Good day, and welcome to The Home Depot Q4 2016 and 2016 Fiscal Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Ms. Diane Dayhoff, Vice President, Investor Relations. Please go ahead, ma'am.

Thank you, Catherine, and good morning to everyone. Joining us on our call today are Craig Menear, Chairman, CEO and President; Ted Decker, EVP of Merchandising; and Carol Tomé, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analyst questions. Questions will be limited to analysts and investors and as a reminder; we would appreciate it if the participants would limit themselves to one question with one follow-up please. If we are unable to get to your question during the call, please call our Investor Relations department at 770-384-2387. Before I turn the call over to Craig, let me remind you that today's press release and the presentations made by our executives include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission. Today's presentations will also include certain non-GAAP measures. Reconciliation of these measures is provided on our website. Now, let me turn the call over to Craig.

Thank you, Diane, and good morning, everyone. Fiscal 2016 was a record year for our business, as we achieved the highest sales and net earnings in company history. Fiscal 2016 sales grew $6.1 billion to $94.6 billion, an increase of 6.9% from fiscal 2015, while diluted earnings per share grew 18.1% to $6.45. Sales for the fourth quarter were $22.2 billion, up 5.8% from last year. Comp sales were up 5.8% from last year, and our U.S. stores had positive comps of 6.3%. Diluted earnings per share were $1.44 in the fourth quarter. We continue to see broad-based growth across the store and our geographies. All three of our U.S. divisions posted positive comps in the fourth quarter, as did all 19 U.S. regions and top 40 markets. Internationally, both our Mexican and Canadian businesses posted positive comps in local currency for the quarter, making it 53 and 21 quarters in a row of positive comps, respectively. Our merchants and store teams did an outstanding job delivering value and service for our customers across multiple events throughout the quarter, both in stores and online. As Ted will detail, both ticket and transactions grew in the quarter, and all of our merchandising departments posted positive comps. We saw healthy balance of growth among both our Pro and DIY categories, with Pro sales outpacing DIY sales in the quarter. A portion of our overall Pro strategy is focused on the integration of the underlying business, which continues to progress. We are pleased with the traction that we are seeing, as we have successfully completed work on the first business use case. The roll-out of Interline's catalog of products is now taking place across all U.S. Home Depot stores. The next phase of the integration is focused on enabling Interline's customers to use…

Thanks, Craig, and good morning, everyone. We had a strong fourth quarter, as sales exceeded our expectations. We saw strength across the store, led by our Pro customer, and our online business continued its double-digit growth, with sales growth of approximately 19% in the fourth quarter. All of our merchandising departments posted positive comps, led by Flooring and Tools, which had double-digit comps in the quarter. Lumber, Outdoor Garden, Appliances, Decor, Indoor Garden, Lighting and Plumbing were above the company's average comp. Hardware, Millwork, Electrical, Kitchen-Bath, Building Materials and Paint were all positive, but below the company average. We continue to see balanced growth between transactions and average ticket in the quarter. Total comp transactions increased 2.8%, while comp average ticket grew by 2.9%. Our average ticket increase was slightly impacted by commodity price inflation and foreign currency. Commodity price inflation positively impacted ticket growth by approximately 32 basis points, while a weaker Mexican peso negatively impacted ticket growth by approximately 45 basis points. Looking at big ticket sales in the fourth quarter, transactions over $900, which represent approximately 20% of our U.S. sales, were up 11.6%. The drivers behind the increase in big ticket purchases were Flooring, Appliances, and several Pro categories. Once again, Pro sales grew faster than the company comp. We saw strong comps in Pro heavy categories like Fencing, Pressure-Treated Decking, Commercial and Industrial Lighting, Electrical Wiring, and Interior Doors. We also saw strength with our DIY customer, classes that outperformed included Special Order Carpet, Outdoor Power, Laminate Flooring and Storage. We drove record sales in each of our Black Friday, gift center and holiday programs. Our customers responded to our great values since traffic increased inside our stores and online, and we recorded our highest Cyber Week ever. Our events helped drive robust comps in…

Thank you. And as a reminder, please limit yourself to one question with one follow-up. Our first question will come from Simeon Gutman with Morgan Stanley. Simeon Ari Gutman - Morgan Stanley & Co. LLC: Thanks. Good morning, and congratulations on the results. My first question is on the – I guess, the balance between the same-store sales guidance and the gross margin guidance. How should we think about market share gains in that 4.6% versus the mix of product and/or, I don't know if it's promotion, but just maybe mix of product and maybe being more aggressive in the Appliance area?

Yeah, so I'll start, and I'll let Carol comment. When you look at the projected margin, as we've said, we're intending to lean into growth in categories that are lower-margin rate categories like Appliances, but also as our Pro business continues to grow with categories in Building Materials. And so that's really what we're looking at as it relates to the gross margin. And if you think about the last two years, gross margin has roughly been about 3 basis points. With the 15 basis points next year, that's about a 12 basis point decline, and we kind of consider that to be pretty flat. Carol B. Tomé - The Home Depot, Inc.: And maybe I'll just add a little color about our sales forecasting model. As you know, it starts with GDP growth forecasts, and for the U.S., GDP is projected to grow by 2.3% in 2017. We then add to that the benefits we believe we will get from rising home prices, housing turnover, and household formation. And we think housing will add another point-and-a-half growth to our overall growth next year. To that, we have added a little bit of share shift in Appliances and certain building categories. And just to put that in perspective, in 2016, Appliances contributed 50 basis points of our comp growth. So that gives you a sense of the share that we're including in our guidance. And then we're adding something else this year that we haven't included in the past, and that's what we call the cumulative wealth effect of home price appreciation. If you look at home equity, since 2011, home equity is up 108%. On average, that equates to $50,000 per household. And we believe that's contributing – as people use the equity of their house to spend back…

Thank you. Our next question will come from Seth Sigman with Credit Suisse. Seth I. Sigman - Credit Suisse Securities (USA) LLC: Thanks. Good morning, guys. Congrats on the quarter.

Thank you. Seth I. Sigman - Credit Suisse Securities (USA) LLC: My first question is about Interline. I may have missed it, but what are you assuming for growth of that channel? And as you think about the integration, it sounds like the initial roll-out of the catalog, that's gone well in the early testing. Can you give us a sense of what you've seen; maybe a lift or just the change in behavior as you've added that catalog to the store? Thank you. Carol B. Tomé - The Home Depot, Inc.: Well, I'll start with the growth assumptions and then we can talk about the performance. On the growth assumptions, we are assuming that Interline will grow faster than the company average in 2017, which was true in the fourth quarter as well. But remember, Interline is less than 2% of our total sales. So it just rounds out at the end of the day, and that's why our comp sales guidance is the same as our total sales guidance for 2017.

And we are – we're excited about the opportunities with Interline. It is a $50 billion market opportunity across multi-family, hospitality and institutional, which we own about 5%, give or take, of that market. So it's a significant opportunity for us to continue our share of wallet with our Pro customer. And as you called out, we talked about the first use case is allowing our stores to purchase the Interline product. The next thing we're working on is allowing our Interline customers to be able to buy product through Home Depot or homedepot.com on their account. And that we're focused on here in 2017. Seth I. Sigman - Credit Suisse Securities (USA) LLC: Okay. And I guess as a follow-up, you've discussed PFRI a lot over the years and the importance for your business. PFRI, it decelerated quite a bit in 2016, particularly towards the back half in year-over-year terms. Obviously, that disconnects with Home Depot's performance which accelerated. Do you think that's market share, maybe tying in one of the earlier questions, or do you think the mix of the business is changing in a way that's just – perhaps the underlying drivers of your business are changing a bit, too? Carol B. Tomé - The Home Depot, Inc.: I think PFRI is a great indicator of the health of the overall market. And as you can see, it is a healthy market. We are a big part of it, aren't we? Because improvements – if you look at the components of PFRI, improvements is one of the big components and we're part of improvements. So in a way, it's a bit circular. I'm not sure that it's a great predictive tool, but it certainly is a great indicator of the health. Now, here's a really fun fact – and I know you know this because you've done all the research in this area. If PFRI were to return to the mean of 4.5% and GDP remain the same, we'd have to grow about 18.5%. And assuming there's no share shift for The Home Depot, that's a $16 billion opportunity for us. So will we get all those sales? I don't know, but it certainly suggests as the housing market continues to recover, there's growth ahead for The Home Depot. Seth I. Sigman - Credit Suisse Securities (USA) LLC: Okay. Thank you for that.

We'll continue on to Christopher Horvers with JPMorgan Chase.

Thanks. Good morning.

Good morning.

Question, on the cadence in the year, how are we thinking about comps? You just blew through what was supposed to be a very difficult comparison and didn't have any impact at all. How are you thinking about the spring set-up this year and then the overall cadence comps? Carol B. Tomé - The Home Depot, Inc.: Well, as you know, we like to look at our business from a half and not a quarter because of what we call the bathtub effect. You're never really sure when spring will land. If we look at the split by half, we would expect the first half to be slightly lower than the back-half of the year. As you know, we're up against a tough comparison in the first quarter, particularly the month of February, where last year we had a U.S. comp of 11.8%. I will tell you, Chris, we planned for a positive comp in February. We are beating our plan. It's early in the quarter, of course, but we're feeling very good about our business.

That's excellent. On the gross margin, does the outlook reflect any, I guess, slowing supply chain benefits or other pressures like ocean freight? And then related to that, inventories were flat in 2016. Should we see the expansion in 2017 with Project Sync?

So on the gross margin, we certainly are seeing some pressure from fuel year-over-year, and Mark Holifield is here, can comment, but certainly, we expect to see some of that pressure in the year. But we will continue to get productivity through our supply chain, and then we'll invest that back into the business.

Yeah, Craig, it's Mark Holifield here. On fuel, yes, fuel does look like it's firming up. We use the Department of Energy to base our plans. The forecast there is $2.72 against what it was in 2016, $2.31. And right now, we're at about $2.58. But that's incorporated in our guidance. In terms of the Sync and continued benefit, we do see continued benefit coming from that as we continue to synchronize the activities between our vendors, our carriers, our distribution centers, and our stores. We are looking into a firming transportation market a bit, but we do expect that we'll be able to offset those things with the benefits that we get from our initiatives. Carol B. Tomé - The Home Depot, Inc.: On the working capital front, we expect working capital to be a source of cash for the business in 2017, and we're planning for inventory turns to improve two-tenths year-on-year.

Thanks very much. Have a great spring.

Thank you.

We'll now hear from Michael Lasser with UBS.

Good morning. Thanks a lot for my – taking my question. Carol, can you describe the thought process behind recalibrating the model that you use to predict your sales outlook for the year by adding a component based on the wealth effect? Some of the skeptics might argue that anytime you have to recalibrate your model this far into a cycle, that might be a sign of the top, especially when perhaps one could argue you're double-counting the housing impact because you do have a housing component already and then if you add another, that weights (36:15) pricing. Carol B. Tomé - The Home Depot, Inc.: Well, first of all, I will say it's a minor change; about four-tenths of growth year-on-year. Secondly, our forecasting model is directionally correct, but at the beginning of 2016, it certainly didn't predict a 6.2% comp in the United States. So we use all these factors to build a model to give us a sense of where we're going. There's another factor out there that we look at, but we haven't incorporated, but we're spending more time trying to understand, and that's the leading indicator of remodeling activity that's published by the Harvard Joint Center for Housing Studies. If you look at that, and I'm sure you have, you can see that it's suggesting growth rates higher than the guidance that we've provided. So no matter how we look at it, we're very confident with the sales forecast that we've given.

That's helpful. And my other question is on your gross margin outlook for the upcoming year, and really your promotional posture. It seems like you're leaning in and taking advantage of some of the market share opportunities that are going to be afforded to you, but how do you balance between suppressing the profitability of the category and gaining your fair share? So you could lead in, be a little more aggressive on some of the promotions, but if that's what the customer is now conditioned to expect, you may never be able to get that profitability back, even if you did pick up some market share in the process.

I think it's important to understand that the margin forecast that we're projecting is really much more around the mix of our business and what's growing in the mix of our business. Ted's here. He can comment. We're not looking to drive additional promotional activity, per se. This is all about, we continue to see categories like Appliances gain traction in the market. We continue to see our Pro customer engage in bigger projects and remodeling. Those carry lower rate businesses, but drive higher gross margin dollars, which is why we get the productivity on the operating margin line.

Yeah, Michael. This is Ted. I wouldn't say our share gains are coming on the back of promotional productivity. Appliances is certainly one category that is promotional, and we do participate in those promotions and have happily taken a lot of share. But the balance of the business, we have been very focused on everyday low pricing and bringing everyday low prices. As you know, we have a very strong Pro business, and you need to be priced right every day when the Pro comes into the store. So the market share gains are happening across the building, and that's the balance that we appreciate the most about it. And other than Appliances, we have not been leaning into promotions, albeit the marketplace in general has been a bit more promotional, that gives us more confidence to support our everyday low price positioning. Carol B. Tomé - The Home Depot, Inc.: One other data point, if I may. If you look at sales by category, peak to trough, while we've more than fully recovered everything we lost during the downturn, we haven't recovered every category. We still have $1.4 billion of sales that haven't fully recovered, and those are in low-margin categories. We want that to grow, and if housing continues to grow, it will.

Thank you so much.

Thank you. We'll go to Scott Mushkin with Wolfe Research.

Hi. This is Cody, actually, on for Scott today. Thanks for taking our question. Your Pro business continues to deliver exceptional performance. What is driving that performance? And can you update us on some of the initiatives you're running?

I mean, Bill and Ted can comment on the Pro business.

Well, we're – this is Bill Lennie. Just a comment on Pro activity. We're seeing a great balance between our low-spend and our high-spend Pro. Good health in the business being driven both by transactions, more transactions, and ticket. So it just says that we've got great activity in the stores. And, as Ted said, the drivers for the Pro are just in-stock and everyday value on the shelf. So it's just health across the business, across multiple categories.

Yeah, I...

Great. Yeah, let's (40:59) – continue.

Sure. This is Ted. The other thing that we continue to focus on is certainly being in-stock and having great value every day. We also strive to have the brands that the Pros want and the innovative product that we seek to deliver. And this happens throughout the store. For example, we're launching an even lighter drywall this quarter. It's 25% lighter, which helps the Pro complete their jobs and saves them time, and certainly a lot of backache. The Milwaukee outdoor power equipment, this is Pro runtime and power without the need of, obviously, messy fuels. So a lot of this is product and value that our merchants strive to bring every day for the Pro customer.

Great. Thank you. And many believe there's a lot of significant pent-up demand out there that will drive growth in housing in 2017 as you guys alluded to as well. However, rates are expected to rise. Is there a rate that you guys beginning to get worried? And how do you balance that pent-up demand versus the expected increase in rates? Thank you. Carol B. Tomé - The Home Depot, Inc.: Yeah, our analysis would show that for every 25-basis point increase in mortgage rates, it costs the homeowner who's applied for a mortgage $40 more per month. So that helps sort of dimensionalize the pressure associated with rising rates. With the median home price in the country of $250,000, mortgage rates could go up to 7-ish percent before the Affordability Index would fall at 100 or below. So there's (42:45) a way to go before we'd be concerned. And you know what, mortgage rates stand today at 4.2%, 4.3%, something like that, the historical mean is 5.8%. So even if a return to the mean, you're still below that inflection point.

Understood. Thank you very much, and best of luck.

Thank you.

Thank you. Our next question comes from Dan Binder with Jefferies.

Great, thank you. Just sticking with the Pro for a minute, I know you've highlighted product, value, credit, delivery. I'm just curious when you listen to the Pro, how much of the advantage do you have really lies with the store base, the density of the store base, the convenience of the store base in the markets?

I mean, there's Pro business across all markets. We actually look at the penetration of our Pro business on a store-by-store basis. And this isn't tied to a specific market. It's a broad-based approach that we've taken in the business candidly from the very beginning of Home Depot. Carol B. Tomé - The Home Depot, Inc.: We joke, we are Pro.

And then in a quarter, I hate to even bring it up, but the shrinks was up a bit. I was just curious if there was anything that you would attribute to that. Carol B. Tomé - The Home Depot, Inc.: I wouldn't read anything to shrink for the year. Shrink was up 1 basis point. This is just a year-over-year comparison.

And then the last question, if I could. Given the strength in e-commerce, is there any implications on the profitability or profit headwind as the e-commerce business grows within the broader mix of the sales?

Yeah, as we have shared in the past, we actually think about this as one business, that's the way the customer thinks about it. And so we handle this from a portfolio approach, and we look at a blended operation, because that's really where the customer is taking us with 45% of our orders being picked up in-store.

Okay. Thanks.

Thank you. We will continue to Dennis McGill with Zelman & Associates.

Hi. Good morning. Thank you.

Good morning.

Curious if you could elaborate a little bit on the Flooring category. It's been an area I think just in general in home improvement that hasn't been very robust even within your relative performance and to see that as a double-digit category, hoping you can maybe explain a little bit what was driving that.

Sure. You've heard us talk over the last several quarters about our investments in hard surface materials. And those businesses continue to do very well with laminate very strong. We're getting great product innovation on vinyl flooring. So today's vinyl flooring is not the 1950s and 1960s kitchens laminate in – or vinyl, rather. And so you're starting to see what's called Luxury Vinyl Plank introduced into many use cases. Tile continues to perform very well. But the thing that is really working for us right now is the soft side. You haven't heard us talk about the soft side in some time; our hard set has been doing great for several quarters. And we're now seeing the soft side pick up very significantly. So we have both ends of that business working for us right now, which is what produced the double-digit comps.

And that acceleration, Ted, from third quarter to fourth quarter was on the soft side, and was there any type of promotion or installed promotion-driven – driving that?

No. No promotion at all.

Okay. And then, Carol, on the capital spending plan of $2 billion, in the grand scheme of things, I guess it's not that much, but up from $1.6 billion in 2016. How much of that is definitely coming through versus things that might be planned and could potentially be pushed out? And just wanted to make sure that's the right comparison, the $2.0 billion to the $1.6 billion. Carol B. Tomé - The Home Depot, Inc.: The comparison is correct. We are planning to spend the capital that we are guiding to of $2 billion. It's about 2% of sales. And as you think about capital for our business going forward, if you want to model 2% of sales, I think that would be a good number to use. We're investing in the initiatives that we've shared with you, be it interconnected retail, supply chain; we are also investing into our stores. As Craig pointed out, 45% of our online orders are picked up inside of our stores, that means we need to do some reconfiguration to hold those orders, and make sure the experience is right. We did a lot of work with our customers this summer and got some good feedback from our customers about things we could do differently in our stores. So 500 of our stores will be receiving what we call a new store environment, (47:43) lighting, the floors are going to be polished up. The stores are relevant, we want to keep them that.

Okay, that's helpful. And, Carol, you mentioned the breach cost I think in the fourth quarter, is that right? And so do you have a number? Carol B. Tomé - The Home Depot, Inc.: It's $11 million in the quarter, $37 million for the year, $298 million life to date, and I think we're done. We're happy about that.

Okay, appreciate it. Thanks, guys. Good luck. Carol B. Tomé - The Home Depot, Inc.: Thank you.

Thank you. Our next question comes from Matt Fassler with Goldman Sachs. Matthew J. Fassler - Goldman Sachs & Co.: Thanks so much. Sorry. Thanks so much, and good morning. Can you guys hear me?

Good morning. Yes. Carol B. Tomé - The Home Depot, Inc.: Yes. Matthew J. Fassler - Goldman Sachs & Co.: Great. My first question relates to capital allocation. We obviously took note of both the dividend hike and the change in the payout ratio, as well as the new buyback authorization. Over the past couple of years, you've bought back more stock than you had initially guided to. Can you talk about whether the higher payout ratio would change your ability or your inclination to do so, I guess if the price was right, of course? And also just remind us of the leverage targets that you're thinking about.

I think we've guided at the beginning of each year based on the cash flow projections that we have for the business. We still have a target of 2 times debt to EBITDAR ratio that is something that our board is comfortable with, so it's possible that we could expand. Carol B. Tomé - The Home Depot, Inc.: Yeah, if you look at where the adjusted debt to EBITDAR ratio stands today, there's $2 billion of borrowing availability. It's not our intent to let that ratio decline, which it will if we don't lever back up. The interest rate environment is still very attractive. We're very pleased with how we've utilized debt financing to supplement our cash to buy back our share. So certainly not suggesting that anything is going to change off of our past practice. Matthew J. Fassler - Goldman Sachs & Co.: And then – thank you for that. And then my second question, my second question – thank you for that. My second question relates to big ticket in the fourth quarter. So this was the third straight year that your big ticket comp was strongest in Q4, and obviously you've been putting up amazing multiyear comps in aggregate in Q4, but big ticket seems to be the biggest driver. If you would talk about either changes in your selling push or in buying patterns, is it better traction in Appliances? Is it the Pro push in Q4? Is it marketing across a broad array of seasons? What is it that is driving your transactions over $900 to such a great degree in Q4 more so than over the rest of the year?

Sure, Matt. I'd say, first of all, that what we really like in the business is the balance. So, as Carol and Craig said, our comp in the U.S. stores was 6.3% in Q4; it was 6.2% for the year. We have an even balance of ticket and transactions. In the fourth quarter, it was roughly 3% for each of ticket and transaction. We're getting growth in our small ticket. We're getting the growth that you're asking about in big ticket, and we're also seeing an increase in items per basket. So just that breadth of performance across the store we like very much. What's driving the outsize gains for another quarter in big ticket is really, you named them, so we continue to drive the Appliance business in the fourth quarter. Appliance has become a big selling period, but traditionally, the Black Friday period in retail. Our Flooring business that I talked about helped drive that ticket. And then the broad strength of the Pro across the entire store is the third large element driving that outsize comp in big ticket. Matthew J. Fassler - Goldman Sachs & Co.: Understood. Thank you so much, Ted. Appreciate it.

Catherine, we have time for one more question.

Thank you. And our final question today will come from Seth Basham with Wedbush Securities.

Thanks a lot, and good morning.

Good morning.

Good morning.

My question is around SG&A, specifically labor optimization. You mentioned this in the past as a potential initiative for 2017. If you can provide update on how you are thinking about it now that would be helpful.

Yeah. And when it comes to optimizing, we're looking at that across multiple aspects of our business. We on occasion look at the structure within our business and we have organizational changes. This past year, for example, we brought together our online and marketing teams because that's really the direction of where the business is going. So we're continually looking at how do we optimize and drive productivity within our business around the SG&A. Carol B. Tomé - The Home Depot, Inc.: And certainly, Craig, you commented on what we're doing with freight inside the store.

Yes. And this is an area that in 2016 really is the first year that we've begun to focus on freight handling inside our stores. It's an area of opportunity for us as we continue to leverage the work that we've begun with supply chain Sync, but really optimize how we flow product inside the stores. I've talked about in the past that what we'll ultimately have to get to in our stores is handling product inside the buildings as efficiently as we do in our DCs.

Got it. So as you look at the forecast for SG&A growth in 2017, does it contemplate much in the way of labor productivity savings? Carol B. Tomé - The Home Depot, Inc.: No material change to what you've seen in the past several years.

All right. Thank you so much.

Well, thank you, everyone, for joining us today, and we look forward to talking to you on our first quarter earnings call in May.

Thank you. Ladies and gentlemen, once again, that does conclude today's conference. Thank you all again for your participation.