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Edited Transcript of ABS earnings conference call or presentation 15-Oct-18 3:00pm GMT

Q2 2018 Albertsons Companies Inc Earnings Call

Boise Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Albertsons Companies Inc earnings conference call or presentation Monday, October 15, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James L. Donald

Albertsons Companies, Inc. - Co-Chairman of the Board

* Melissa Plaisance;Senior Vice President of Finance & Investor Relations

* Robert B. Dimond

Albertsons Companies, Inc. - Executive VP & CFO

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Conference Call Participants

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* Alison Mermey

Oaktree Capital Management, L.P. - VP

* Bryan Cecil Hunt

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Geoffrey McKinney;Citibank

* Hale Holden

Barclays Bank PLC, Research Division - MD

* Mary Ross Gilbert

Imperial Capital, LLC, Research Division - MD of Institutional Research Group

* Sarah Manzone

JP Morgan Chase & Co, Research Division - Analyst

* William Michael Reuter

BofA Merrill Lynch, Research Division - MD

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Presentation

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Operator [1]

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Welcome to the Albertsons Companies' Second 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.

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Melissa Plaisance;Senior Vice President of Finance & Investor Relations, [2]

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Hello, and thank you for joining us for the Albertsons Companies' Second Quarter 2018 Earnings Conference Call. Speaking today from the company are Jim Donald, our CEO; and Bob Dimond, our CFO. In addition, Bob Miller, our Chairman; Shane Sampson, our Chief Marketing Officer; and Susan Morris, our Chief Operations Officer is with us as well.

Today, Jim 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 our second 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 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 on Form 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 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 Jim Donald.

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [3]

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Thanks, Melissa. Good morning, everyone. Jim here. As many of you have read this morning, we continue to make progress towards our full year goals. During quarter 2, we had identical sales of 1% and our adjusted EBITDA increased 13% to $549 million. With a $100 million incremental Safeway synergies in fiscal 2018, incremental cost savings initiatives and continuing improvement in identical sales, we're on track to achieve our fiscal 2018 adjusted EBITDA of approximately $2.7 billion. In addition, our balance sheet remains strong and provides the flexibility to continue to invest in our business.

As I've assumed the role of CEO, we'll continue to be focused on a number of key operating initiatives to enhance the customer experience in the omni-channel environment we live in, both four-wall and no-wall to improve our results. In our four-wall, we continue to re-merchandise and refresh our store base, refine and differentiate our fresh offerings and expand our convenience driving those solutions.

We continue to expand natural organic, specialty healthy and ethnic offerings, strengthen our rapidly growing Own Brands portfolio, enhance our pharmacy and specialty pharmacy business, leverage data analytics, partner with differentiated brands, support our ability to serve the rapidly growing Hispanic market through El Rancho, and other stores in Hispanic markets, leverage our merchant-oriented senior team, who continue to develop an organic model to compete with the small box hard discounters and grow our meal kit solution business in our four-wall and no-wall environment.

And speaking of no-wall environment, we continue to accelerate eCommerce rollout and capabilities, expand home delivery, Drive-Up and Go and Instacart deliveries, the launch of Grubhub and Uber Eats, we continue to develop our pipeline and invest with returns benefit to four-wall, no-wall, and, of course, our consumers, and we continue to leverage our loyalty programs and the data and insights it provides, and we'll also be launching our online marketplace initiative this week. We're committed to combine the best of eCommerce and bricks and mortar to aggressively take advantage of our scale and our customer loyalty.

I'm very pleased that the second quarter continued to show progress towards these objectives. Our team continues to implement change that is driving progress. They're taking steps to improve our margins by running better stores, completing systems conversion and focusing on shrink. Our relentless focus continue to show a shrink improvement on a year-over-year basis. In the 7 months I've been back on board with Albertsons, I have seen that we are very well positioned for growth. Our store system conversions are complete. We're in our fourth year since the Safeway merger and including our 2018 expected capital spend on a combined basis we have invested over [$5 million] of capital and are realizing healthy returns.

Our technology efforts have gone from fixing systems to fixating on our future in our omni-channel environment. The data we have harnessed for over a decade has given us the power to understand our customers and reward their loyalty to us.

Let me share a few of these observations with you. We leverage our customer data to understand what makes each shopper different from how often they shop our stores, the breadth of categories they buy, the role products plays and the role organic refresh plays in their overall selection process. We can understand the uniqueness of each shopper and personalize their experience at every touch point possible. Our customer satisfaction continues to be strong. We're seeing improvements in our price image, and this quarter saw a very nice lift in perception of the quality and service in our [four-wall] departments. From the products we develop via our Own Brands to how we develop programs that reward our customers loyalty, our use of data no-wall will remain a core strategic advantage which positions us for growth.

In our four-wall environment, we use our customer service information to give us immediate feedback as well. Can you imagine that we process data on 2.2 million households daily and 9 million households on a monthly basis. We're focused on meeting customers changing needs and positioning ourselves to serve our customers whenever, wherever and however they prefer.

While we've had home delivery through Safeway since 2001, we're now expanding our offerings company-wide through a combination of our own delivery, Drive-Up and Go, which allows customers to order online and pick-up at the store, and Instacart, which allows for delivery to the customers' homes in as little as an hour. We utilize 1,000 refrigerated trucks and 1,200 plus drivers for our white glove home delivery, which is unique in the marketplace.

We also plan to expand our Drive-Up and Go in 250 stores and provide Instacart deliveries from 2,000 stores last fiscal year and 2018, that's up from 1,300 stores at the end of fiscal 2017. We also plan to test home delivery of pharmacy and we expect double-digit growth on our Plated volumes through both home and in-store delivery. By the end of fiscal 2018, we expect to have Plated meal kits in over 350 stores.

We're also pursuing the automation 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. Our 4-year plan will give us the opportunity to drive out cost, increase our capacity and also enhance our customer service in a very tight logistic and distribution center hiring environment. As we work hard to improve our efficiencies, we partner with organizations with expert knowledge who deliver tools and capabilities that support our Shopper 360 program, which drives our customer-centric retailing program. The speed and the granularity of this data is helping us position for growth by ensuring that we have the right products on our shelves, by understanding how loyal each shopper is to every product in the store, by understanding how promotion and price drives shopping behavior and how this impacts our sales and profitability, our customers and their overall loyalty, by leveraging data science to identify which households are exhibiting behaviors that indicate a reduction in loyalty or overall attrition in our stores.

By building statistical rigor in how we test and measure initiatives in store so we can test big and learn quickly. And we're building a deep foundation around how shoppers shop categories to assist with aisle and category design and adjacencies.

We're 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 and the community.

We're a very young and energized company. Our base of employees includes the following: nearly 120,000 employees are under the age of 35, and with 30,000 of our employees are 19 years old or younger, and 33% of our employees are millennials. We continue to blend in our four-wall and no-wall environment, we're positioned for growth and are developing superior talent to meet our customers’ needs as we move forward.

We continue to build on strong foundations and a great track record in sustainability. Part of our mission to be the favorite local supermarket across thousands of neighborhoods includes making smart, sustainable decisions that foster better lives, create vibrant neighborhood and contribute to a healthier planet. And, I might add, create a robust omni-channel marketplace, because a good brick-and-mortar environment leads to a healthy eCommerce environment.

We recently launched a sustainability council to oversee continuous improvements in our 4 sustainability platforms: people, products, planet and community. Our sustainable efforts continue to result in cost-saving opportunities across the company, while also reducing our environmental footprint. Our manufacturing plants are continuing to work toward a 0 waste goal by 2022 or sooner. In 2017 alone, we recycled 556 million pounds of cardboard and 24 million tons of plastic film. In 2018, we've already completed more than 800 energy-efficient projects in over 500 stores, which is more than 4x the number of projects we did in 2017. Our teams maximize the use of available rebate to achieve a swift ROI.

Our portfolio of responsibly-sourced products continues to be a differentiator for us as well. We are recognized by EPA as a Retailers Safer Choice Partner of the Year 2 years in a row for our Own Brands line of green home care products that our safer choice certified and we're promoting similar national brand products. We've launched a robust new seafood policy this year, and we continue our strong partnerships with FishWise and the Seafood Task Force to improve environmental issues and labor conditions in seafood supply chain. We also partnered with Trace Register to provide an end to end electronic traceability to make progress towards our traceability policy and commitment.

I'd like to now provide an update on a few key areas of our marketing, merchandising and operations. We're accelerating investments in an expansion of our capabilities in the eCommerce, digital marketing and loyalty programs to provide value to our customers and also our customers additional methods of shopping with us and in turn drive sales. Our total eCommerce sales including Instacart and Plated meal kits grew a 113% year-over-year in quarter 2, 2018. We have been able to utilize our well-located stores to rapidly expand our Drive-Up and Go pickup service to provide additional options for our customers. We expanded availability of this offering to 139 stores at the end of quarter 2, 2018 and plan to further expand to over 250 stores in this fiscal year.

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 in 1,944 stores at the end of our second quarter. We continue to see growth in our pharmacy delivery business, which includes mail order, MedCart and specialty drug delivery. We continue to make data-driven personalized offers to our customers through Just for U, which we've expanded into all markets. In fact, at the end of the second quarter, our registration for Just for U and United's loyalty program increased 38% year-over-year on a combined basis.

We also continue to expand your rewards and have begun to offer grocery rewards. The weekly average sales to participants in these two programs is significantly higher than to non-users, which is very, very encouraging. Driving traffic into our stores will always be an important factor in delivering sales. However, we also know that there is a core group of loyal customers we cannot afford to lose. In fact, we know that it can take up to 20 new customers to make up for the lost sales of one loyal customer, measuring the health of our business and monitoring our performance with this key group is the cornerstone on how we will deliver profitable sales growth.

The Own Brands portfolio consists of more than 11,000 high-quality products, which resonate well with our shoppers. Our Own Brands sales penetration continues to grow, reaching 25% sales penetration and 24.7% in volume penetration in quarter 2, 2018, excluding pharmacy, fuel and Starbucks sales. This represents our highest Own Brands sales penetration rate in our history.

Own Brands continues to deliver on innovation with over 700 new item introductions so far this year to the surprise and delight of our shoppers and over 400 items in the pipeline for the remainder of the year. Our O Organic brand continue to deliver strong sales growth, posting a 9.3% sales increase in the second quarter compared to the second quarter of last year. Open Nature and O Organics, Albertsons' natural free from and organic brands, now represents approximately 23% of total natural and organic sales for Albertsons. That's a 139 basis points growth from quarter 2 last year. As I mentioned before, we now have 4 billion dollar brands; O Organics, Lucerne, Signature and Signature Café.

We continue our disciplined approach towards managing capital expenditures. Year-to-date, we have spent approximately $631 million, including approximately $40 million from the Safeway integration-related capital expenditures, we've completed 59 remodel projects, we've opened 3 new stores, and we continue to invest in our digital marketing capabilities. In fiscal 2018, we now expect to spend approximately $1.4 billion in CapEx, including approximately $75 million in the Safeway integration related capital expenditures, 9 new stores, 125 remodels, including 4 store expansions and an increase in our investment in technology and automation.

As I mentioned previously, we're working to automate several distribution centers over the next few years, which will greatly improve our labor productivity, increase storage density, enhance inventory management and shorten the stocking time lines. 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 centers requires a capital investment, we expect this automation to generate significant EBITDA improvements going forward.

On the technology side of the business, we completed our 3.5-year journey of converting all the Albertsons stores to our Safeway IT systems, positioning us for growth going forward. To-date, we've trained over 121,000 employees on the new systems. We have replaced and hung over 70 million shelf tags and signs in our stores. In total, we converted 967 stores and 10 distribution centers and simultaneously completed significant consolidations in our supply chain network. Every single converted store opened on time and was able to serve its customers. The conversions completed ahead of the original [conversion] schedule and we improved both our approach and efficiency with every incremental division.

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 we expect to deliver approximately $823 million of synergies on an annual run-rate basis by the end of fiscal 2018.

I mentioned earlier that we have gone from fixing our systems to fixating on future with regards to technology. Our capital spend has shifted from fixing systems to areas that position us for growth. Finally, our current initiatives, motor scheduling, line buster technology, digital receipts, digital logs and One Touch Fuel are improving check-out times throughout our four-wall environment and we're looking forward to entirely improved technology in our no-wall environment. Overall progress to-date on these initiatives is saving customers 99,000 hours in checkout time each week.

Regarding digital, significant progress has been made with the integration of Just for U and eCommerce for the first time several weeks ago. Our sites, safeway.com and vons.com, will be updated over the next few months.

Over the years, we helped feed millions of families through our robust food donation program and giving platforms. In fact, during fiscal 2017, we contributed nearly $250 million to local food banks and charities, and thanks to generous contributions from our customers and our employees we also supported important causes such as hunger relief, cancer research, disaster relief, services for people with disabilities and veterans programs. In calendar 2018, Albertsons Companies' Foundation has raised over $28 million for the charitable organizations in our neighborhoods. Through our Hunger Is campaign, the Albertsons Companies' Foundation in 2018 is enabling 50 million breakfasts for children, that's enough breakfast to feed the entire population of the major cities throughout each of our corporate and division offices. We're directly providing breakfast to over 650,000 kids, and those kids could fill empty stadium 12 times.

Now let me finish with this before I turn it over to Bob. I continue to connect personally with our associates in our stores, distribution centers and manufacturing facilities. I firmly believe that our front line is directly connected to our bottom line, both in our four-wall and our no-wall environment. And I'm encouraged as I see the high-level of dedication to serving our customers day-in and day-out whether on check stand in our stores or driving one of our home delivery trucks. We're committed to supporting their efforts with fair wages and benefits, training and frequent communications. I'm a firm believer that when it comes to the development of our future leaders, both in four-wall and no-wall environment. The more we give our time to coach and mentor, the better our returns.

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

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [4]

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Thanks, Jim, and hello, everyone. Sales and other revenue increased $192 million or 1.4% to $14 billion during the 12 weeks ended September 8, 2018, our second quarter of fiscal 2018 compared to $13.8 billion during the 12 weeks ended September 9, 2017. The increase in sales was driven by an increase in fuel sales and our 1% increase in identical sales, partially offset by a reduction in sales related to the closure of 30 stores in the first two quarters of fiscal 2018.

Gross profit margin increased to 27.2% for the second quarter of fiscal 2018 compared to 27% for the second quarter of fiscal 2017. Excluding the impact of fuel, gross profit margin increased 40 basis points. The increase was primarily attributable to lower advertising cost, lower shrink expense as a percentage of sales and improved product mix compared to the second quarter of fiscal 2017. These improvements represents the realization of our cost reduction initiatives and gross margin for the second straight quarter.

We're pleased with our performance in both identical sales and gross profit margin during the quarter, considering we experienced elevated integration and conversion activities during the first and second quarter of fiscal 2018 compared to the prior year. In fiscal 2018, we converted 506 stores, which were more store conversions than all three previous fiscal years combined as we converted 219 stores in fiscal 2017, 151 in fiscal 2016 and 91 in fiscal 2015.

Selling and administrative expenses decreased to 26.3% of sales during the second quarter of fiscal 2018 compared to 27.5% of sales for the second quarter of fiscal 2017. Excluding the impact of fuel, selling and administrative expenses as a percentage of sales decreased 110 basis points during the second quarter of fiscal 2018 compared to the second quarter of fiscal 2017. The decrease in selling and administrative expenses was primarily attributable to gains related to property dispositions in the second quarter of fiscal 2018 and impairment charges related to underperforming stores in the second quarter of fiscal 2017 and the realization of the company's cost-reduction initiatives, partially offset by higher acquisition and integration costs as a result of converting 219 stores in the second quarter of fiscal 2018 compared to 82 stores in the second quarter of fiscal 2017 and third-party costs related to the proposed merger with Rite Aid Corporation that was mutually terminated.

Interest expense was $194.9 million during the second quarter of fiscal 2018 compared to $214.8 million during the second quarter of fiscal 2017. The $19.9 million decrease in interest expense was primarily driven by the write-off of deferred financing costs in the second quarter of fiscal 2017 related to the company's refinancing transactions in fiscal 2017.

Adjusted EBITDA was $548.6 million or 3.9% of sales for the second quarter of fiscal 2018 compared to $485.2 million or 3.5% of sales for the second quarter of fiscal 2017. The 15.1% increase in adjusted EBITDA primarily reflects the company's identical sales increase, improved gross profit and realization of the company's cost-reduction initiatives.

Net cash provided by operating activities was $1.19 billion for the second quarter of 2018 compared to $872.7 million in the prior year. The increase in cash flow from operations was primarily driven by the improvements in operating results compared to the second quarter of fiscal 2017 and changes in working capital primarily related to accounts payable and inventory.

As of September 8, 2018, we had cash and cash equivalents of $1.7 billion. No borrowings under our $4 billion asset-based revolving credit facility, and total availability of about $3.2 billion net of letters of credit.

During the second quarter, we closed on a sale leaseback transaction of two distribution centers for a purchase price of approximately $290 million.

Including the approximately $1 billion 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 reduce debt and invest in our business.

With respect to our 2018 outlook, we're providing the following update. We now expect identical sales growth to be in the range of 1% to 1.3% for the full year in fiscal 2018. We continue to expect adjusted EBITDA of approximately $2.7 billion. Interest expense to be down slightly compared to fiscal 2017. Our effective tax rate to be in the range of 25% to 27%, excluding one-time asset sales and discrete items, and as previously mentioned, to spend approximately $1.4 billion in capital expenditures, including the acceleration of our DC automation and digital marketing capabilities.

And now Jim will provide some closing remarks.

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [5]

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Thanks, Bob. We were pleased to see improved sales in quarter 2 as modest food inflation continues to be passed along in the marketplace and our efforts to improve the four-wall and no-wall environments through remerchandising and refreshing our store base, leveraging of data analytics and expanding our Own Brands offerings resonated with our customers. And we are really pleased that we now completed our store conversion that the impact of these conversions both in the topline and bottom line perspective are behind us. These efforts coupled with successful cost reduction, including continued improvements in strength, the achievement of the fiscal 2018 incremental synergies from the Safeway acquisition and our incremental cost reduction efforts that allow us to generate improvements in sales and achieve our target for adjusted EBITDA of $2.7 billion in fiscal 2018. And as we move forward, we intend to pay down debt and keep enhancing our financial flexibility.

With that, I'll turn it back over to the operator and Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Geoffrey McKinney of Citibank.

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Geoffrey McKinney;Citibank, [2]

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I guess, just to start with the reduced guidance on the ID sales product. Can you walk us through the drivers there versus the 1.5% to 2% that you've been expecting, what changed in this quarter or what changed in your second half outlook for the year?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [3]

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Sure, Geoff. This is Bob. As you saw, our first quarter came out of the gates a little bit on the shy side, like 2%, and it's really more a factor of what has happened in the first half of the year. We were glad to see that did increase to 1%. I think most of the slowing of what we saw in the first half of the year had to do with -- that it was driven by inflation being much lower than what we all thought it might be. Inflation was roughly about 0.4% across the first half of the year. I think we and others are expecting that we'll start seeing some upticks in that as we move throughout the rest of the year and that's what our forecast for the rest of the year would suggest that it will increase a little bit and build based upon where we're at today.

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Geoffrey McKinney;Citibank, [4]

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Okay. And then to touch on Jim's last comment in terms the intention to pay down debt and enhance flexibility and [fiscal soundness]. Almost $1.7 billion of cash is historically high relative to where you generally carried a [$300 million] to $700 million balance. What's the right number going forward? Can you update us on any new capital allocation priorities and how we should think about that cash balance over the course of the year?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [5]

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Yes, that's a really good question. And we are completing right now as we speak an evaluation of our alternatives for the use of the excess cash on our balance sheet. And we plan on using a substantial portion of that to pay down debt, and would be providing the details of that publicly before too long.

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Operator [6]

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(Operator Instructions) We will now take our next question from William Reuter of Bank of America.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [7]

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With the slight tweak in sales guidance down, but maintaining the adjusted EBITDA guidance, what has been a little bit better that's offsetting this slightly lower sales?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [8]

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Bill, as you've seen in the first 2 quarters, despite having slightly lower ID sales, we've been able to deliver very solid EBITDA on the bottom line. And I guess, how we've been doing that is really through our cost reduction initiatives that we've had out there. We've talked about shrink reduction, we've talked about some of the things that we've done within gross margin to reduce costs such as advertising, cost of packaging and things like that, which are all contributing to the bottom line.

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [9]

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Yes. And also Bill, as I mentioned, these conversions are done. And it's quite an undertaking to do what we did in 1 quarter. And as a we see, as we distance ourselves away from converting the systems to the Safeway system, we're seeing opportunities there both on the top line and the bottom line perspective, but I'll also add that we're looking store-by-store, district-by-district, division-by-division and corporate overhead for continual cost-out opportunities for us. And so a lot of these things are all starting to come together, that's given us a little bit more ammunition towards that EBITDA number.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [10]

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Very helpful. And then you talked about using the proceeds from the sale leaseback or your cash balance, both investing the business, paying down debt, you said more to come in the near future. How should we think about just going forward, you still have a whole lot of real estate. Will there still continue to be opportunistic sale leasebacks over the next 12 months?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [11]

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Yes, we're not going to preannounce what exactly what we'll do there, but we'll more than likely opportunistically, so long as there is a market, we'll continue to look at that opportunity. We still own a ton of real estate in excess even after the sales that we have announced, in excess of $10.5 billion worth of real estate at the cap rates that are -- we're currently offered for these past deals, they were very attractive and if that continues for a bit, I could see us opportunistically executing on a few more.

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [12]

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And I'll also add that, as I close with we intend to pay down debt and enhance our financial flexibility, it's all a combination of growing sales of cost out and then looking to opportunities that the sale leaseback provided.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [13]

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Okay. And then just lastly for me. Unemployment rates are very low. I know that a lot of time supermarkets based upon time of when modern and union contracts come up, some of that used to delay impacts on your wage increases. Can you talk about how you view wage inflation just over the next handful of years? Any commentary about timing or turnover, anything you can help us with?

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [14]

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78% of our employees are -- [68%], sorry, are basically unionized employees. So we know pretty much up front where this increase is coming from. With minimum wage rates increases going in, the playing field gets leveled somewhat. But your first point was even a bigger point on the ability to continue to attract and retain associates. And so as I mentioned earlier, we're doing many things in both the four-wall and no-wall environment to attract and to develop and make us the place that people want to work. And so long story short, we know where we're going with wage increases. We know where our competitors are going. And right now, opportunities through both four-wall and no-wall gives us the opportunity to retain associates more than we ever have had before.

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Operator [15]

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We can now take our next question from Bryan Hunt of Wells Fargo Securities.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [16]

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I was wondering you also raised your CapEx guidance by $200 million. Could you tell us where that incremental spending is going and maybe what you're looking for from a return basis?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [17]

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Good question there, Bryan. We did increase our number by roughly about $150 million from what we've announced earlier in the year, that was to be able to accelerate our spending in 2 areas. One, automation in our distribution centers as well as the other is to increase our digital spend, our data science spend.

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [18]

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Yes, that's exactly where that was.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [19]

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And when you say [distribution center]...

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [20]

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I'm sorry, to answer your second question, in both of those areas, there is an expected very large return. We have completed our first automated distribution center this past spring in Tolleson, Arizona. The part of this extra money allows us to get going on our next distribution center that will be in place by the first part of next year.

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [21]

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Bryan, you're going to say something.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [22]

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Yes. I was wondering, when you look at these automated distribution centers, I mean, is there a uniform spend across those distribution centers? I mean, can you give us an idea what it cost to automate?

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [23]

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Well, it's not a uniform spend because our distributions vary in size, they also vary in dry goods versus frozen goods versus fresh goods. And so what we're looking at is an investment in each one individually to basically take care of all the things that I mentioned earlier. So I don't know, Bob, the spend on average?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [24]

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Yes, there are some big ranges depending upon what is necessary to be done.

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [25]

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Right.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [26]

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Right. Very good. The second one, I mean, you sold your 2 distribution centers in the sale leaseback. Can you talk about whether those were legacy Albertsons or Safeway distribution centers?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [27]

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In those 2 particular cases, they happened to be legacy Albertsons distribution centers. But these are distribution centers that we view as strategic that we'll be operating for the long term.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [28]

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Great. And then my last question. Shrink was a material inhibitor of EBITDA last year. Obviously, you're making progress on knocking shrink down. Can you remind us what your target was for shrink reduction this year and maybe what the progress is year-to-date?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [29]

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Sure. In our roll forward of EBITDA that we talked about in the last call was roughly $170 million worth of shrink reduction during the year that equates to about 35 basis points of a reduction.

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [30]

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And we're on track for that. I think that the second point of your question was the progress that we're making is both from -- well, it's from all fronts. We've had what we call a [project] in place that goes from internal theft to external theft to ordering profitably to or watching profits through our vendors. And so it's a combination of just being vigilant on this and it's 24 hours, 7 days a week, but we have these programs that are rolled out in all 2,318 stores.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [31]

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And I'm sorry, one last one and then I'll hand it off. But if I go back a little over a year ago, you all were tendering for various bonds in the marketplace. When I think about debt reduction, are you looking to reduce your fixed cost debt as well as your floating cost debt? Or how should we think about that?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [32]

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Yes. You may see us, Bryan, reduce some of that. We haven't made the announcement as to how we're going to do that yet. I think to do a fairly large amount though, our debt which is prepayable certainly in our term loans. So I think you should probably expect a bigger percentage probably going towards that. We may execute something that would also trim back some bonds opportunistically.

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Operator [33]

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We can now take our next question from Hale Holden of Barclays.

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Hale Holden, Barclays Bank PLC, Research Division - MD [34]

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On the debt reduction theme, should we think that as an example that the M&A pipeline is a little -- will narrow or not to expect any near-term M&A?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [35]

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I don't know that I would necessarily say that, Hale. We've got a lot of excess cash in our balance sheet that we've accumulated and it makes sense for us to pare that back. I think we continue to look for M&A opportunities. We're out -- we did presented essentially everything that's available out there and are actively looking at opportunities and might -- we're not precluding ourselves from taking action there. As you know, we've got good access to the capital markets and we can always tap into that should we need to.

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Hale Holden, Barclays Bank PLC, Research Division - MD [36]

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I just have 2 other ones. Is the plan post Rite Aid now to consider coming back to the public markets? Or are you guys still assessing what you want to do?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [37]

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Yes, I think we're assessing what we want to do there, so more to come.

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Hale Holden, Barclays Bank PLC, Research Division - MD [38]

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Okay. And then my last question is on the core customers that are worth 20 to 1 what a new customer would be. Can you walk through some of the things you're doing from a loyalty program standpoint to try to keep or enhance that base? It's sounded like a fairly decent focus on retention there.

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [39]

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Well, we're fortunate that with conversions all over we're now able to execute Just For You. By the end of the year, we'll be in all divisions, number one. And so we're currently not in [dual and active] just been converted. So as we wrap up the conversions and roll these out, we're not going to be able to do everything from a complete basis versus having sort of partial MyMixx versus having Just For You. Then we're looking at the data on a daily basis that gives us the insights into who these customers are and we're able to personalize their offerings for them to remain these loyal customers. In addition, we have fuel rewards and grocery rewards to sort of keep them loyal to us as well. And when I say keep them loyal to us, we often see if they'll trip out and what is the cost, what will it take to retain those. So it's kind of, for ones we have an overall program that's going to be corporate-wide versus sort of a mix of different programs that should give us a lot more horsepower to develop this elite customer.

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Operator [40]

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We can now take our next question from Carla Casella of JPMorgan.

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Sarah Manzone, JP Morgan Chase & Co, Research Division - Analyst [41]

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It's Sarah on for Carla. Piggybacking on Hale's question about accessing the public market. Do you guys have a leverage that you think is the right level to be able to go public today?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [42]

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Let me answer it this way. We definitely have debt reduction as a key strategy that we're working towards here. And we've targeted that we'd like to be down in the low 3 range and we'll be working to make sure that we are paying down debt as quickly as we can. Now some of that may get augmented by the ability to execute a couple of these sale leasebacks like the ones that we just talked about, but remember we also generate significant free cash flow on our business as well. And as it relates to an IPO, I don't think that precludes us from needing to get down to 3x before we go ahead, but we'll assess the market as we go forward and figure out when that appropriate time is.

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Sarah Manzone, JP Morgan Chase & Co, Research Division - Analyst [43]

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Okay. And then you guys have made a lot of progress reducing SG&A. Do you think that is a sustainable level or are there further opportunities to cut it?

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [44]

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I think with regard to SG&A. This isn't one-and-done program. This is a program that continues to develop, continues to evolve. As our mix shifts from eCommerce to four-wall, the opportunities abound, again, in every corner of this company, we look at improvements. We know -- we're just now look at investing capital. One of the areas that we're investing capital and, of course, is automation that, I mentioned, with a workforce that is shrinking in distribution and logistics that is going to help us with our SG&A there, also process improvement at store level, be it line busting or self checkout, that too enhances store labor. So as I breakdown the part and where there's capital spend, the opportunities are going to continue to drive cost out of the system.

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Sarah Manzone, JP Morgan Chase & Co, Research Division - Analyst [45]

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Okay. And then lastly from us, [our research] team has done some recent pricing studies that show some of your prices elevated in local markets. Could you tell us why that might be? Are you catching up where you may have taken prices too low?

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [46]

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No. Look, first of all, we're not the EDLP player in a market. Our business, quite frankly, is different than the legacy competitors that we have. We're fresh-oriented. Our mix of fresh is a lot different that drives more margins, which is good news for us. But right now how -- as we look across the landscape, pricing is a day-to-day division-by-division area. And so what might be true in Boston would not necessarily work in Chicago. Also, our assortment is such that, as I mentioned earlier, some of the things that we're doing to enhance our four-wall experiment -- experience is the assortment of our NOSHI, which is all of our ethnic, our organic and our sort of high-end type of items. So you can't necessarily look at the four-wall environment and say, these guys are priced too high. It's the actual makeup of what's inside that store that drives this, but we're looking at this, part of what I mentioned on investing in the data science give us the ability now to price these goods based upon the consumer data whether that be taking it up or taking it down. We're launching that use case in a very near term.

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Operator [47]

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We can now take our next question from Mary Gilbert of Imperial Capital.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [48]

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Yes, with respect to the 1% increase in ID sales, can you provide some of the metrics around that in terms of basket size, traffic and inflation as it contributes to that? And then also with regards to inflation, can you give us some idea of what category you're seeing that inflation, the magnitude and the outlook for the balance of the year?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [49]

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Sure. As far as breaking up that traffic and basket, that's up in the -- we haven't disclosed for some time now and aren't prepared to do that, because we're really focusing on some other key metrics that is breaking down loyal households into segments and so forth and that is our primary way of looking at things. However, on your other question, inflation as we indicated, appears to be -- retail inflation, appears to be running at right about 0.4% for this last quarter. We are expecting though that we'll see some increases as some of the increases whether it be from transportation or other input costs start moving through the system.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [50]

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Okay, all right, great. And then it sounds like you said with regards to the fair value of the real estate following sale and leaseback, that is now around $10.5 billion that's the Cushman & Wakefield piece. Is that about right?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [51]

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That's correct. We're -- what used to be just about $12 billion is we've done sale leasebacks on properties that now reduced that down to just over $12.5 billion -- $10.5 billion, sorry.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [52]

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Okay, all right. That's helpful. And then with the sales that you've completed, have they all been done above their market value?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [53]

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Yes. What's very interesting and encouraging about this is that they were all done above the appraised values and that's one of the things that makes this very interesting to us. The cap rates have been very good for us.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [54]

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Okay. And then also I had a few housekeeping. Could you give us what the cash rent was for the quarter and first half for both years? And then how we should look at the run rate given the new sale and leasebacks? And then if you could also give cash taxes and cash interest?

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [55]

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Yes, as far as the cash rents, that's not something that we disclose on a quarterly basis. As far as cash taxes for the year, it's going to be fairly minimal somewhere probably around $75 million to $100 million for the year.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [56]

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Okay. And then also...

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [57]

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And then interest, I think, was another question. We had indicated interest for the year will be just slightly lower than what the prior year full year rate was.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [58]

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Got it, okay. And then how should we think about working capital for the year net change in working capital? Any kind of guidance you can give us there, whether it would be a source of cash or use of cash with some of the net store closings, et cetera? It just seems more efficient.

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Robert B. Dimond, Albertsons Companies, Inc. - Executive VP & CFO [59]

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Yes, the guidance that we provided doesn't go to that level of granularity. What I will caution you on is there are some seasonality differences on our working capital in particular in the first quarter that tends to be a pickup, which it was this year. Our third quarter tends to be a use of cash just because we're purchasing all of our holiday inventories that we'll sell through between our third -- between our fourth and our first quarter. So there is some significant fluctuation between the quarters. Overall, working capital is usually based like net favorable number year-over-year. That gives you the answer you're after.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [60]

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Perfect, that's helpful. And then I just wanted to -- I had another question. What percent of the store base sort of meets the standard of recently refreshed and in good condition?

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [61]

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Well, we look at 10% of our stores a year. And so each store is basically looked on individual basis and there could be stores that are older on average in the fleet that don't need refurbishment and stores in high density areas that are younger on average that need refurbishment. So what we look at the end is just a basic 10% of the store combining the investments in bricks-and-mortar with the other areas of operation that we're investing in as well. But yes, one last one though. In general, again, I keep saying that bricks-and-mortar business yielded good eCommerce business. So our store base in general, I'm very pleased with in terms of where we're going from a bricks-and-mortar percentage.

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Melissa Plaisance;Senior Vice President of Finance & Investor Relations, [62]

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And now we have time for one last question.

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Operator [63]

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We can now take our last question from Alison Mermey of Oaktree capital.

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Alison Mermey, Oaktree Capital Management, L.P. - VP [64]

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As a lot of CPG companies are trying to cap all new cost increases, are you able to reflect that on a one-to-one basis to consumers?

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James L. Donald, Albertsons Companies, Inc. - Co-Chairman of the Board [65]

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Well, this is not anything that's necessarily new for us. The CPG companies and our teams here are constantly negotiating whether it's on allowance side or the price increase side. So we're not seeing anything relatively new there or spike in increased activity, but we're taking all of these basically, to your point, on a one-on-one basis.

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Operator [66]

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This concludes today's question-and-answer session. I'll just hand it over to you for any additional or closing remarks.

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Melissa Plaisance;Senior Vice President of Finance & Investor Relations, [67]

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Thanks, everyone. And I'll be available for the balance of the day if there are any follow-up questions. Have a great day.

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Operator [68]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.