely impacted month of 2020. And since then, we have seen a steady improvement in the performance of both the Facilities Maintenance and Construction and Industrial businesses.

We expect a recovery of our markets to continue with our Hospitality business recovering more slowly than our other businesses.

We will continue to prioritize the health and safety of our associates and their families, while we also continue to support our customers and communities by providing the critical products and services needed to maintain their facilities, care for the residents and operate and maintain safe job sites and work environments.

Thank you for your continued interest in HD Supply. And I’d now like to turn the call over to our operator, Howard, for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question or comment comes from the line of Deane Dray from RBC Capital Markets. Your line is open.

Deane Dray — RBC Capital Markets — Analyst

Thank you. Good morning, everyone.

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

Good morning.

Deane Dray — RBC Capital Markets — Analyst

Hey, great to hear everyone’s voices and everyone is doing well, appreciate that. Hey, just in terms of the look-forward, and I don’t mean to parse words. But just at the margin, the improvement in May is encouraging and I believe Brad commented that the June had started off with further sequential improvement. Can you comment on that?

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

Yes. So, we’re only one week into June, Dean. But we are seeing the trend from May continue into June for both businesses.

Deane Dray — RBC Capital Markets — Analyst

That’s great. And then if we’re trying to gauge how your customers in hospitality and multifamily reopen, and there is a sense that there has been deferred maintenance. What does the early stage look like in terms of the recovery? It just — there is a sense that there’ll be some higher volumes that will come through initially that might spike higher, just what’s your sense in terms of those higher initial volumes? And then also, can you comment on what I think is a bit of surprise that PPE is actually a higher margin product for you? So, two questions there, please.

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

So, thanks for the question. Definitely encouraged by the trends that we’re seeing as states reopen and our customer properties reopen. When we look forward, I think the real key to unlocking the growth that we expect is going to be contingent on two things. The first is our customers need to develop a process, a safety process, if you will, for their associates to go into a living space to conduct maintenance. They have the same responsibility to protect the health and safety of that individual, like all of us do. And on the other side of that, the actual individual, the resident living in that unit, has to be comfortable to invite someone into that space.

We’re very-very early in that process. I expect that’s going to gradually improve through the course of the summer. But again, the trends that we’re seeing from a mix of goods from an average order value is very-very encouraging out of the gate.

From a PPE perspective, from a margin standpoint —

Evan J. Levitt — Senior Vice President, Chief Financial Officer and Chief Administrative Officer, HD Supply

Yes, Deane, as far as the PPE margin comment, PPE and the safety category overall for Construction and Industrial is a higher gross margin category for us. It is not necessarily a higher gross margin category for us in Facilities Maintenance.

Deane Dray — RBC Capital Markets — Analyst

Got it. And just the last point is a comment. Really appreciate, haven’t seen you guys move to the adjusted earnings, just excluding the one-time items. I appreciate that. Thank you.

Evan J. Levitt — Senior Vice President, Chief Financial Officer and Chief Administrative Officer, HD Supply

Very good. Thank you.

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

Thank you, Deane.

Operator

Thank you. Our next question or comment comes from the line of Julian Mitchell from Barclays. Your line is open.

Jason Makishi — Barclays — Analyst

Hi. This is Jason Makishi on for Julian. Maybe just a question about operating leverage across the businesses. Clearly, in Q1, there was significant operating deleverage in both C&I and FM. Clearly, you took a lot of cost out in reaction to the COVID-19 crisis. Maybe just talk about how you see operating leverage trending through the year and maybe how any cost out returning in 2021 could hobble the leverage coming out of the downturn, sort of two dynamics at work there? Thank you.

Evan J. Levitt — Senior Vice President, Chief Financial Officer and Chief Administrative Officer, HD Supply

Yes, sure. Jason, thanks for the question. I think the best way to think about this is probably thinking about, we’re looking at the decremental margins. So, in the first quarter, our decremental margins were about 40%, but that included $9 million of charges for expected credit losses and donations. Going forward in the, call it, the second and third quarters, to the extent that the pandemic continues to negatively impact sales, I would expect any decremental margins to be closer to 25% to 30%. As you indicated, we’ll also get the benefit from some of the cost actions we’ve taken later in the quarter, in the first quarter as we’ll see those play out for the balance of the year.

Now, as the economy picks up and sales recover, as far as operating leverage or incremental margins in the recovery period, certainly some of those cost out items will reverse. So, that will be a headwind at year-over-year. But with a good recovery and the re-leveraging of fixed costs, we would expect to be able to grow profitably and begin to return to our more normalized margins.

Jason Makishi — Barclays — Analyst

Understood. And maybe just a quick follow-up on free cash flow, quite strong in Q1. Capex taken — targets kind of taken down a little bit for the year. Maybe just talk about the other puts and takes in there in terms of working capital and where broadly you expect to end up for free cash flow for the full year?

Evan J. Levitt — Senior Vice President, Chief Financial Officer and Chief Administrative Officer, HD Supply

Yes, so the team did a nice job in the first quarter, focusing on the cash flow, and that was a big focus for us. We wanted to enhance our liquidity position and we were successful in doing that. But the team of both companies did a nice job with that.

As you know, working capital in a downturn is a source of cash for distributors. Now, this downturn, it’s actually little more difficult than some others, because it is difficult to forecast demand and where that demand is going to come from and what categories, as customer buying patterns change. But the team did a nice job with that.

Also, keep in mind that we didn’t pay any cash taxes in the first quarter. Our first and the second quarter estimated tax payments will be due in July, that’s assuming that they are further deferred. The CARES Act deferred the first quarter payments to July. So, that now coincides with the second quarter payment. There has been some discussion of delaying it further. So, if that were to occur, that would impact then second and third quarter cash flow.

We expect to continue to generate good, solid positive cash flow throughout the year, but we aren’t providing specific guidance.

Jason Makishi — Barclays — Analyst

Understood. Thanks for all the help.

Operator

Thank you. Our next question or comment comes from the line of Hamzah Mazari from Jefferies. Your line is open.

Hamzah Mazari — Jefferies — Analyst

Good morning. Thank you. My first question is just if you view there to be any structural trends post-COVID-19 that could either be positive or negative for the business? We’re thinking about rural to urban migration, longer work from home. I know you talked about pent-up demand already in the FM business. But just any changes you see structurally coming out of COVID-19? I know it may be early, but just any thoughts how that could impact your business?

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Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

Yes, I think clearly, Hamzah — Joe DeAngelo. Safety is going to be first and foremost on everybody’s mind and keeping communities safe and healthy and job sites flowing, really important. So, I think both business President’s said, “We’ll keep safety as front and center and will be a core product category going forward.” You saw that since we did have — we are the number-one safety products provider, and the construction space is a natural add-on to additional safety products there. It was pretty de minimis coming into in Facilities Maintenance, but we think it’s going to be front and center. And the team has done a great job looking at the future of maintenance and how do you maintain each living facility successfully, and has actually created a number of interactive products on our website to help our maintenance professionals come back to work and stay and work in a new environment. So, I think that’s going to be net new additive going forward as we go.

And I think you’re correct, there are going to be some general trends that are going to basically de-identify cities in a lot of cases and we’ll have to see what that results in from a structural built endpoint and from how you operate. But I think we’re in the sweet spot of both areas. I mean, we’re national in construction, so therefore whatever construction project is out there, we’re going to participate in and we’re going to get more and more content on that. And whatever living facility is out there, we’re going to make sure that it is safe, healthy and continuously renovating.

So, we feel good about positions going forward, again, additive in terms of safety.

Hamzah Mazari — Jefferies — Analyst

Great. And just a follow-up question, I’ll turn it over. On the C&I business, you had mentioned it’s tough to forecast if delayed projects will be replaced by new projects. Maybe if you could comment on any verticals where you’re seeing delays? And then, do you — are you still bullish on a roll up opportunity within C&I and is that something sort of post spin, clearly, that will be executed on? Thank you.

John Stegeman — Executive President, HD Supply and President, HD Supply Construction and Industrial – White Cap

Yes, I’ll take the first piece of that, Evan. Regarding pent-up demand with customers out there, our best indicator typically is not what the market really says. It’s indicated by our customers in the backlog, and the amount of bidding that they’re doing out there. Currently, that looks very encouraging. Of course, we are recovering from a lot of delayed projects. We still have project delays out there. However, the last market to really open back up was New York City, this week. So, we’re seeing mobilization on job sites again, which is very exciting for the business.

The concern that we stated was, it’s a little bit more difficult to forecast — once these delayed jobs move through the system financially, will there continue to be projects rolling into the latter half of 2020? And the best indicator we’ll have of that will be what our customers are bidding, which looks very encouraging from a commercial perspective.

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

And, Hamzah, we do expect M&A opportunities in both businesses, particularly as we get into — get further into the recovery. It certainly is a growth opportunity and a growth strategy for both businesses and is one of the rationale for the separation, so both — each business can focus on their respective markets.

As you come out of a financial downturn, you often see enhanced opportunity with M&A, as some of the lesser-capitalized players that may have a good business may have good sales folks and a good customer book are looking to exit. And so, we will certainly look to take advantage of those opportunities in both businesses as they present themselves, as we get further into the recovery.

Evan J. Levitt — Senior Vice President, Chief Financial Officer and Chief Administrative Officer, HD Supply

Yes, I think, clearly, in every recovery process or every downturn process, we had the opportunity to track the applicable best talent in the industry. And so, in addition to acquiring companies, we’re always going to look out for top talent and a competitor that may have not positively differentiate themselves as these teams have. So, we look forward to attract the best talent and growing our team.

Hamzah Mazari — Jefferies — Analyst

Great. Thank you so much.

Operator

Thank you. Our next question or comment comes from the line of Ryan Merkel of William Blair. Your line is open.

Ryan Merkel — William Blair — Analyst

Hey, thanks. So, first off, C&I sales down only 13% in April and 1% in May, much better than I was thinking. Was this because most existing jobs were deemed essential and underlying demand coming into this was strong?

John Stegeman — Executive President, HD Supply and President, HD Supply Construction and Industrial – White Cap

Yes, well, certainly that had a big — it provided a lot of opportunity for us, but I understand that our national scale made a huge difference. Our business was actually very-very strong with national accounts that actually never slowed down during the pandemic. They stayed busy on their jobs. Our business with big national accounts is up dramatically through the first quarter. And I think the other piece that was critical, as we decided as a business not to sit back and allow the economy to dictate what was going on in our business. We created, with some of our associates who weren’t as busy naturally because of the job shutdowns, we created an outbound calling center called Project Outbound in the business, and we decided to be able to, on a daily basis, call customers that are underserved. We considered to be underserved based on what our marketing team has developed and it provided significant opportunity with new customers that helped offset some of the losses that we had from closed job sites.

So, staying very-very close to the market, I believe. The other thing that really helps us with over 540 account managers out there calling on customer is every one of those account managers stay busy on the phones. We wanted to be first in the minds of our customers. I believe we took some market share during this period. And with the amount of cash flow we have and the opportunity we have from a scale perspective, it provides us an opportunity to have inventory and take care of customers’ needs.

So, it was a plan to be inventive during the downturn to make sure that our business was not declining too rapidly and our team did an incredible job of finding new opportunity out there in the market.

Ryan Merkel — William Blair — Analyst

Yes, the performance is really pretty amazing. So, congratulation. That’s helpful color. Let me move to hospitality. Obviously, the big decline makes sense. I’d like to get a little more granular, if we could. I think you mentioned a slow recovery, but could it be down the rest of the year, and what are customers telling you?

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

So, I’d say it’s still early days to make a determination what the year is going to look like. We are really taking it day-by-day. When I look at hospitality — I’ll add a little bit more color beyond what I shared in my prepared remarks. Obviously, the improvement in May from April was significant. The improvement continues in June.

And there are couple of things that are driving that. One is, we’re certainly seen parts of the country and certain hotel types recover faster. And those type of properties are in our sweet spot. And then the second piece is very similar to what John just mentioned, I attribute to fantastic execution by our team. We really made no changes to our sales organization. We’ve had excellent in-stock position and consistent next day deliver, and we are absolutely taking share in the market.

Like I said, I think it’s really going to be dependent on the level of return of travel, both business and leisure. Certainly encouraged by what we’re seeing in May, but I’d say I’m just not in a position right now to say what it’s going to look like over the next six months.

Ryan Merkel — William Blair — Analyst

Yes, fair enough. Okay, that’s helpful, thanks. Pass it on.

Operator

Thank you. Our next question or comment comes from the line of John Inch from Gordon Haskett. Your line is open.

John Inch — Gordon Haskett — Analyst

Thank you. Good morning, everyone. Hey, could we talk a little bit about the property improvement business and the puts and takes in that business and how that has transcended thus far during the spring? I know, obviously, that business had some issues before. And like just, how did this all work with respect to kind of the inventory you had to pre-buy? What’s happening now? I think you mentioned that the maintenance stuff probably kind of filters back or flows back through the summer, just any kind of color there? Is there a snapback where this season kind of like a deferral until next year mostly? Like, how — what are the puts and takes?

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

It’s a great question. And as we entered the COVID-19 crisis in April, to no one’s surprise, we saw many of the projects that were scheduled for April and the first part of May, were either postponed or canceled. The good news is, a very high percentage of those projects have either been rescheduled or restarted.

When I think about property improvement, the business is facing, I think kind of two issues right now. One is, just given the dynamics of what’s happening in the country, there are less people moving, which means there’s less opportunity for our customers to actually turn a unit. So, I think the overall pie in 2020 is going to be a little bit smaller.

And then when you think about that process, it’s just like any other bit. You’ve got to go on site, you’ve got to walk it, you’ve got to develop, you’ve got to win the job. And because of the shelter-in-place, you really missed out on at least 30 days of that process.

So, as states start to reopen, we’re working really closely with our customers, playing catch up as best as we can. And I’m really encouraged by the progress we’re making. However, I don’t think we’re going to catch up. I think the time is not going to be our friend here. But generally, that demand that doesn’t get done in the summer from a churn perspective, will generally be carried over to the following year.

I’m still really bullish on that business. I think it’s a huge differentiator for us. Really excited to see what we can deliver over the next three or four months.

John Inch — Gordon Haskett — Analyst

That’s helpful. Are you seeing on a bunch of inventory then that you had to kind of pre-buy from Asia or wherever and then — I mean, your inventories are great, right, because as you said, I think the working capital becomes a source of cash. But, kind of, if you peel the onion, are you still seeing on a bunch of property improvement inventory that may be helps you in the future because you don’t want to spend as much money? And, what also happens to the air conditioning business? Did that just go ahead anyway? Because I know that in the past has been kind of — there’s been puts and takes associated with like with the refrigerant and stuff like that. And those items seem kind of expensive to me. How is that playing out thus far this year?

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

We’re not sitting on a good deal of inventory. Our team has done a really nice job of partnering with our customers to make sure we have, what I would consider really streamlined assortment of products, and products that we use for our renovation jobs. And you’ve heard me talk about national account partnership in the past and I think this is a perfect example of being close to the customer, understanding what they need and then being really disciplined on the back and to only order what we need for the next few months.

So, we’re actually in, I would say, really strong position from an inventory perspective. Certainly, the drop in sales in April, we’re working through that. But we don’t have this overhang that’s going to last for the remainder of the year.

John Inch — Gordon Haskett — Analyst

Okay. So, that’s very encouraging. And just last, C&I, we’ve talked about when the economy was really good, we had all these labor constraints, now presumably we might have labor constraints for different reasons that people who didn’t have work had to go back to Mexico or wherever. How do you guys see the — how do you guys see labor? And the constraint in labor maybe providing a dampener or maybe even a catalyst to the construction business in United States, as it evolves over the next few months and quarters?

John Stegeman — Executive President, HD Supply and President, HD Supply Construction and Industrial – White Cap

I think in general, as jobs are coming back, people want to work. Certainly, the unemployment scenario has been interesting in terms of the amount of money that individuals did get. But I think in general, we’re seeing jobs ramp back up with appropriate people.

Some of the issues that we are seeing are kind of unique in that trended systems which move construction workers to and from job sites in places like New York City or in major cities, are still are operating as they normally would. So, there are some constraints out there that will continue to free up. As you know, the environment gets a little bit safer or people feel safer. But we have not, certainly, have not heard from contractor saying that they can’t start their work back up because they do not have labor. We haven’t heard that really happen.

John Inch — Gordon Haskett — Analyst

Got it. Thanks very much, everyone. Appreciate it.

Operator

Thank you. [Operator Instructions] Our next question or comment comes from the line of David Manthey from Baird. Your line is open.

David Manthey — Robert W. Baird — Analyst

Thank you. Hey, good morning, everyone.

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

Good morning.

David Manthey — Robert W. Baird — Analyst

First off, John, can you give us a current breakdown of your C&I end market, overweight/underweight exposures if we think about office, retail, manufacturing, government, infrastructure, whatever. Could you give us where right now you’re overweight and underweight?

John Stegeman — Executive President, HD Supply and President, HD Supply Construction and Industrial – White Cap

Yes, the only two segments that we typically report on at least presently are where we are residentially and where we are commercially. Commercially, the breakdown is multifaceted. As you can imagine, there’s road and bridge, there’s structural buildings, there’s any kind of health care facilities, airports, so any type of commercial project.

Historically, our business has been in the 25% to 30% range, residential, primarily on the West Coast, with the balance being commercial. We haven’t really seen those numbers shift greatly during the downturn, one way or the other. Obviously, commercial projects shut down, but residential homes, quite honestly, with the inability of the sales offices being open, there was a gap, probably a 30-day to 45-day gap where major homebuilders that we do a lot of business with just basically went on fall. They just basically stopped. That’s cranking back up right now, and we don’t really see a shift in either direction to any extreme.

David Manthey — Robert W. Baird — Analyst

Okay, thank you. On the commercial side, we just looked at the Dodge Data. No reason to believe you’re very different from that dispersion, is that what you’d say?

John Stegeman — Executive President, HD Supply and President, HD Supply Construction and Industrial – White Cap

Yes, as you look at the data of approaching the third and fourth quarter in particular, it looks promising. It’s been changing because I think even the data points out there have been a little bit challenging for people to grab onto with starts and slowdowns and delays.

So, the best indicator we have of what’s going on in the market is what our customers are currently doing. I think that will remain that way for a period of time. Dodge typically doesn’t report very accurately on the front end. They report pretty accurately on the back end. So, our best indicator again is what our customers are doing out there in the marketplace.

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David Manthey — Robert W. Baird — Analyst

Yes, I was referring to the mix, John — just, yes.

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

Yes, Dave, as John said, we have not historically provided a specific exposure by category. We are able to participate in the broad range of construction categories across the spectrum. And in general, we continue to see strength in distribution centers, data centers, infrastructure, including road, bridge and airports.

David Manthey — Robert W. Baird — Analyst

Okay, thank you. And just one quick one for Brad. Can you give us the average order size in FM this year and then the comparable figure last year?

Bradley Paulsen — President, HD Supply Facilities Maintenance

Hey, Dave, that’s something we generally don’t share and won’t plan on sharing it today.

David Manthey — Robert W. Baird — Analyst

Okay, thanks.

Operator

Thank you. Our next question or comment comes from the line of Nigel Coe from Wolfe Research. Your line is open.

Nigel Coe — Wolfe Research — Analyst

Thanks, good morning. Thanks for the question. So, just want to clarify, the 25%, 30% decremental margin guidance, overall, kind of color. That’s net of the cost savings you’ve highlighted. I think, Evan, you commented on that. And would it be fair to say that that would land mainly within the FM business, since C&I seems to be back on the growth book?

Evan J. Levitt — Senior Vice President, Chief Financial Officer and Chief Administrative Officer, HD Supply

That is correct. The 25% to 30% decremental margins would be for both businesses. But as you indicate, the construction business is getting close to flat. And it’s — and it is inclusive of cost savings.

Nigel Coe — Wolfe Research — Analyst

Got it. Okay, thanks. That’s helpful. And then on the bad debt expense, the $8 million, I think it was, is that compensated with a handful of customers, I’m thinking here perhaps the hospitality segment might be a disproportionate amount of that pick up or is it much broader? And how do we feel about credit quality in the back half of the year?

Evan J. Levitt — Senior Vice President, Chief Financial Officer and Chief Administrative Officer, HD Supply

Yes, good question. Thanks for asking that. It is a broad estimate across all of our exposures. Certainly, hospitality is a vertical that we’re more concerned about. We haven’t seen the hospitality sector impacted like this in the past. And so, quite frankly, we’re not 100% sure how it’s going to play out. So, we took what we believe is an appropriate conservative approach to our credit expectations in hospitality, but across the broader spectrum of our portfolio as well.

Nigel Coe — Wolfe Research — Analyst

Got it. Okay, thanks very much.

Operator

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

Keith Hughes — SunTrust Robinson Humphrey — Analyst

Thank you. Just a question on C&I. You had referred to some benefits in the quarter from rebar prices falling. How much longer do you think that benefit will be in place to support trues up year-over-year?

John Stegeman — Executive President, HD Supply and President, HD Supply Construction and Industrial – White Cap

Keith, the commodity market ebbs and flows based on supply and demand. And obviously, if you look at the first six weeks of the first quarter, supply was appropriate and demand was very high. And then the faucet closed and the exact opposite happened. We went into surplus condition and demand was very low.

So, our rebar facilities followed a suit as jobs closed, and now they’re cranking back up. So, I believe we’re going to see a little bit of a rush initially, as job sites reopen, as they reengage. And then I think the best guess that we have is that we’ll see similar conditions to what we saw in February and early March from a demand perspective for the business.

Keith Hughes — SunTrust Robinson Humphrey — Analyst

Okay. And a follow-up on that, you — we talked a lot about the kind of future of commercial construction end of the year, end of next year. How 00 when do you think you’ll have a good feel for what demand will be towards the end of the year starting up in ’21? How long does the back — how long does the backlog run and when could you get real comfort around commitment to ’21 for commercial construction?

John Stegeman — Executive President, HD Supply and President, HD Supply Construction and Industrial – White Cap

Yes, I think, because we’re so close to our customers and we’re constantly monitoring jobs that they’re bidding. There is good bidding going on right now for future projects. We have some bellwether individuals that we pay a lot of attention to in the industry that work for suppliers, that keeps us in tune with what major products they’re bidding in major cities.

So, I think it’s going to be interesting to better understand the financial condition of markets as we go forward. I think that will help determine the number of public and the number of private jobs that come out there. So, I think we’re going to continue to monitor that closely. But the reality is, regardless of what happens out there in the market, while we are certainly impacted being the largest player in our space, the opportunity typically exceeds what we’ve been doing as a business. So, I always see the opportunities and lighting even in downtimes.

Keith Hughes — SunTrust Robinson Humphrey — Analyst

Okay, thank you.

Operator

Thank you. Our next question or comment comes from the line of Michael McGinn from Wells Fargo. Your line is open.

Michael McGinn — Wells Fargo — Analyst

Good morning, everyone. Thanks for the time. I just wanted to go back and just talk about the capex for a second. My understanding was you had some back-end digital IT investments left for that spin. Is that still the case or are they embedded in that $80 million number or is it all done now?

Evan J. Levitt — Senior Vice President, Chief Financial Officer and Chief Administrative Officer, HD Supply

Now, that — we are currently working on that. That work will continue. As far as included in the $80 million, it will not move us materially off of the $80 million in the short-term.

Michael McGinn — Wells Fargo — Analyst

Okay. And then, sorry if I missed this, but the furloughs and the cost savings that you identified, obviously very fluid situation with the market. But is there — are they more likely to come back before the spin or after the spin? Do you have a time in your head that makes some sense for you guys?

John Stegeman — Executive President, HD Supply and President, HD Supply Construction and Industrial – White Cap

Yes. So, keep in mind, when we talk about 300 folks, that’s a very small percentage of our workforce. And we’ll bring folks back as demand dictates. But we’ve done everything we can to minimize the impact to our workforce of the COVID pandemic.

Michael McGinn — Wells Fargo — Analyst

Okay. And if I could just sneak one more in on the free cash flow working capital line. I think John, you mentioned national accounts, they’ve been trending well through this downturn, they didn’t see that slowdown. In my mind, that screams maybe longer payment terms but receivables looks like a nice inflow here, whereas inventories were an outflow. And that makes sense with the safety product. But how do you expect those two to trend for the balance of the year?

Evan J. Levitt — Senior Vice President, Chief Financial Officer and Chief Administrative Officer, HD Supply

Well, from a pay perspective, quite honestly, our national accounts pay is very well. They’re typically very well capitalized. We choose the new business with large national accounts that are well capitalized, that have the capability to pay us. Quite honestly, most of them pay us electronically and they pay us quicker than some of our smaller contractors do financially. So, that would be my comment on the financial side of working capital.

John Stegeman — Executive President, HD Supply and President, HD Supply Construction and Industrial – White Cap

Yes, my apologies, I’ll just add here. You’re right, we aren’t carrying some additional inventories in newer product categories — in new product categories for us, but additional focus on product categories for us. With some additional SKUs that were added, that inventory is turning well.

The receivable, I do expect that some customers will extend terms with us. They will take a little longer to collect some of those receivables in the current environment. Our credit teams do a phenomenal job in working with our customers. So, we are very sympathetic to the impact on many of the industries in which we operate in. And so, we’re going to work with our customers and the partnership to get through the crisis together. And as I said, we do expect to generate significant cash flow over the course of the year and we’ll monitor inventories and receivables very close.

Michael McGinn — Wells Fargo — Analyst

So, on those new inventory SKUs, I think you mentioned safety, good margin product — product margin category for you. But other distributors, you’re saying that it’s kind of hard to do business with these newer supplier relationships. Maybe that has to do with the rebate structure. I guess what are you doing right, what are other people seeing the headwinds in their business?

Evan J. Levitt — Senior Vice President, Chief Financial Officer and Chief Administrative Officer, HD Supply

Yes, some of this product, as you can imagine, is very much in demand from the suppliers. And so, in some cases, suppliers require payment in advance or on delivery. And depending on the product and the optionality we have to source it from other locations, we’ll make the decision on what terms we’re willing to commit to. But at the end of the day, our commitment is to have the products on hand when and where our customers need them.

Michael McGinn — Wells Fargo — Analyst

Thanks. I appreciate the time.

Operator

Thank you. Our next question or comment comes from the line of Patrick Baumann from JPMorgan. Your line is open.

Patrick Baumann — JPMorgan — Analyst

Hi, good morning, everyone. Thanks for taking me in. Just had a couple questions on FM. Jan-San, the product set is historically been pitched like lower margin mix, which is why you weren’t there. Just wondering how COVID has changed your view of this going forward? You mentioned you’re adding to the assortment. I’m just curious if you’re doing this kind of as a one-off or if you think you need to have it as part of the broader solution set for your customers going forward, such that it’s going to grow in mix terms and then kind of what are the implications of that? And then I got a follow-up.

Bradley Paulsen — President, HD Supply Facilities Maintenance

Yes, absolutely, it’s going to be part of our go-forward assortment. As Joe explained, safety is going to be a focus for our customers and we’re really deliberate in positioning HD Supply as the safest, most dependable, most helpful option for our customers and Jan-San is going to be part of that. So, we will figure out the margin implications over time. But as Evan just stated, that’s an obligation that we have to our customers.

Patrick Baumann — JPMorgan — Analyst

Got it. And then maybe if you could parse out the hospitality segment a little more. What did you mean by recovery in certain hotels in your sweet spot? I just — if you can peel the onion on that for us a bit in terms of how you look at mix within the hospitality segment, and maybe the differences in the recovery profile you’re seeing?

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

Sure. So, I’ll go really high level on this. Two basic camps you’ve got, full-service hotels, limited service hotels. Full-service hotels could be a fully flag Marriott location, a limited service to be a Courtyard by Marriott. We’re seeing, at least on our side, the recovery in the limited service, which makes sense, certainly in the southern states. And again, that’s one of our core customers in hospitality.

Patrick Baumann — JPMorgan — Analyst

Got it. So is your geographic mix more South than skewed in hospitality or —

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

So, we’ve got a national footprint. We’re just seeing the recovery from a customer perspective, more in the southern states than we are seeing in the northern states.

Patrick Baumann — JPMorgan — Analyst

Okay, I’ll leave it there. Thanks for your time. Appreciate it. Good luck.

Operator

Thank you. We have time for one more question. Our final question will come from the line of Mr. Andrew Obin from Bank of America. Your line is open.

Andrew Obin — BofA Securities — Analyst

Yes, good morning.

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

Good morning.

Andrew Obin — BofA Securities — Analyst

Just a couple of questions on competitive dynamic. What are you seeing from players like Home Depot and Lowe’s? Pricing pressure initiatives by them in your core markets, what’s the competitive environment looks like in that respect?

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

So, John, I’ll take this first. From our perspective, I think a lot of folks have gone through the same process as we have, and that’s obviously committed to the health and safety of their own associates and support of the customers in whatever manner possible. We haven’t seen any significant movement from a pricing standpoint.

That being said, I expect that it’s going to be a very competitive environment for the remainder of the year. And our perspective is, we’re going to play offense and get every ounce of available market share that’s in the market. And we feel like we have earned an incredible amount of credibility and trust with our customers through this crisis, and are well positioned to do that.

Bradley Paulsen — President, HD Supply Facilities Maintenance

And just as follow-up to that Brad, the business that that we have, that looks the most like Home Depot or Lowe’s is our Home Improvement Solutions business. And quite honestly, that business has outperformed for us when compared to Home Depot and Lowe’s. Even with the current comps that just came out from Home Depot and Lowe’s, our business outperformed that business.

Of course, Home Depot and Lowe’s, there’s a lot of business with one truck contractors. But I will tell you, most of their surge in business has been in the outdoor improvement areas, for landscaping, which was certainly highlighted in their earnings reports.

Andrew Obin — BofA Securities — Analyst

And just a follow-up in terms of cash flow — and apologize if I missed it. So, given that your liquidity is an advantage in this market, could we see you guys may be deploy more working capital for the remainder of the year to sort of pound some market share?

Evan J. Levitt — Senior Vice President, Chief Financial Officer and Chief Administrative Officer, HD Supply

We will certainly ensure that we are in stock for our customers with the products when and where they need it. And essentially, we’ve already made that investment in work cap. If you look at our inventory, our inventory is higher than it would ordinarily be at this level of sales, as we are investing in the customer.

But that being said, working capital is a source of cash for distributor during a downturn. Certainly, we’ve seen that in receivables as we’ve collected receivables. Inventory, we’re making the investments in the right places.

Andrew Obin — BofA Securities — Analyst

So, no need to have another step-up in inventories for second half?

Evan J. Levitt — Senior Vice President, Chief Financial Officer and Chief Administrative Officer, HD Supply

I don’t anticipate that, no.

Andrew Obin — BofA Securities — Analyst

Thank you very much.

Operator

Thank you. I’m showing no additional questions in the queue at this time. I’d like to turn the conference back over to management for any closing remarks.

Joseph J. DeAngelo — Chairman of the Board and Chief Executive Officer

Well, thank you for your questions. We continue to execute and work to establish two market leading companies. Our teams are focused on keeping our people safe and helping our customers and communities navigate a challenging environment. Thanks for your interest in HD Supply.

Operator

[Operator Closing Remarks]

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