Albertsons Companies Inc (ACI) 2017 Q3 法說會逐字稿

Welcome to the Albertsons Companies third-quarter 2017 conference call, and thank you for standing by. (Operator Instructions). This call is being recorded, and if you have any objections, please disconnect at this time.

I will now turn the call over to Miss Melissa Plaisance, GVP of Treasury and Investor Relations. Please go ahead.

Hello, and thank you for joining us for the Albertsons Companies third-quarter 2017 earnings conference call. With me today from the Company are Bob Miller, Chairman and CEO; and Bob Dimond, our CFO.

Today, Bob Miller will provide a brief introduction and will touch on our recent results and trends, discuss some of our latest milestones and plans to grow and improve the business. He will also discuss the latest developments in real estate and technology, corporate development, and synergies. Bob Dimond will then provide an overview of our third-quarter results, and Bob Miller will end with some closing comments.

I'd like to remind you that management may make statements during this call that include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not limited to historical facts, but contain information about future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions, and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements will be contained from time to time in our SEC filings, including those on Form S-1, S-4, 10-Q, 10-K, and 8-K. Any forward-looking statements we make today are only as of today's date and we undertake no obligation to update or revise any such statements as a result of new information, future events, or otherwise.

Please keep in mind that the financial statements and management's prepared remarks are -- there are certain non-GAAP measures. And the historical financial information includes a reconciliation of net income to adjusted EBITDA.

And with that, I'll hand the call over to Bob Miller.

Thank you, Melissa. Good morning, and thank you for joining us. I'll begin by commenting on sales. During the third quarter, we expected to see identical store sales improvement as a result of significant promotional and pricing investments. But we've experienced disappointing results from these investments, as our ID sales in the third quarter of 2017 matched the second-quarter decline of 1.8%.

As a result of these investments, our third-quarter gross margin was down 140 basis points compared to last year, and adjusted EBITDA of $429 million came in below last year's adjusted EBITDA by $246 million. But we are seeing an improvement in the fourth quarter, and are very encouraged now that our quarter-to-date ID sales have been positive through the first six weeks of the quarter. And we believe that they will remain positive through the remaining six weeks of the quarter.

Inflation in food is still low compared to historic levels, but is showing continued increases. And while it is not all passed along during the third quarter, we're beginning to see it move into pricing in many categories across the store. We also believe that as our marketing and merchandising strategies take hold, we will begin to see year-over-year growth in adjusted EBITDA as we move into fiscal 2018.

We anticipate improvements to adjusted EBITDA as a result of $100 million in incremental synergies from the Safeway acquisition as we convert the remaining 532 stores onto Safeway's IT systems, resulting in the elimination of TSA fees paid to SuperValu, as well as from the implementation of $150 million of cost reduction initiatives that I will touch on in a moment.

We currently estimate these synergies and cost savings initiatives, together with continued identical store sales momentum, will result in adjusted EBITDA in fiscal 2018 of approximately $2.7 billion. In addition, our balance sheet remains strong and we have ample liquidity, including our $4 billion ABL revolver, under which there are no current outstanding borrowings.

Our team continues to focus on making our stores the favorite local supermarket in the neighborhoods that we serve. At the same time, our e-commerce and digital marketing teams are very focused on meeting consumers' changing needs. With our growing home delivery business, our relatively new Drive-Up and Go click-and-collect offering, the initial rollout of Plated meal kits in our stores, and our recently announced alliance with Instacart, we are positioning ourselves to serve our customers whenever, wherever, and however they prefer.

Once the Instacart platform is fully developed, customers across many of our key markets will have access to same-day delivery in as little as an hour. We expect Instacart's delivery service to be available in more than 1,800 stores by mid-2018. In addition, our own brands group continues to develop new products to meet our customers' changing needs and desires.

Today we are also announcing some changes to our executive team. Wayne Denningham, President and Chief Operating Officer, will retire near the end of the fiscal year. Wayne's contribution and service, spanning over 40 years with us, are greatly appreciated, and we wish him well in retirement.

In addition, I'm pleased to announce that promotion of Susan Morris to Executive Vice President and Chief Operating Officer, who will report directly to me and assume Wayne's responsibilities over operations, distribution, and manufacturing. Going forward, I intend to be very involved in our operation and merchandising decisions.

Susan has been with the Company for 32 years, and has served in a variety of senior executive roles for us, including most recently as EVP of the Western Region, and previously as EVP of the Eastern Region; and prior to that as Division President of multiple divisions.

Separately, I have signed a one-year extension to my employment agreement, which will run now through January 30, 2019.

Let me talk about digital, e-commerce, and loyalty. We want to allow our customers to seamlessly shop with us and are accelerating investment in the expansion of our capabilities in e-commerce, digital marketing, and loyalty programs to drive sales.

In fiscal 2016, we expanded our online ordering and home delivery offering to 10 new markets, and expect to serve 34 markets in eight of the top MSAs by the end of fiscal 2017. We're pleased to report that our e-commerce home delivery business, established within Safeway in 2001, continues its double-digit growth year-to-date in the third quarter.

Our in-house home delivery offering stands apart from many of our competitors, as our employees pick the orders in our stores; the orders are loaded by our employees in the Company-owned, temperature-controlled trucks; and, ultimately, are hand-delivered into our customer's kitchens.

In addition, we're able to utilize our well-located store locations to rapidly expand Drive-Up and Go to provide additional service option to our customers. We expect to expand this offering to 80 stores by fiscal year-end 2017, and to approximately 500 stores in fiscal 2018. We are also upgrading our mobile app for delivery in [Drive and Go] to make it more appealing and easier to use.

As discussed, we've just begin our new alliance with Instacart and are pleased with the initial consumer response being seen in the geographic areas where it has been rolled out. We continue to see growth in our pharmacy delivery business -- which includes mail-order, MedCart, and specialty drug deliveries -- are all seeing double-digit growth year-to-date through quarter three.

We continue to make data-driven, personalized offers to our customers through Just 4 U, which is expanding into new markets. In fact, on a year-to-date basis through quarter three, our registrations for Just 4 U, MyMixx, and United's loyalty program combined, increased 23% since the beginning of the year. We also continue to expand fuel rewards. The weekly average sales of participants in these two programs is significantly higher than non-users, which is very encouraging.

The own brands portfolio consists of more than 10,000 high-quality products with sales in 2016 of nearly $11 billion. That resonates well with our shoppers. In the third quarter, year-over-year, we have demonstrated great products since our merger with Safeway and increased sales penetration of own brands by 62 basis points to 22.3%, and own brands' volume penetration by 80 basis points to 22.1%, excluding pharmacy, fuel, and Starbucks sales.

Own brand continues to deliver on innovation, with approximately 400 new items already launched in 2017, and more than 1,000 in the pipeline for 2018. We're excited about our O Organic brand, which posted a 14% growth in sales year-over-year in the quarter, with over 1,000 items, and plans to introduce 500 new items in 2018. O Organic now joins Lucerne, Signature, and Signature Cafe as a $1 billion brand. In addition to new item innovation and brand development, own brands continues to focus on package redesign to refresh shelf presence and comply with new regulatory nutrition guideline changes.

As we move forward, we will focus on a number of key operating initiatives to improve our results. We plan to continue to re-merchandise and refresh our store base, partner with differentiated brands, leverage our pharmacy and specialty pharmacy business, expand fuel centers and convenience stores, leverage data analytics to improve the customer experience, grow our loyalty program memberships, accelerate e-commerce rollout and capabilities, as well as further strengthen our own brand portfolio and expand our natural, organic, specialty, and ethnic offerings.

In addition, we have expanded our efforts on cost reduction throughout the Company and have identified more than $150 million of additional cost savings for 2018 in areas including corporate and division overhead, advertising circular, and tag costs, product packaging costs, and store level costs for services and supplies, to name a few. These initiatives are being pursued with great energy and speed, and we are encouraged that they will enhance our performance as we move into 2018.

In the area of real estate and corporate development, we have opened 18 new and acquired stores, and remodeled 119 stores year-to-date. We also continue to evaluate acquisition opportunities to expand our business and serve our customers in new and different ways.

As we reported earlier in this quarter, we purchased Plated, a leading meal kit provider. Not only do we expect Plated's online business to continue to grow at a rapid pace, but this will accelerate our ability to offer meal kits in stores. In fact, we have begin in-stores sales and several stores in Northern California and have plans to expand to many stores across the Company by the end of 2018.

We also made an equity investment in El Rancho, a top operator of Hispanic stores, which will allow El Rancho to grow more quickly and enable us to better serve the growing Hispanic community.

We will continue our disciplined approach towards managing capital expenditures. For fiscal 2017, we expect to spend approximately $1.5 billion, including approximately $200 million for Safeway integration-related capital expenditures. And we expect to complete approximately 165 remodel projects and open 21 new and acquired stores.

With the Safeway integration largely behind us, we expect our capital expenditures for fiscal 2018 to reduce to approximately $1.2 billion. This is a reduction of approximately $300 million from fiscal 2017. Though we are decreasing our capital expenditures, we will increase our investment in technology in fiscal 2018.

Finally, we will be automating several distribution centers over the next few years, which will greatly improve our labor productivity, increase storage density, enhance inventory management, and shorten stocking timelines. We expect our first automated distribution center in Tolleson, Arizona, to be operational in the fourth quarter of 2017. While the automation of our distribution center requires a capital investment, we expect this automation will generate substantial EBITDA improvements going forward.

On the technology side of our business, since we began the conversion of the Albertsons stores to our in-house Safeway IT platforms in late June of 2015, we have completed the transition of eight divisions: Southern, Houston, Denver, Intermountain, Seattle, Portland, Southern California, and Southwest. This brings the total number of converted stores to 456.

In addition, we have completed conversion of seven distribution centers and changed the source of supply from one distribution center for more than 350 stores. The conversions are on schedule, and we continue to improve both our approach and efficiency with every division.

As we look ahead, 2018 will be a significant year for the integration team as we convert the remaining 532 stores in Shaw's, Jewel, and Acme, as well as five distribution centers, allowing us to be fully on the in-house systems. We will also continue to reduce supply chain costs by consolidating two Southwest distribution centers into one. No source of supply chain is required to convert Shaw's, Jewel, and Acme, so we expect these conversions to be much less disruptive to the business.

I'm also pleased to report that the realization of synergies continues to go well. We are on track to deliver $675 million of synergies in fiscal 2017, and deliver approximately $800 million of synergies on an annual run basis by the end of fiscal 2018.

With that, I will now turn the call over to Bob Dimond, our Chief Financial Officer, for an overview of our third-quarter results.

Thanks, Bob, and hello, everyone. Sales and other revenue remained relatively flat at $13.6 billion in the third quarter of fiscal 2017 compared to the third quarter last year. Fuel sales increased $117.6 million. And new stores and acquisitions, net of sales related to store closings, contributed an increase of $95 million. These increases were offset by a decrease in sales of $225.3 million from the Company's 1.8% decline in identical store sales.

During the quarter, we invested heavily in price in order to attempt to drive identical store sales, but we experienced disappointing results from these investments. Our identical store sales decrease of 1.8% resulted from a 2.7% decrease in customer traffic, offset by a positive 0.9% increase in average ticket size. As mentioned earlier, we are encouraged by the trends in our identical store sales over the past six weeks, which are positive over the same six weeks in the prior fiscal year.

Gross profit margin decreased to 26.7% for the third quarter of fiscal 2017 compared to 28.1% for the third quarter of fiscal 2016. Including the impact of fuel, gross profit margin decreased 130 basis points. The decrease is primarily attributable to investments and promotions and pricing, in addition to an increase in shrink expense partially due to system conversions.

Selling and administrative expenses increased to 27.4% of sales in the third quarter of fiscal 2017 compared to 27% of sales in the third quarter of fiscal 2016. Excluding the impact of fuel, selling and administrative expenses as a percentage of sales increased 70 basis points compared to the third quarter of fiscal 2016. The increase in selling and administrative expenses as a percentage of sales was primarily attributable to higher employee wage and benefits cost, higher depreciation and amortization expense, and deleveraging of sales on fixed costs.

Interest expense was $193.9 million for the third quarter of 2017 compared to $212.4 million in last year's third quarter. The decrease in interest expense during the third quarter of 2017 is primarily due to lower average interest expense at -- lower average interest rates on outstanding borrowings as a result of our refinancing transactions last year.

Our adjusted EBITDA in the third quarter was $429 million or 3.2% of sales compared to $674.8 million or 5% of sales in the prior year. The decrease in adjusted EBITDA primarily reflects our investments in promotions and price, together with higher employee wage and benefits cost and deleveraging of sales on fixed costs in the third quarter.

Net cash provided by operating activities was $710.6 million for the first three quarters of 2017 compared to $1.109 billion in the prior year. The decrease in cash flow from operations was primarily due to a decrease in operating income, offset by lower interest in income taxes paid, and other changes in working capital.

Our balance sheet remains strong, with solid liquidity. As of December 2, we had no borrowings outstanding under our $4 billion asset-based revolving credit facility, and total availability of approximately $3.3 billion, net of letters of credit.

On December 3, 2017, we completed a reorganization of our legal entity structure to effectively make Albertsons Companies, Inc. our corporate parent and simplify our overall tax reporting and compliance requirements. We believe this reorganization will allow us to be more tax efficient in the future and reduce administrative and compliance costs.

Also in December, the Tax Cuts and Jobs Act was signed into law. And based on our preliminary review of the Tax Act, we expect it to result in a significant ongoing benefit to us, primarily as the result of the reduction in the corporate tax rate from 35% to 21%, and the ability to accelerate depreciation deductions for qualified property purchases. Beginning in fiscal 2018, we expect our effective tax rate to be in the mid-20s before discrete items. We continue to evaluate the impact of the Tax Act to our business, and will provide an update when we report our fourth-quarter results.

As we move forward, our strategy is to continue improving operating performance with a focus upon driving net sales, adjusted EBITDA, and free cash flow, which will allow us to pay down debt. We continue to feel good about our ability to deliver operationally driven improvements to our balance sheet.

And now, Bob Miller will provide some closing remarks.

Thanks, Bob. While our sales momentum didn't pick up as quickly as expected in the third quarter, we are now halfway through the fourth quarter with positive identical store sales. We have continued plans to drive sales in store and online, and have numerous opportunities for cost reductions. We are also excited about our recent investments in an equity stake in El Rancho, our alliance with Instacart, and the rollout of Plated in our stores. And we will continue to evaluate other strategic opportunities to serve existing customers in different ways.

We believe that sales growth, led by continuing to run great stores; enhance the customer experience; improving our digital marketing, loyalty, and e-commerce efforts; and innovation in own brands, coupled with successful cost reduction efforts and the continued execution on incremental synergies from the Safeway acquisition; should allow us to generate improvements in sales and achieve our target for adjusted EBITDA of approximately $2.7 billion in 2018.

As we move forward, we are confident that our dedicated employees will deliver what our customer need and want. And, in turn, we expect our free cash flow to grow, allowing us to pay down debt and increase our financial flexibility.

With that, I'll turn it back to the operator for questions.

(Operator Instructions). Geoffrey McKinney, Deutsche Bank.

You noted the price investments in the third quarter didn't deliver the ID sales that you expected. Do you have a sense of what ID sales would have been if you had not made the price investment? And then I might have missed it in the prepared remarks, but did you indicate what traffic was year-over-year as well in the quarter?

Let me take the second part first. Our customer count was down 2.7%. Basket was up 0.9%, almost 1%. But I will tell you that our customer count is trending positive in the last few weeks of the first quarter -- fourth quarter, so we're encouraged by that.

It's hard to say where the investment -- where the sales would have been without the investment. I will tell you, in some cases, we were very promotional in big markets where we have number one share. And it just caused the market to be extremely promotional along with our investment, so we didn't get anything for that promotional money. So I assume, maybe if we hadn't have heated up the market so much, we would have been a little flatter to about where we are now in those markets.

Other markets where we invested in regular pricing reductions, that's a slow growth. We're starting to see growth in some of those markets today. So it's a broad-based plan to invest, and I can't tell you what it would've been without it.

And have you held these promotions to start the fourth quarter when ID sales turn positive?

I would say we're still promoting aggressively. But it's more of a targeted plan in key markets, and we're getting good identical sales improvement in those key markets.

Okay. And then on the fiscal 2018 guidance of $2.7 billion for EBITDA, does that include the expected additional synergies and cost saves as if they were realized and not just identified?

That is true. They are included.

Okay. And then I know by the end of next year, you expect to be run rating $800 million. What do you expect delivered Safeway synergies to be next year versus this year? Just trying to bridge the LTM figure versus that figure.

Sure. We'll -- to help you out with stitching that together, we'll end this year with $675 million worth of synergies. This coming year, as Bob indicated in his prepared remarks there, we will add $100 million to that, which would give you up to roughly $775 million. But that's just in the P&L. As upon a run rate basis, we will have completed all of our integration activities by the end of next year, so we'll be at a run rate in excess of -- or right around $800 million.

Okay. And then from the additional $100 million would be on top of that run rate of $800 million?

No. The additional $150 million (multiple speakers) off of where we end this year at the $675 million. Oh, I see. The cost saves. I'm sorry. Yes, that's in addition. Yes, those are (multiple speakers)

So once (multiple speakers) the cost saves, the $800 million of synergies was part of the $800 million of Safeway. Okay, so not incremental to that $800 million. Okay.

Correct.

Okay. And then I guess in light of highlighting the benefit from the tax policy change, do you have a ballpark for where cash taxes could be next year?

Yes. As I indicated in my prepared remarks there, and I think we also put it in the press release, we think it's going to be significant. We continue to evaluate it. So I'll give you -- and it depends upon which year you might look at. But we think it could be in a range of $150 million to $300 million depending upon the year over the next couple of years.

That's helpful. Thank you, guys.

William Reuter, Bank of America Merrill Lynch.

This is actually Mike on for Bill. I have (multiple speakers). Hello?

Hi. Go ahead, Mike.

I have two questions. First, could you give us an outlook for inflation for either 2018 or the first half of 2018?

It's hard for me to project. We're seeing inflation grow month over month. But I can't tell you where it's going to end up.

Last month it was 0.09, right, Bob?

That's right.

Which is the best month we've seen in 19 months. I guess if you think inflation is good, that's the best. So I can't tell you what it's going to grow to, but it's going to continue to go up, we think.

Bob, other comments?

Yes, I mean I've seen various economists indicate that they're believing next year will range between 1% in 2%, and that's kind of our outlook as well. And if you look at how, as Bob just indicated, things have been progressively increasing a little bit month by month, the most recent report from the BLS, as you've probably all seen, was positive 0.9% for December. So we're optimistic that it may continue to rise slowly from there.

Got you. And then my second question is, are you seeing anything different in terms of the competitive landscape, such as bigger changes from mass competitors or from some other value options?

Well, I will tell you that things are still competitive out there. That's the nature of our business. But what's really happening today and we're excited about, we continue to see less new stores open every year that affect our stores. Next year will be at least 30% less than opened this year. And this year was less than the year before. So we continue to see less competitive openings. We are excited about that, as we don't have to compete with as many new stores.

All right. Thanks so much.

Carla Casella, JPMorgan.

I'm wondering on the sale-leaseback proceeds, what you intend to do with all those proceeds. And how much have you already reinvested?

I'll let Bob handle that.

Yes, Carla. Our strategy for that is to use it first for paying down debt; or if we see a strategic opportunity for an acquisition, it could potentially be used for that as well. For example, we've just acquired a couple of companies this past quarter, as we discussed there with Plated and the investment in El Rancho. If there were any other great opportunities like that, we might utilize a small piece of it for that. But in the absence of that, we'd be paying down debt.

And have you used any of it currently to pay down debt?

We have.

And is there any specific debt you'd go after?

I don't have the exact number for you. But during the quarter, I think you'll see in our financials here, there was a couple hundred million dollars paid down during the quarter.

Okay. Is there any specific tranche of debt, though, that you are targeting?

During the third quarter, we had an opportunity to repurchase some of our NAI bonds, and so we'll continue to evaluate on an opportunistic basis what makes sense.

Okay, great. And then the employee -- the wage increase, was that fully in the third quarter, or should we see wages increased more in the fourth? Or should we just annualize out the increase for the next three quarters to get to a run rate level?

Most of it was in the first three quarters. We will have some additional in the fourth quarter. But if you think about the minimum wage, they all started around the first of the year. So they're probably -- are going to be the same. But some union contracts that started mid-year are now in effect. We don't have a lot of contracts in the fourth quarter or next year compared to what we've had in the past 12 months.

Okay, great. And then the -- you mentioned some of the gross margin weakness was related to systems conversion and shrink. Can you say how much of that? Because I would assume those two are more one-time in nature, and we may see some of a reversal of that as we go into next year.

Let me say this: the third quarter was, by far, the biggest hit from our integration. When we -- if you think about it, in Southern Cal, we had five distribution centers. We reduced that to two; closed three; moved all the stores to different source of supply; changed the systems on the Albertsons stores from cost accounting to retail accounting; had more shrink than normal. It was very costly. It's been costly over time.

Fortunately, all of the distribution changes for stores are almost done except the Southwest division. And that's going to all be behind us mostly in this year. So we think a lot of that as one-time. I don't know that we can give you a number.

Bob, you might talk about the shrink some.

Yes. As far as shrink goes, we do track that as a separate component. In the third quarter, for example, it was about 50 basis points of our 140 basis point reduction there, was due to that. That, as Bob indicated, was by far the worst individual quarter, year-over-year. If we were to look at it on a year-to-date basis, it's closer to 20 basis points. So we would expect that as we go into next year, we will get that under control, and we have an opportunity to reduce that.

Okay, that's great. And just one more question on the Safeway integration. What stage would you say you are in on the price investment standpoint? Are you close to done with that process?

I would say our price investment in our business will continue for a long time. But we don't see big price investment going forward, as we've had in the past two years with the -- if you think about the competitive environment, we had deflation in our industry; all of our competitors and us were fighting for sales, spending a lot promotionally. And as we get a little inflation and get comfortable with our identical sales, I will tell you that my history -- and I've been around a long time -- the competitive situations slowed down a little. And we don't think we're going to have to invest any more next year than what we have invested this year. And we have very little margin improvement next year, mostly driven by sales increases.

Great. Thank you so much.

Kristen McDuffy, Goldman Sachs.

Just a couple of cash flow questions. I believe when you bought Safeway, there was some contingent value rights related to Casa Ley. Would it be a cash payment required for that on January -- at the end of January, given that you hadn't sold the asset yet?

I'll take that. Actually, the way that that would work is if we -- to your point -- if we don't sell the asset by the end of -- I think it's February, then -- or by February, then we would need to buy it back. We will be releasing -- your timing is perfect here; we will have a release out later today to talk about a transaction. I would rather not give the specifics of that. That will be in a release later today, but what it will indicate is there is a buyer. And so in that particular case, we would not have to pay any cash out.

That's helpful, thank you. And then what are you expecting to pay for pension contributions in fiscal 2018?

Yes, we continue to evaluate. We need to finish out here this year. But our current estimate is between $50 million and $60 million.

And that compares to nothing for 2017, right?

No. It was about $32 million for 2017. It is a slight increase, as you might recall. When we did the Safeway acquisition, we ended up front-loading, if you will, by paying about $260 million up front. It's a requirement by the PBGC. And that gave us kind of three years where we did not need to pay anything. So this will be the first year of paying a little bit. That's why the increase.

Got it. And I was looking at the working capital fluctuations, and it looks like working capital was more of a use of cash than is typical. Can you talk about that?

Yes. Actually, if you would look at our third quarter, that is the quarter that we typically would be building inventories for the holidays. And so this particular year, inventories increased by -- or the use of cash for inventories increased by about $279 million. A year ago, that was $216 million. So I would say that that's just a normal, seasonal fluctuation we would expect. Typically how that works is it'll flip back, most of it in the fourth quarter, a little bit in the first quarter, as far as a favorable trend that you have to see coming back in those future two quarters.

Got it, thank you.

Bryan Hunt, Wells Fargo.

I was wondering if you could discuss when in Q4 did same-store sales turn positive, and elaborate on the magnitude of the increase that you are seeing so far?

Well, I will say we don't give quarterly guidance, so we aren't going to comment on the number. But I will tell you we've been positive at least four or five out of the last six weeks.

And did you all take any specific actions to trigger this? Or do you think it's a result of the investments made in the previous quarter?

I think some of it was investment in the previous quarter. But also we've been more targeted in our investments, starting late in the third quarter and into the fourth quarter, which we think are getting us better results than we were doing before.

And Bob, as -- yes. Those targeted investments, as you specify them, were there just more blanket investments made? And are the targeted investments from a total impact to the P&L less than then they were previously?

They are less than they were previously. But we just picked certain divisions that we thought that were important to us to drive sales, and we increased the promotional spend. And in other divisions, we did not spend as much promotionally and seen margin increases in those divisions. So we think targeting these to certain divisions gives us a bigger bang for our buck, and it seems to be working very well.

Great. And just to follow up on the same-store sales increases, did traffic increases coincide with the same-store sale increases, or are they a little independent?

They certainly coincide. Our traffic trends are much better this quarter. In fact, in the last few weeks, we've been positive in customer count. So first time in a while, so that's a very good trend for us. And we would expect that to continue in the fourth quarter.

And just a few more questions. When you look at that $2.7 billion of guidance, and I back out the incremental savings from the Safeway integration as well as the $150 million of targeted cost savings that you all enumerated, there's about -- based on what my estimate is for this year, there's about a $200 million increase that you all have to realize from operations.

Where do you see that driven? Do you feel like it's inflation-driven, or the fact that you believe your same-store sales are going to continue to carry over positive in the next year? What's your confidence level in that $2.7 billion?

Well, let me take it first, and then I'll have Bob. Certainly we have a little bit of inflation in that number. We think historically inflation has been 2% almost -- if you go back many years. We think we're going to get back to that run rate or maybe a little less. There's a little bit inflation-driven.

But also, Bob, you can comment on shrink and other things.

Yes. Bryan, I just want to make sure that you get the pieces that are incremental here. Because I don't view it as a $200 million differential, so maybe we've confused some folks on the call.

Currently we have an LTM EBITDA that's about $2.4 billion, just shy of that, so you're building from there. And you've got $100 million of incremental Safeway synergies that we talked about. And then on top of that, an incremental $150 million worth of these cost savings initiatives that we discussed. So the two of those together are an incremental $250 million. And so that just leaves you an additional $50 million to get to $2.7 billion.

That $50 million will come from the confluence of a variety of things, as Bob indicated. Some from ID sales being positive; but also we've got a real opportunity, as discussed on a prior question, to get our shrink back under control and reduce shrink year-over-year which we think has an opportunity of more than [flooding that cap].

Can you give us an idea of what shrink is year to date? What the impact is to margins?

Yes. On a year-to-date basis, it was 24 basis points.

Okay.

(multiple speakers) in excess of $100 million.

And then my last question. So, Bob, if we're starting from $2.4 billion, are you trying to say that Q4 is going to be flat year-over-year? Or from --?

I didn't say that. I was just trying -- we're not giving any guidance for the fourth quarter. So I was just saying, if you were to start from where we're directionally at right now, you can build there by just those components I gave you, to keep it simple.

And I'm sorry, my last question. A lot of your peers, as they've built out their -- I'll call it generally click-and-collect programs -- it's definitely had an impact to margins. [So does] the cost they've invested in training and other initiatives to get their people and their systems right to execute this flawlessly.

Can you talk about your cost to invest to drive your Drive-Up and Go initiative for 2018? It seems like you are rolling it out pretty aggressively. As well as your delivery initiative, and maybe what kind of drag that may have on profitability. And that's it for me, thanks.

Yes, as far as the impact there, it is less from an incremental profitability on the incremental sales, certainly up front. There is a little bit of capital that we've got to deploy. But as far as a big drag to EBITDA, we haven't experienced that.

Let me say that we have a number of pick stores for our home delivery who are trained -- people are trained full-time in the stores to pick orders; and those are the stores that we are rolling out first. And will cover in a majority of the stores, where the people are already trained, have the system, have the carts, know how to pick the orders. It will not be as big a cost as somebody starting from scratch.

Very good. I'll hand it off. And I really appreciate your time.

Hale Holden, Barclays.

I was wondering, in the gross margin impact in the quarter, it sound -- [its] shrink in the longer timelines to get back. But is the assumption that you would get most of the promotional spend back in the current quarter? Or reverse it?

No. We're still aggressively spending in the fourth quarter, but more targeting and less than in the third quarter.

So is it different, or just a smaller select group of markets that you're targeting in the current quarter?

Yes, we've only picked certain markets to target very aggressively. We're getting good results there. It's not the whole Company. And before, we had pushed all of our divisions to get comp sales moving, and it cost us a lot of money. And we're not taking that approach today. We're really monitoring from here what our promotional levels are.

So some markets will be less promotional -- some of the markets where you have a dominant share -- than where you would have been in the prior quarter?

I would just say, I'm not going to get into what markets or how we invest, but yes. We're investing in certain markets more than others.

And then I was wondering if you could bridge us East Coast/West Coast and give us a sense of what you're seeing on the East Coast versus the California stores.

We don't give divisional breakdowns. Sorry.

Okay. I appreciate the time. Thank you.

Brent Engel, Allstate.

One clarification question here. On the taxes, the $150 million to $300 million that you guys cited, is that tax benefit? Or is that what you guys are expecting for cash taxes kind of for the next few years?

That is the cash tax benefit of the new Tax Act. So that's savings.

Okay. And that's -- you're saying that that's on an annual basis?

That's correct. So it's significant.

Great. And then another clarification on the pension contributions. So, is -- I guess, how should we read this? The $50 million to $60 million, is that a run rate number, or will that increase from here?

We haven't disclosed what it will be going forward. It does change year to year. We reevaluate and recalculate it each year. But we'll -- we're near the end of this year, so we have a pretty good idea as to what next year's obligation is.

Okay. But is there any way to just talk about the volatility in that number? I mean, is it possible that could double? Or should it stay kind of around that range?

It can be volatile.

Okay. And then just on the distribution -- automating the distribution centers, I assume --

I'll just go back on that. It all depends upon how well the returns on investments go. That can have a nice blunting impact. What the discount rates are; a lot of those things have a big difference. So quoting out more than a year in the future doesn't make (multiple speakers).

Certainly, certainly. Okay, understand. And then on the distribution centers, I'm assuming the first one that's getting rolled out in the fourth quarter, the savings from that are included in your $150 million number?

Yes, there will be savings in that number -- small savings the first year as we ramp it up and train people, and get the thing running right. We'll also start installing automation in our Chicago warehouse. We won't get any payback for that next year, but big payback in future years.

Okay. And how many years does it take to fully benefit from those savings?

By after one full year, we will be fully getting the savings that we anticipate, which are pretty darn good.

Okay, great. And is there any way -- and I don't know if you guys have provided this in the past -- but is there any way to kind of quantify the savings per plant or distribution center?

Our plan -- I'll tell you our total plan. Over the next five years, we're going to automate a large number of distribution centers. And we estimate the savings will be about $200 million. I'm not going to (multiple speakers) specifics by year, but that's our plan.

No, that's helpful. And then two more, if I can. The new store -- you guys said 30% fewer new stores opening up in your markets. Can you tell us how many stores opened up in your markets in 2017?

It's between 200 and 300; about 250 stores opened up in 2017.

That affected us.

Right.

That's about -- that's a little less. We have 200 to 300 stores open every year for the last few years, and it's coming down significantly. As you know, a number of our competitors have announced they are going to open less new stores. We actually are cutting back our plan a little bit on new stores. So you'll see less new, I think, big supermarkets open in the next few years.

Great, thanks. And then last one. I know you guys don't give identical store sales guidance. But just given the EBIT guidance that you guys have given, is it possible to achieve that EBITDA guidance without having same-store sale growth over 1%?

Yes, it's possible to do that. We expect to have 1% to 1.5%, though, so we think that's a number that we can hit. Let me say, we haven't given guidance before. We're giving annual guidance today because we're very confident in that number. And we feel good about next year and what's going to happen with the integration behind us, a strong balance sheet, and the ability to do the things we need to drive business. So we're confident in our number.

Great. Thanks, guys. Good luck.

We have time for one last question.

Marc McDonough, CIFC Asset Management.

It seems like a lot of your large competitors are seeing acceleration in comps and earnings. And can you just comment a little more on your relative decoupling from that? Is there anything outside of this promotional investment and some of these anomalous margin items that are impacting this?

I will tell you that our integration has been actually very intensive. And we've had to move a lot of stores and their supply chains and other things. It's probably the one thing that's different than our competitors. Most of that is behind us now. If you think about what we've had in the past, we had dual-bannered divisions. And all of our dual-bannered divisions are converted on front-end system now.

So as we go forward, the three divisions we have left, we don't have to change any source of supply; we don't have to change any SKU rationalization. All they have to do is change the front-end system and re-tag the store and the training involved. So it's still a big job, but the really hard lifting and disruptive -- the disruption we've had in our business is all behind us. And I think that's an element that other people haven't had.

Got it, very helpful. That's all for me. Thank you.

Okay. Thanks, everyone, for participating today. I'll be available if you have any follow-up questions for the balance of the day. Bye-bye.

And that concludes today's presentation. Thank you for your participation and you may now disconnect.