Albertsons Companies Inc (ACI) 2018 Q1 法說會逐字稿

Welcome to the Albertsons Companies first-quarter 2018 conference call and thank you for standing by. (Operator Instructions). This call is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Ms. Melissa Plaisance, GVP of Treasury and Investor Relations. Please go ahead.

Hello and thank you for joining us the Albertsons Companies first-quarter 2018 earnings conference call. With me today from the Company are Bob Miller, Chairman and CEO; Jim Donald, President and COO; and Bob Dimond, our CFO.

Today, Bob Miller will provide a brief update on the Rite Aid merger; then Jim Donald will touch on our recent results, discuss some of our plans to grow and improve our business, share some observations and provide an update in a number of key operating areas. Bob Dimond will then provide an overview of first-quarter results and Jim will then make some closing comments.

I'd like to remind you that management may make statements during this call that are 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, as well as statements regarding the Company's proposed merger with Rite Aid Corporation.

These include statements that relate to the benefits, expected synergies and revenue opportunities of the proposed merger, integration plans, estimates for growth, management and governance of the combined company, and expected timing of the proposed merger transaction.

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 on Form S-4, 10-Q, 10-K and 8-K as well as Rite Aid's SEC filings.

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 included in the financial statements and management's prepared remarks are certain non-GAAP measures and the historical financial information includes a reconciliation of net income to adjusted EBITDA. And with that I will hand the call over to Bob Miller.

Thank you, Melissa. Good morning and thank you for joining us. I'd like to begin this call with a quick update on the Rite Aid merger. As you can imagine, we are very busy preparing for our announced merger with Rite Aid, which is expected to close in the second half of the calendar year.

The combined Company on a pro forma basis will have $83 billion in revenue and $3.7 billion in adjusted EBITDA, with 4,868 stores and 4,327 pharmacies. With a strong position and local scale in highly attractive markets. We will have a unique offering in the US with an opportunity to build narrow networks and drive significant loyalty among pharmacy and grocery customers.

Keep in mind that an Albertsons pharmacy customer spends 3.5 times more with us per transaction than a non-pharmacy customer. We are well on our way with integration planning for the merger and have confidence in achieving the $375 million in annual run rate cost synergies within three years.

We expect the integration with Rite Aid will be less complex and disruptive than the Safeway integration, requiring far less change from a system and distribution perspective. In addition, we are anticipating incremental annual revenue opportunities of $3.6 billion through the Rite Aid merger.

As we look forward we believe our merger with Rite Aid will create a differentiated leader in food, health and wellness, and will position us to meet our customers' needs with a wide network of pharmacies, lower cost and enhanced Own Brand offerings in health and beauty care. And now Jim will update you on the quarter and our operations.

Thanks, Bob. I do want to mention my top two execs are in the room with me: Susan Morris, who heads up our operations; and Shane Sampson, our Chief Merchant.

It has been a busy quarter and for that I want to highlight 11 key areas in our business, starting with results and briefly touching on what we are working on to grow our omni-channel experience that blends in the best of brick-and-mortar and e-commerce.

Whether it's delivering enhanced customer service, delivering technology for the future, delivering and growing our digital e-commerce and loyalty business, delivering on our Own Brands, delivering through our real estate and corporate development a platform that enhances our four wall environment to create a better no wall environment, or delivering on our Own Brands strategy, delivering on [count] for the 21st century along with integrating sustainability into what we do for all our customers, our omni-channel strategy is built to fulfill our mission of becoming the favorite local supermarket brick-and-mortar and digital.

As many of you read this morning, we're making progress towards our full-year goals. During quarter one we had an identical sales improvement of 0.2% and our adjusted EBITDA improved 5.7% to $816 million. This strong quarter one performance, which exceeded our internal expectations on adjusted EBITDA, coupled with $100 million of incremental Safeway synergies in fiscal 2018, recent COGS initiatives and continuing improvement and identical sales makes us even more confident in achieving our fiscal 2018 adjusted EBITDA 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. As we move forward we will be focused on a number of key operating initiatives to enhance the customer experience and improve our results.

We plan to continue to re-merchandise and refresh our store base, leverage data analytics, partner with differentiated brands and enhance our pharmacy and specialty pharmacy business, and expand fuel centers in adjacent convenience stores, grow our loyalty program membership, accelerate e-commerce rollout and capabilities, as well as further strengthen our Own Brands brand portfolio and expand our natural organic specialty healthy and ethnic offerings.

I'm very pleased that we began this year making progress towards these objectives. Our team is implementing change; they are taking steps to stabilize and improve our margins by running good stores, completing systems conversions, enacting strength with a vengeance. In fact compared to the fourth quarter of fiscal 2017 we've reduced our shrink by 45 basis points.

We've also expanded our loyalty programs and have moved our e-commerce efforts forward, taking care of our customer needs to get fast delivery through Instacart. And we are addressing their desire to create fresh and innovative meals with our meal kits solution, Plated, where we have seen significant growth, delivering to our customers whenever, wherever and however they want.

In the four months I've been back on board with Albertsons Companies, I've visited over 300 stores, both our own and our competitors across all geographical areas. I've also visited many of our manufacturing plants and distribution centers and I've really enjoyed connecting with our employees and better understanding the opportunities and challenges we face every day across our operations, and of course we face many. Let me share a few observations with you.

In communicating with our customers, hearing and reading what they say about us, both good and opportunistic, we've been enhancing the customer experience. Our customer satisfaction is the highest it has been in four quarters. We are seeing improvements in our price image, the perception of the quality of our meat and produce, and the speed of checkout. Our four Cs, just to remind you, full, fast, friendly, fresh and clean, work in both a four wall and no wall environment.

I might add here too, the speed of check out and price are two key drivers for online shopping. I'm pleased to see progress in that area.

We're also proud that our Vons division was named the place for vegetarians to shop for groceries by the Business Insider. We are focused on meeting our customers' changing needs and positioning ourselves to serve our customers again whenever, wherever and however they prefer.

While we have had home delivery through Safeway since 2001, we are now expanding our offerings companywide through a combination of our own delivery, Drive-up & Go, which allows customers to order online and pick up at the store, and Instacart, which allows for delivery to the customer's home in as little as an hour.

We utilize 1,000 refrigerated trucks, 1,200-plus drivers for our [light crowd] home delivery, which is unique in the marketplace. We also plan to expand Drive-up & Go to 500 stores and provide Instacart delivery service to 2,000 stores by fiscal year-end 2018, which is up approximately from 1,800 stores today.

Relative target tests home delivery and pharmacy and expected (inaudible) of Plated volumes through both home and in-store delivery. By the way, I spent last week with the Plated team front of the house and back of the house and I came away very impressed and confident of the quality and the value of this product, both for our four wall and our no wall environment. And by the end of fiscal 2018 we expect to have Plated meal kits available in over 650 stores.

We are also pursuing the automation of several of our distribution centers that should improve our efficiencies, lower our cost over time and allow us to serve our customers more effectively at lower cost. The improvement in sophistication of delivery better positions us for delivering what our customers want both in brick-and-mortar and in our e-commerce business.

We are also developing our talent for the future through training programs including our leadership development program through Albertsons University, as well as a number of employee resource groups that recognize, celebrate and benefit from the uniqueness of each employee and provide professional and personal growth opportunities in the workplace, in the community both in our four wall and no wall environment.

We are also proud of our 54 outstanding women who were named the top women in grocery by Progressive Grocer. Our world and business environment is changing quickly and developing people to this changing evolving business is paramount for success.

We continue to build a strong foundation and great track record in sustainability. Part of our mission to be the favorite local supermarket and the favorite local digital supermarket across thousands of neighborhoods includes making smart, sustainable decisions that foster better lives, create vibrant neighborhoods and contribute to a healthier planet. At Albertsons Companies we've integrated sustainability into our everyday business decisions and make community giving one of our priorities.

Our teams actively strive to provide quality service and products with a fair price while also working to reduce our environmental impact from buying of local products to supporting local growers and suppliers to ensuring that wholesome food is distributed to charitable organizations helping others who need it most.

Over the year we've helped feed millions of families through our robust food donation program and giving platforms. Thanks to the generous contributions from our customers and employees, we also support important causes such as hunger relief, cancer relief, disaster relief, services for people with disabilities and veterans programs.

Last year we made approximately $248 million in food donations to local food banks and almost $45 million in cash donations, helping over 2,000 organizations and individuals including victims of hurricanes and wildfires in our operating areas. In addition, our employees donated countless volunteer hours to help those in need in their local neighborhoods.

To further address our omni-channel business we are accelerating investments in and expansion of our capabilities in e-commerce, digital marketing and loyalty programs to provide value to our customers, offer our customers additional methods of shopping with us and in turn drive sales.

Our total e-commerce sales, including Instacart and Plated meal kits, grew 108% year-over-year in quarter one 2018. We've been able to utilize our well located stores to rapidly expand our Drive-up & Go service to provide additional options for our customers. We expanded this offering to 94 stores by the end of the quarter one and we plan to expand further to over 500 stores in fiscal 2018.

As mentioned earlier, we've also expanded our fast delivery through Instacart which allows our customers to have access to same day delivery in as little as an hour. Instacart was operating in all 13 of our divisions and 1,796 stores at the end of our first quarter.

We continue to see growth in our pharmacy delivery business, which includes mail order, med-card and specialty drug delivery. We continue to make data-driven personalized offers to our customers through Just for You, which we have expanded into new markets. In fact, at the end of the first quarter our registrations for Just for You, [My Mix] united loyalty program increased 28% year-over-year on a combined basis.

We also continue to expand fuel rewards and have been gradually expanding grocery rewards. The weekly average sales of participants in these two programs is significantly higher than to nonusers, which for us is very encouraging.

The Own Brands portfolio consists of more than 10,000 high quality products which resonate well with our shoppers. Our Own Brands sales penetration continues to grow reaching 24% sales penetration and 24.3% in volume penetration in quarter one 2018, excluding pharmacy, fuel and Starbucks sales. This represents our highest Own Brands sales penetration rate for quarter to date.

Own Brands continues to deliver on innovation with over 400 new item introductions in quarter 1 to surprise and delight our shoppers and over 700 items in the pipeline for the remainder of the year. Our O Organics brand continues to deliver strong sales growth posting a 10.2 sales increase in the first quarter compared to the first quarter of last year.

Open Nature and O Organics, Albertsons' natural free from and organic brands, now represent over 23% of total natural and organic sales at Albertsons, over 100 basis points growth from quarter one last year. And all this is before our Open Nature four-week campaign started both in-store and online. O Organics, Lucerne, Signature and Signature Café all had the distinction of being $1 billion brands with Open Nature rapidly approaching.

We continue our disciplined approach towards managing capital expenditures. In quarter one 2018 we spent approximately $350 million, including approximately $37 million for Safeway integration (inaudible) capital expenditures and completed 24 remodel projects, 23 four wall and one expansion and opened two new stores. Delivering a better shopping experience in our four wall environment enhances our no wall environment.

If we switch to 2018, we continue to expect to spend approximately $1.2 billion in CapEx, which includes 10 new stores, 115 remodels including two store expansions and an increase in our investment in technology and automation.

As mentioned previously, we're planning to automate several distribution centers over the next few years, which will greatly improve labor productivity, increase storage density, enhance inventory management and shorten stocking timelines. Our first automated distribution center in Tolleson, Arizona became operational in the fourth quarter of 2017 and is performing well. While the automation of our distribution center requires a substantial capital investment, we expect this automation will generate substantial EBITDA improvements going forward.

On the technology side of the business, since we began the conversion of the Albertsons stores to our Safeway IT platform in late June of 2015, we have completed the transition of nine divisions: Southern, Houston, Denver, Intermountain, Seattle, Portland, Southern California, Southwest and Shaw's.

We are currently converting stores in our Jewel division and have completed 91 of the 187 stores in that division as of the end of quarter one. To date we've trained over 70,000 employees on new systems and replaced and hung over 19 million shelf tags and signs in the stores. In total we converted 700 stores and 11 distribution centers across the Company as of June 16, 2018.

Every single converted store has opened on time and been able to serve its customers. The conversions are on schedule, they're on budget and we continue to improve both our approach and efficiency with every incremental division.

Following the completion of Jewel, we'll convert the Acme division and expect to finish all store conversions by mid-September of this year. This will allow us to terminate our TSA with Supervalu and realize the largest portion of $100 million in incremental fiscal year 2018 Safeway synergies.

In addition to our store conversion activities, in quarter one we completed the consolidation of distribution centers in our Southwest division to reduce supply chain cost. I'm also pleased to report that the realization of synergies continues to go very well. We delivered synergies of approximately $675 million in fiscal 2017 with a year-end run rate of $750 million and expect to deliver approximately $823 million of synergies on an annual run rate basis by the end of fiscal 2018.

And finally, as I mentioned earlier, as I travel around the Company I have met fellow associates in stores, distribution centers, manufacturing plants. It's amazing to me that over 41,000 of our employees have over 20 years of service. I am encouraged and I see their dedication to serving our customers, four wall and no wall, day in and day out.

Just last week, to finish with a story, a district manager of ours located a terminally ill customer. This customer's favorite beverage was discontinued. He ended up driving four hours to receive the product and delivered the beverage to the gentleman's house. This isn't about e-commerce delivery or bricks and mortar delivery; this is about customer service.

And I'm hopeful that our twice weekly videos are helping our associates gain an understanding of how we are moving the Company ahead and meet our customers' needs wherever, whenever and however they want.

So with that, I'll turn the call over to Bob Dimond, our CFO, for an overview of our first-quarter results.

Thanks, Jim, and hello, everyone. Sales and other revenue increased $193.4 million or 1% to $18.7 billion during the first quarter of fiscal 2018 compared to $18.5 billion during the first quarter of fiscal 2017. The increase in sales was driven by an increase in fuel sales and the Company's 0.2% increase in identical sales.

Our ID sales during the first quarter were negatively affected by some headwinds that we believe should lead to easier comparisons going forward. Sales in the first quarter were impacted by increased winter storm activity at a few divisions early in the quarter, conversion disruption in the Jewel-Osco and Shaw's market that is now behind us, and somewhat softer Easter sales due to the calendar shift.

Gross profit margin increased to 27.7% of sales for the first quarter of fiscal 2018 compared to 27.4% of sales for the first quarter of fiscal 2017. Excluding the impact of fuel, gross profit margin increased 60 basis points. The increase is primarily attributable to lower advertising costs, improved product mix and lower shrink expense as a percentage of sales compared to the first quarter of fiscal 2017.

These improvements represent the realization of cost reduction initiative and gross margin that we outlined when we provided our fiscal 2018 outlook in April. We continue to see a sequential improvement in shrink as a percentage of sales with an improvement of 45 basis points from the fourth quarter of fiscal 2017.

Selling and administrative expenses decreased to 26.7% of sales during the first quarter of fiscal 2018 compared to 27% of sales for the first quarter of fiscal 2017. Excluding the impact of fuel, selling and administrative expenses as a percentage of sales decreased 10 basis points during the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017.

The decrease in selling and administrative expenses as a percentage of sales was primarily attributable to lower depreciation and amortization expense, gains related to property dispositions, and the realization of the Company's selling and administrative cost reduction initiatives.

Interest expense was $254.6 million during the first quarter of fiscal 2018 compared to $270.5 million during the first quarter of fiscal 2017. The weighted average interest rate during both the first quarter of fiscal 2018 and the first quarter of fiscal 2017 was 6.4% excluding amortization of deferred financing costs and original issue discount. The decrease in interest expense was driven by lower average outstanding borrowings and lower amortization of deferred financing costs.

Adjusted EBITDA was $815.8 million or 4.4% of sales for the first quarter of fiscal 2018 and was up $44 million compared to $771.7 million or 4.2% of sales for the first quarter of fiscal 2017. The increase in adjusted EBITDA primarily reflects the Company's improved gross profit and the realization of the Company's cost reduction initiatives. Also, excluding the incremental $20 million of sale-leaseback rent expense, first-quarter 2018 EBITDA would have been $64 million higher than Q1 of 2017.

Net cash provided by operating activities was $911.6 million for the first quarter of 2018 compared to $654.3 million in the prior year. The increase in cash flow from operations was primarily driven by the increase in operating income principally reflecting improvements in financial results compared to the first quarter of fiscal 2017, and changes in working capital primarily related to accounts payable and inventory.

As of June 16, 2018 we had no borrowings outstanding under our $4 billion asset based revolving credit facility and total availability of approximately 3.1 billion net of letters of credit. Over the last 12 months we have reduced our outstanding debt by over $200 million. We expect to continue to reduce debt and net leverage using free cash flow generated over time.

Subsequent to the end of our first quarter we entered into an agreement relating to the sale and lease back of two distribution centers for a purchase price of $292 million, which we expect to close before the end of the second quarter. Upon closing, including the $962 million in sale-leaseback transactions we executed in fiscal 2017, we will have completed approximately $1.3 billion in sale-leaseback transactions.

We will continue to evaluate opportunistic sale-leaseback transactions that can allow us to invest in our business and reduce debt.

As previously disclosed, with the support of our banking syndicate and institutional debtholders, we have successfully secured all of the financing required to close the Rite Aid transaction. Following consummation of the transaction we expect to delever the business to 2.75 times net debt to adjusted EBITDA over the next three years.

As indicated earlier, we exceeded our internal expectations for adjusted EBITDA in the first quarter and are reaffirming our outlook for 2018. We expect identical sales growth of 1.5% to 2% for the full year and fiscal 2018, adjusted EBITDA of approximately $2.7 billion, interest expense to remain relatively flat, and effective tax rate to be in a range of 25% to 27% excluding one-time discrete items, and to spend approximately $1.2 billion in capital expenditures.

And, as Jim mentioned earlier, we are looking forward to our announced merger with Rite Aid. Together with Rite Aid we will become the number one integrated food and drug retailer on the West Coast with a very strong presence in key markets including California, Washington and Oregon. And will also have attractive market conditions in the Northeast.

In addition, we expect to realize $375 million in annual run rate cost synergies within 36 months and have $3.6 billion of incremental annual revenue opportunities through narrow networks, cross-selling opportunities in food as well as health and beauty aids, our omni-channel retail experience and digital and e-commerce offerings.

As we have previously mentioned, we expect that integration efforts related to the Rite Aid merger will be far less complicated and disruptive than our nearly complete Safeway integration. For instance, we are planning to -- we are not planning to convert front-end systems, consolidate warehouses and change the source of supply like we did in the Safeway merger.

We believe the merger will enhance shareholder returns and generate strong free cash flow to reduce debt to under 2.75 times net leverage within 36 months, and improve our financial flexibility for the combined Company. And now I will turn it back to Jim to provide some closing remarks.

Thanks, Bob. We were pleased to see improve sales in quarter one as modest food inflation was passed along in the marketplace and our go-to-market strategies and promotions resonated with our customers both in our four wall and no wall marketplace.

[Due to] sales growth led by continuing to run good stores enhancing the customer experience, improving our digital marketing, loyalty and e-commerce efforts and innovations in Own Brands coupled with successful cost reduction efforts including continued improvements in shrink and completion of the fiscal 2018 incremental synergies from the Safeway acquisition should allow us to generate improvements in sales and achieve our target for adjusted EBITDA of $2.7 billion in fiscal year 2018.

We also believe that the pending merger with Rite Aid will enhance our ability to serve our customers by creating a differentiated leader in food, health and wellness with strong local networks of food stores and drugstores in very attractive geographies. This combination will produce excellent coverage in key West Coast markets and a strong position in the Northeast United States.

A strong local presence will allow us to participate in broader alliances to serve our customers at lower cost, create cross shopping opportunity and enhance loyalty. With the incremental synergies that we expect to realize from this combination we believe we will enhance sales and profitability going forward, allowing us to produce attractive shareholder returns as well as to pay down debt and enhance our financial flexibility.

Also, again, our experience in converting stores, warehouses and systems, coupled with a strong change management culture bode well for our upcoming integration.

I would be remiss if I did not acknowledge the loss in the Albertsons family that took place earlier this month. Doug Saigon, President of Jewel-Osco, passed away after a brief illness. He was a very, very strong leader within the Company and also in the Chicagoland community. He will truly be missed.

With that I will turn it back to the operator to begin the Q&A.

(Operator Instructions). Geoffrey McKinney, Deutsche Bank.

Hi, good morning. Thank you for the question. I think I understood the ID sales being at plus 0.2% relative to full-year guidance, largely explained by weather. And I guess that -- that [repeating] you expect those sales to accelerate throughout the balance of the year.

I guess can you talk about the puts and takes in terms of maintaining that guidance relative to also maintaining the EBITDA guidance on what was ahead of plan print and the potential to see some leveraging in the second half of the year on accelerated ID sales?

Yes, we did overcome a few headwinds here in the first quarter and were still able to deliver solid earnings there. I think that some of what we were able to do here in the first quarter was to improve a little bit quicker on our strength reduction initiatives which allowed us to offset a little bit of that.

I think as we move forward into the future quarters things will line up pretty close to the way that we had planned for the year, which by the way envisions to continue to see us with great shrink results there.

As you will recall, our bridge for the year called for about 30 basis points of shrink to be pulled out. We've already achieved kind of down to that level and now we just need to continue to fulfill that level and there may be some upside from that.

No, I think that's right. I think when I look at the rest of this year, again I'm confident that -- remember that we talked about earlier in the call what we meant. We're also -- I mentioned earlier on the call too I'm balancing and blending in our e-commerce business with our bricks-and-mortar business and it's -- they are running in good stead right now. And if you look out where our numbers are going for the rest of the year I'm confident in what Bob said earlier in his remarks.

Okay, and as a follow-up, you are currently at a run rate you would like to be absent achieving more than you've guided to from a shrink perspective. Away from that I guess what are the buckets from an SG&A perspective maybe that you pulled back from spending on in this quarter given the delivery of the EBITDA number, vis-à-vis potential deleveraging on planned ID sales for the second half of the year? I guess a little more granularity there would be helpful.

Yeah, I think that as we would benefit from greater sales, certainly we would be able to get some leverage on fixed cost. But I think that also plays into how our plan was laid out for the year. So, as I indicated earlier, we are confident -- we are glad that we came out as strong as we did here for the first quarter. It gives us great confidence now in being able, as we progress through the year, to achieve our $2.7 billion target.

And, Geoff, cost improvement is part of our culture here. And so, we are looking at just on a daily, on a weekly basis areas of the Company that we can continue to improve both cost out, which is good, as well as look at a store-by-store division-by-division opportunities on a go-forward basis.

Understood and maybe I guess I'll ask it one more way. In light of the ID sales (technical difficulty) what kind of kept you conservative from an EBITDA guidance perspective and not using that? I guess just to be point-blank there.

From and EBITDA perspective, to be honest with you, I've been here for four months and I'm still -- found out where the restroom was in the office because I've been out in the stores and in the distribution centers. But again, being comfortable with this guidance allows me the flexibility to continue to blend in the investments that we need to grow top line/bottom line both on an e-commerce and a bricks-and-mortar business.

One more point, we indicated that our integration is really now down to one more division and that that will be completed within two months. And then what that does is that takes away any of the disruption that is caused during the year to our organization. And it also allows us to realize the synergies that relate to getting off of the TSA with Supervalu.

So, all of that is factored in to our plan. That also, though, will end up showing up as we get past September -- last two quarters of the year in slightly lower SG&A as a percentage of sales.

Okay that was very helpful. Thank you, guys. I will pass it along.

William Reuter, Bank of America.

You had talked about seeing a little bit of modest food inflation in the quarter. Can you tell us what you saw and then what you have embedded in your expectations for same-store sales in terms of inflation for the year?

Yes, during the quarter I think it started off right around 0.5% of inflation. The last peer-to-peer month of the quarter was pretty soft. You guys probably saw that things went backwards to about 0.1%. I think overall we saw just short of 0.5% of inflation. And the good news is starting off this second quarter things rebounded -- you probably saw the reports published by the BOS that showed it rebounded back to 0.4%.

So, generally things are probably starting off just a little bit lighter than we originally thought. The reports that I'm seeing are the BOS is still reporting that they believe inflation will be somewhere in the 1% to 1.25% range in the latter half of the year.

And if that means improving from roughly the 0.5% today to 1% or 1.25%, we think that will bode well for the industry. I think we also are starting to see that companies are starting to pass through some price increases, which I think it's healthy obviously for us all.

That's good to hear. And then in terms of the proceeds from the sale of the two additional DCs in the second quarter, can you talk about what the expectations are there? And then if you expect further sale-leasebacks either later this year or into 2019?

Our debt agreement allow us, as you are probably aware, to either pay down the term loans or to reinvest or invest in the business. And I would guess across the year we'll probably do a little bit both of those. But certainly that's something that we'll evaluate as we go forward.

As far as doing additional ones, I think it really is opportunistically is how we are looking at this. The sale-leaseback market has been very strong, the valuations that we've received have exceeded the appraised values that we have and those are fairly recent appraisals for these properties. So the cap rates we've been able to get have been very attractive to us. And most of the properties that have been in these pools have been -- have had high tax basis and so it's been quite tax efficient for us.

So, we see this as an opportunity to continue to watch. And you may see us do a few more. But as we note today, we'll close this other one that's roughly $290 million of size sometime here in the second quarter.

Okay and just lastly for me, you talked about making some investments in DCs and automation over the next couple years and a whole bunch of benefit to that. I guess, is one of those benefits going to be working capital? And do you have and expectation for how much working capital there might be to pull out?

That would be one of the benefits that comes out of that, the more tangible benefit is actually in making the distribution centers more productive, meaning that it doesn't take as many hours to be able to run those. So I think that is driving the bigger part of the return. But there is some benefit in working capital. Jim?

Yes, the specifics on the productivity are pretty amazing. In Tolleson we're experiencing -- [Bob picked] the $12.50 an hour versus $3.50 an hour. And so, you look at [growing this out] in this warehouse environment is pretty compelling.

Very helpful. Okay, I will pass to others. Thank you.

Carla Casella, JPMorgan.

Did you say what the monetary -- the impact of the winter storms was to [IDCOs] -- how much that took off of your ID sales?

We didn't talk about that as a single item, but we talked about that and the convergent disruption and kind of the difference in the Easter calendar as a total as being roughly 30 basis points.

Okay, that's great. And then, how much revenue did Plated add in the quarter and what's the opportunity there? I'm wondering is that all included in your comp?

So, Plated we don't -- for competitive reasons we are not indicating exactly where those sales are. It continues to grow very well. We continue to roll that out. We are very excited about Plated.

Now as far as including it in our identical sales, we do include that. As you know, our definition includes same-store sales, which a lot of our e-commerce sales are sourced from our stores and go through our store systems, so get picked up that way. And then we also do include direct-to-consumer sales which Plated would be one of those.

Okay, great. And then on the cost side, are there any one-time costs included in your numbers so far for the Rite Aid transaction? Are all the one-time related to the past transactions, Safeway, etc.?

Yes, there is a little bit but it's very minor.

Okay. And just to clarify the sale-leaseback proceeds, did you say the timing and the amount that you'll get in this year?

The timing and the amount of --?

The sale-leaseback proceeds for the new sale-leasebacks?

I'm sorry. So, the amount was $292 million of gross proceeds and we believe that will close during our second-quarter which ends the first part of September.

Okay, and is the net dramatically different from that?

Yes, it's -- directionally $250 million is the net.

Okay, great. Thank you.

Brian Hunt, Wells Fargo.

Thank you for your time. My first question is in the Safeway stores where you've had delivery for an extended period of time, could you talk about the penetration of delivery relative to the total store sales?

We don't really share those numbers. We can just say that our total commerce business is up 108%. But we see that business growing on a store-by-store basis.

And do you believe that delivery service is cannibalistic to in-store sales? And if so to what degree?

It's a great question and we are seeing some incrementality on these shopping visits. But we are also seeing that the Drive-up & Go consumers are still coming into our stores to shop for fresh. And we see that with our fresh numbers versus our center store. So, we think we are getting a win-win out of this. And again, the key here is just to be as vigilant on this customer service aspect of this business as we are in the day-to-day business with customers going through the stores.

Great. Shifting gears, could you -- you guys identified another $150 million of cost reduction for 2018, can you talk about how much progress you made on that in the first quarter?

Yes, I don't know that I have the exact number within the quarter, but I will tell you that we are well along in the rollout of those programs because it touches upon quite a few different things. There was some in advertising which reduced advertising expense which benefited our gross margin since that's where that goes. It included areas of reduction and corporate and division overhead.

Product packaging costs was a real opportunity. We've got those all vetted out in the fourth quarter. The new prices are going in and we're benefitting from those savings here in the first quarter and will do all throughout the year.

There's a variety of store level costs for services as well as supplies. Included in those services also included things in the maintenance category. So, it's across a lot of buckets. We have executives assigned to each area. And I will tell you we're very comfortable that we are on track with being able to get that full $150 million.

Great. Thanks, Bob. And then my last question, and there's been a lot of conversation around IDs so far on the call. But are there any specific catalysts that you feel like that will help you drive to that 1.5% to 2% level by the end of the year?

Yes, it's a continuation of all the things that we are doing from our gold operating standard to running good stores to leveraging our pharmacy -- our specialty pharmacy business, continuing to rollout technology and digital innovation. The loyalty program membership is key in driving this as well, partnering with our differentiated brands and, again, as far as the four wall no wall delivering superior customer service.

All of those are key as we go forward, as well as being -- running our Company like we've done now, strengthening our promotions, improve the quality of our products on a day in and day out basis.

I appreciate your time. Thank you.

Hale Holden, Barclays.

Good morning, thank you for taking the call. Two significant pharmacy announcements in the last month with Amazon PillPack and CVS and the US Postal Service for delivery. And I was wondering how you think about that in the context of the transaction that you have coming up there on the revenue synergies.

Thanks, Hale. It is kind of too early to tell on the PillPack. This pharmacy business is a very, very complex business. But I can tell you this, our pending merger with Rite Aid more than doubles our pharmacy counters, giving us not only more convenient locations in our bricks-and-mortar, but also it generates scale and improves logistics to expand our e-commerce through home delivery and Instacart.

And again, while it's too early to predict where and how Amazon will utilize PillPack expertise, in both cases that you mentioned scale becomes critical here for a bricks-and-mortar retailer and a need for being able to ramp up the e-commerce business is critical as well. And I think that this merger does both of these for us.

Thank you. And then I just had two housekeeping questions. I was wondering if you could give us a breakout of traffic and ticket in the quarter, as well as give us any indication of when you thought the proxy advisor firms would come out on the transaction.

First I'll take the one on breakout of traffic and ticket. Actually that is not -- those are not statistics that we do provide. However, what I will tell you is that one of the things that we do track closely is our growth quarter over quarter in Just for You. That's our loyalty program registrations which were up over 25% during the quarter. So, we think that is the more important thing for us to be following. And then the proxy, it's announced the vote is scheduled to occur on August 9.

Proxy advisors, we are meeting -- Rite Aid will be meeting with them this week -- and I mean ISF and whoever they -- will be meeting with them this week and hopefully we'll get the results of those meetings the following week.

Thank you very much for the time. I appreciate it.

Joe Stauff, Susquehanna.

Thank you very much and good morning. I just want to ask you what you can share with us as investors regarding closing of this transaction. As you guys know, certainly not many deals if any close (technical difficulty) [targeted] price is down this much. So maybe at a minimum you could share with us basically how much liquidity that you have that you could tap to the extent you wanted to bump. And how you are thinking about the situation going into August? Whatever you can share with us I would appreciate it.

Well, let me say that our first-quarter result shows that this transaction really provides the Rite Aid shareholder with a great opportunity to invest in the large-scale uniquely positioned food and drug retailer and the strong business momentum. We are incredibly excited about this transaction and the benefits it provides to both us and the Rite Aid shareholders. And we think this is the right combination at the right time for both of us.

And can I just follow up on that, please? I can appreciate that and I understand, but again, just as investors looking just where the clearing price of the security is creating, the market is saying there's a very low probability that this deal goes through. And I was just wondering if there's any other parameters you can share with us at this time.

I'd just said the proxy has been filed. The shareholders have been communicated with. The Rite Aid team is following best practice in communicating with their stockholders and encouraging the vote of their shares. And again, we think this merger represents the best opportunity for both of us to partner at this time. And we're not going to comment on prices or anything else.

Okay, thank you very much for taking the question.

Okay, thank you, everyone, for participating in the call. If there are follow-ups I will be available and look forward to talking with you. Goodbye.

And again, that does conclude our call. We would like to thank everyone for your participation. You may now disconnect.