U.S. Markets open in 7 hrs 16 mins

Edited Transcript of Tops Holding II Corp earnings conference call or presentation 31-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Tops Holding II Corp Earnings Call

Apr 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Tops Holding II Corp earnings conference call or presentation Friday, March 31, 2017 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Langless

Tops Holding II Corporation - CFO and EVP

* Frank Curci

Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC

* Jack Barrett

Tops Holding II Corporation - EVP of HR, Assistant Secretary and Director

* John Persons

Tops Holding II Corporation - President, COO and Director

================================================================================

Conference Call Participants

================================================================================

* Ben Fisher

* Christopher Mandeville

Jefferies LLC, Research Division - Equity Analyst

* David Kuck

* Hale Holden

* Karru Martinson

Jefferies LLC, Research Division - Analyst

* Kenneth Williamson

* Lou Cherrone

* Peter Maguire

* Rosemary Sisson

* Scott Simon

* Tom Radionov

* William Michael Reuter

BofA Merrill Lynch, Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the Tops Holding II Corporation Fourth Quarter and Full Year 2016 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, [ Craig Mihalik ], Investor Relations. Thank you, sir. You may begin.

--------------------------------------------------------------------------------

Unidentified Company Representative, [2]

--------------------------------------------------------------------------------

Yes. Thank you, Christine, and good morning, everyone. We appreciate your participation today in Tops' fourth quarter and full year ended December 31, 2016 financial results call. The release was distributed yesterday after markets closed.

If you do not have a copy of our news release, please visit our website at topsmarkets.com for instructions on how to obtain a copy.

On the call today are Tops' Chairman and CEO, Frank Curci; President and COO, John Persons; and Executive Vice President and CFO, Dave Langless. Frank, John and Dave will provide their prepared comments, and then we will open up the line for questions.

As you are aware, we may make forward-looking statements during the call and in the Q&A session that follows.

These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from what we discuss here today. These risks and uncertainties are available for you in the news release as well as within the company's filings with the Securities and Exchange Commission.

I would like to point out as well that during today's call, we will discuss non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.

We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release.

With that, I'd like to turn it over to Frank.

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [3]

--------------------------------------------------------------------------------

Hey, thanks, [ Craig ], and good morning, everyone. We do appreciate your time today and your interest in Tops Markets.

We continue to execute our core strategy by expanding our supermarket base and maintaining or growing market share in each of our key regions during the year. While the entire industry struggles with persistent food price deflation, we continue to take a long-term view and are implementing the appropriate strategic steps to make our operations more efficient and to set the stage for stronger financial performance when the operating environment improves.

During the year, we added 9 new supermarkets, bringing our total number of stores to 172. While the number of new stores was more than we've seen in recent years, the additions were right in line with our strategy. We opened or acquired 3 smaller stores that were fill-in opportunities, where we have the ability to leverage our Tops brand and buying power to serve customers in smaller communities that are contiguous to our larger regional areas.

Additionally, in the third quarter, we completed a 6-store acquisition, which included 5 stores in the Hudson Valley region of Eastern New York and 1 store in North Central Massachusetts. This acquisition provides an excellent opportunity for Tops on several levels as we have previously discussed.

The stores provide a natural extension of our geographic footprint and bring an established revenue and customer base, which we have augmented with our successful promotional programs.

During 2016, with our focus on integrating and investing in these stores, introducing our merchandising programs and identifying optimal product mixes, the performance of these stores got off to a slow start. In 2017, we expect to see profitability improve as our remodel efforts are completed and merchandising programs have been fully implemented.

As always, at the background of our strategy is our commitment to our customers. During the course of the year, we gained or maintained market share across our entire footprint. We strive to give customers an exceptional shopping experience and we work hard to ensure that we offer convenience, savings and friendly service along with our unique promotional programs.

We offer a wide variety of healthy local and national brand as well as an expanded Tops Brand portfolio. And importantly, we are committed to our communities.

This is what we do every single day and is what is driving our market share gains.

Notably, December was a particularly strong month for Tops in terms of market share. We increased our promotional activities, which did put some pressure on margins, but we felt it was prudent as growing our -- and -- as growing or maintaining our share was really -- what really set us up nicely for when the current deflationary trends subside and we return to more normal retail pricing levels.

Currently, we are looking to add 1 new location in 2017. Although as we have demonstrated, we will continue to take an opportunistic approach to strategic acquisitions and new store development that can further strengthen our footprint.

With that, I'll turn the call over to John who will cover our initiatives to drive sales and margin growth.

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [4]

--------------------------------------------------------------------------------

Thank you, Frank, and good morning, everyone. Just like other supermarket chains, we have not been immune from the negative impact of industry-wide food cost and retail deflation, especially in the dairy and meat commodities.

Overall, we estimate that deflation resulted in an impact of approximately $24 million or 1.1% to our same-store sales during all of 2016.

Dave will talk more specifically about quarter 4 in a moment. As expected, these headwinds have continued into the first quarter of 2017. We will, however, cycle some of the more significant cost and retail declines in the protein and dairy categories the next 2 quarters.

As we discussed on our last earnings call, to offset this impact, we continue to focus on higher-margin categories. And we have developed various initiatives and promotions to drive sales and margin.

With respect to our strategic initiative of growing our organic and natural food business, we made significant progress in 2016 and certainly in the fourth quarter.

Looking at organic specifically, we want to be recognized as the destination by consumers for this category. And we currently offer more than 3,000 different organic items, which is a substantial increase over our selection just 18 months ago.

For the year, we saw growth in this segment of more than 23% in both sales and in units, and that growth rate was double that of the marketplace.

For the quarter, growth was a strong 33%. The coordinated approach of enhancing our product mix, key partnerships with manufacturers and a strong marketing and advertising plan is working. This will continue to be a focus area of ours in 2017 as consumers -- as consumer buying habits shift towards these categories.

Our efforts around growing fresh prepared foods through better offerings and more selling space are seeing positive results as well. In 2016, this category grew by more than 5% in total and almost 3% in comparable stores.

While staying true to our reputation and offering the best in prepared chicken, pizza and sandwiches, we have been building on that base by adding offerings of specialty salads and take-home meals as our plan to further enhance our production mix -- or excuse me, our product mix this year and continue growing these profitable product lines.

Importantly, our efforts to improve our customer engagement, saw notable changes in 2016. While still offering the best in-market weekly promotional circular, we enhanced our marketing efforts with innovative television advertising around our private brands relaunch initiative and our professional sports partnerships.

On top of those traditional channels, increasing digital engagement is a key initiative for Tops. And digital is now the second biggest marketing investment for us, and we are realizing significant results.

Just about 2/3 of our almost 500,000 digitally-engaged customers reach us on their mobile devices, and our optimized mobile app allows for special offers, (inaudible) notifications and best in-market e-coupon use for all of our customers. We've had more than 26 million e-coupon clicks in the 3 years since we introduced this app and the acceptance rate with both consumers and our manufacturer partners continues to grow rapidly.

In the fourth quarter, we also enhanced engagement and increased customer loyalty by introducing our Christmas bonus program. This initiative, which was linked through our TOPS BonusPlus card, which is the loyalty card that enables all of our customers to unlock the unique programs we have to offer, allowed customers to save an extra 20% on select gift cards by earning gift points for every $50 or more spent on groceries. These points could be redeemed by purchasing gift cards for participating retailers. It's estimated that this program generated $6 million to $7 million of incremental sales in the fourth quarter, and this program helped us to realize market share growth in the fourth quarter, when full volume typically sees a shift into mass and club channels and has certainly helped to drive an increase in our most loyal households of 3% in comparable stores. We will continue to develop and run these types of overlay programs to drive sales and consumer loyalty as they are unique to Tops in our marketplace.

Earlier this week, we kicked off our Monopoly game for 2017, which will run until June 17th. This year's biggest combined grand prize is a chance for 200 people to win free food for a year with one lucky winner guaranteed to win free food for life.

We have seen customers respond well to our Monopoly games in the past and we look forward to another successful program.

Lastly, as the marketplace saw increased investment in pricing and promotion during the fourth quarter as well as increased advertisement, we also expanded our Price Lock program to combat the efforts of our competitors. Price Lock was established more than 2 years ago and allows for us to provide our customers with reduced retail pricing on key items locked in over an 8- to 12-week period. With the added competitive activity, we increased the number of items in our Price Lock program by 20% during the fourth quarter. We will continue to utilize and evaluate this program as a way for us to compete with everyday low price operators in our marketplace.

While 2016 certainly had its challenges and 2017 is seeing some residual effects, we believe we are taking the appropriate actions and that this is the right time and the right environment to make investments for the future. The cumulative power of these actions, combined with our ever-expanding supermarket portfolio, is expected to strengthen our growth and future profitability profile.

With that, I'll hand it over to Dave to cover the financials. Dave?

--------------------------------------------------------------------------------

David Langless, Tops Holding II Corporation - CFO and EVP [5]

--------------------------------------------------------------------------------

Thank you, John, and a good morning, everyone. As a reminder, the fiscal 2016 year-end included 52 weeks. Fiscal 2015 included 53 weeks, with the additional week falling within the fourth quarter.

Excluding the extra week in 2015, fourth quarter inside sales increased $28.3 million or 5.4%, primarily reflecting the contribution of new locations. Same-store sales calculated using comparable 12-week periods decreased 1.9% in the quarter due to the 1.2% impact of continued food price deflation and approximately 30 basis points impact from lower Supplemental Nutritional Assistance Program or SNAP sales due to reduced federal funding as well as lower traffic. For the year, inside sales increased more than $53 million on a comparable 52-week basis, which reflects the $95 million incremental contribution from acquired and new supermarkets. The same-store sales decrease for the full year was 1.8%, of which approximately 50 basis points was attributable to lower SNAP sales with the majority of the remaining decline due to food price deflation.

Fuel sales in the quarter were lower primarily due to 1 less week of sales, while lower full-year fuel sales were primarily due to a decrease in the average retail price per gallon and the additional week in the 2015-time period.

As of December 31, 2016, we had 52 corporate fuel stations in operation, which is unchanged from the prior year.

Gross profit margin for the quarter was down 110 basis points to 28.5%, largely due to an increase in self-insured workers' compensation claims expense of $1.9 million related to our warehouse and transportation operations and a $1.6 million reduction in noncash inventory valuation adjustments related to the capitalization of warehousing costs. Exclusive of distribution costs and this noncash inventory valuation adjustment, gross margin on inside sales, which excludes fuel, was 31.6% and 32% for the fourth quarters of 2016 and 2015, respectively. The decline was largely driven by the increased promotional activity in the quarter that Frank and John spoke to, including activity in connection with the introduction of our Tops Brand into new markets following our 6-store acquisition, which had an estimated impact of 25 basis points.

Gross profit margin for the full year improved 10 basis points to 29.6%, primarily due to the smaller proportion of relatively lower-margin fuel sales.

Fourth quarter operating expenses were $161 million an $11 million decrease, and as a percent of sales decreased 100 basis points to 27.6%.

The lower expense rate was driven by effective cost controls, a $4.2 million decrease in onetime costs, along with lower performance-based compensation expenses.

As a result, operating income was $5.5 million and operating margin came in just 10 basis points lower than last year's fourth quarter.

For the full year, there were a few atypical expenses, including $3.3 million of costs associated with the acquisition and integration of the 6 stores acquired in August, expenses of $1.7 million in connection with the evaluation of a potential acquisition and $1.3 million of incremental legal and professional fees related to the ongoing dispute and associated arbitration proceeding with the New York State Teamsters Conference Pension and Retirement Fund. The 2015 period also included an $11 million gain from the sale of pharmacy scripts and inventory. As a result, operating income was $38.5 million for 2016 compared with $58.4 million in 2015.

Interest expense decreased $1.8 million and $3.2 million during the fourth quarter and full fiscal year, respectively, primarily due to one less week in the 2016 periods.

Net loss for the fourth quarter improved $1.6 million to $13.8 million, and for the full year was $44 million compared with a net loss of $62 million in 2015.

The 2015 full year amount includes $35 million of debt extinguishment costs related to our debt refinancing activities.

We use adjusted EBITDA, which excludes certain noncash and nonrecurring items, as an internal metric and believe it is useful in evaluating our operating performance. This is a non-GAAP measure, so as Craig mentioned, please review our reconciliation and related disclosures in our release.

Fourth quarter adjusted EBITDA was $24.8 million, down $5.6 million from the 2015 period, while fiscal year 2016 adjusted EBITDA was $130.1 million, a decrease of $2.6 million from fiscal 2015. Both the quarter and full year results were impacted by the one less week in the 2016 periods, the effect of which was approximately $2 million to $3 million.

We ended the year with a cash balance of $25 million compared with $35.6 million at the end of 2015. Cash provided by operating activities was $32 million and supported our growth initiatives, including an investment of $17.4 million for 7 supermarkets acquired in 2016 and $34.6 million in capital expenditures that were largely related to new store openings, store remodels and maintenance activities.

During 2017, we expect to invest between $20 million and $25 million in capital expenditures including acquisitions.

Our total debt at year end, including capital leases, was $862.1 million compared with $848.3 million at 2015 year end. The unused availability under our asset-based lending facility was $39.5 million after giving effect to the borrowing base calculation, $22.8 million of letters of credit outstanding and $72.9 million of outstanding borrowings.

On December 30, 2016, we amended and restated this credit facility, extending the maturity date to 2021, reducing the applicable interest rate by 50 basis points and increasing the maximum borrowing capacity from $125 million to $150 million, inclusive of a $10 million first-in, last-out term loan.

We expect the cash generated from operations and availability under the revolving credit facility will provide sufficient liquidity to fund debt service requirements, investments in working capital, capital expenditures, acquisitions and other cash requirements of for the next 12 months.

As many of you are aware, our HoldCo notes mature in June of 2018 and will go current on our balance sheet in the second quarter of 2017. The current balance of these notes is $85 million. Our management team is very focused on this maturity and is currently analyzing and actively pursuing opportunities to address these notes and lower overall leverage in the near term. We will update investors on our progress in the future, and are confident in our ability to mitigate the maturity risk.

With that, we can open up the call for any questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of William Reuter with Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

William Michael Reuter, BofA Merrill Lynch, Research Division - MD [2]

--------------------------------------------------------------------------------

Last quarter, when you guys talked about the acquired stores, they were kind of ramping up more slowly than you had expected. Can you talk about the performance? And I think you kind of expected that, this quarter, we would start to see that improve. Can you talk a little bit about those acquired stores' performance?

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [3]

--------------------------------------------------------------------------------

Yes, sure. Bill, this is John. So as Frank alluded to, for the quarter, they were certainly slower than we had originally thought. But if you think about how we entered the market, we wanted to put our best foot forward, new entry into the market with the stores. So what we did was decided to keep, really, the go-to-market strategy there in place. So pricing levels stayed the same and, on top of that, we actually layered on our promotional ad program, which is generally considered very heavy and certainly was heavier than what they had previously. So essentially, we really had kind of the deepest program in the market. And we wanted to make sure we did that as we transitioned all the stores through the end of the quarter. So at this point now, 5 of the 6 stores have been through the transition, the remodel and there's 1 story yet to go that is in the midst of a pretty extensive remodel and expansion. So at this point now, we're reevaluating those stores in terms of the go-to-market strategy and the pricing level and the entire mix. The good news is we are beginning to see -- in the 4 core stores, we're beginning to see some nice improvement -- nice trajectory and nice improvement in margin and in sales, and we'll continue to evaluate our strategy and adjust accordingly.

--------------------------------------------------------------------------------

William Michael Reuter, BofA Merrill Lynch, Research Division - MD [4]

--------------------------------------------------------------------------------

Okay. And then do you -- were those stores contributing positive EBITDA to the quarter? And if we go back to when you guys acquired those stores and what you expected from them in EBITDA, do you expect that, over kind of the long-term, we'll still get to those levels?

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [5]

--------------------------------------------------------------------------------

Yes. We do think in the long term. So for the quarter, these stores were -- they contributed -- they didn't contribute. It was a negative $1.9 million for the quarter. And that was really -- the 4 core stores were essentially breakeven for the quarter and there were 2 stores that contributed that loss. And those are the stores, obviously, that we're focused on. And we do believe that the 4 stores will and are on a trajectory of meeting our original pro forma.

--------------------------------------------------------------------------------

William Michael Reuter, BofA Merrill Lynch, Research Division - MD [6]

--------------------------------------------------------------------------------

Okay. And then you talked about self-insurance and how that was a drag on gross margins in the quarter. Do you expect that, that -- was that kind of onetime in nature? Or do you expect that we'll continue to see some increased costs in the -- over the next couple of quarters from this?

--------------------------------------------------------------------------------

David Langless, Tops Holding II Corporation - CFO and EVP [7]

--------------------------------------------------------------------------------

No. No, Bill, we largely believe that, that will be onetime in nature. We went through a change in third-party administrators during the year, and as part of the process, some assumptions changed in the X-ray evaluation process. So the increased expense you saw was largely noncash in nature and it was really related to some changes in assumptions, which we largely believe will be onetime in nature. Just to give you a full appreciation for the contact -- for the full impact, in total, when you look at what impacted distribution cost and what included selling and general expenses, the increase for the full year was $2.4 million. So a pretty sizable noncash increase in expense during the year.

--------------------------------------------------------------------------------

William Michael Reuter, BofA Merrill Lynch, Research Division - MD [8]

--------------------------------------------------------------------------------

Okay. And then you talked about some increased promotional activity that was a drag on your gross margins. Was this the kind of layering of these promotions which you talked about in the acquired stores? Or was there some change in the competitive environment?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [9]

--------------------------------------------------------------------------------

No, it was really a combination of the both -- of both of those things.

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [10]

--------------------------------------------------------------------------------

Exactly. There wasn't any real change in the competitive set. There was, of course, ramped up competitive price reductions from the competitors that we currently deal with. And what we did is simply layer on, on our entire business as well as the acquired stores in order to reach the goals for the fourth quarter.

--------------------------------------------------------------------------------

William Michael Reuter, BofA Merrill Lynch, Research Division - MD [11]

--------------------------------------------------------------------------------

Okay. And then just lastly for me. You talked about the maturity of the HoldCo notes in June of 2018. You said you're actively pursuing it and you said you would update us when there's something to say. Can you talk us -- to us at all about the kind of breath of options that you're exploring right now? Or would you rather wait and talk about it when you have something subsequent or...

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [12]

--------------------------------------------------------------------------------

Yes, Bill, we really can't provide any more detail at this time on that. But hopefully in the very near future, we'll have a good update on it.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Our next question comes from the line of Bryan Hunt with Wells Fargo.

--------------------------------------------------------------------------------

David Kuck, [14]

--------------------------------------------------------------------------------

It's Dave Kuck on for Brian. I wanted to touch on the acquired stores again. Can you remind us how do these acquired stores compare from a size perspective versus your existing store base? Are those generally bigger, smaller in line with your existing store base? And then also, what was the sales contribution from those acquired stores in Q4?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [15]

--------------------------------------------------------------------------------

Yes. So Dave, I'll start off. There were 6 stores, 4 of them were Stop & Shop stores, 2 of them were Hannaford stores. The 4 Stop & Shops are slightly bigger on -- than our average store but not a lot bigger than stores that we currently operate here in Buffalo and Upstate New York today. The 2 Hannaford stores are slightly smaller. They're in the 40,000 square-foot range. So they're stores that we're pretty comfortable with. I think John said it well. When we talked about the fact that we didn't want -- we wanted those stores to really get off to a good start. And obviously, we've gotten off to a slower start. But a lot of it was due to the fact that we kept their pricing in place and put our promotional program on top of it. So that deflated both our margin and our sales. But the sales contribution for the quarter was just under $29 million. So they're good-volume stores. We see that the trend of those stores have been good. There were 4 stores that we really went after. Those stores, we're very happy with. The 2 stores that have gotten off to a slower start and really caused the negative EBITDA during 2016 were really stores that were on the fringe of our interest, I'll say. And because of the fact that this was a deal that had to be made and it had to be 100% deal for the sellers, these 2 stores, we've gotten off to a much slower start. So in general, we're still happy. They're doing good volume. We're tweaking our programs so that it's a more normalized promotion pricing program and we're real happy with the trends that we're seeing today.

--------------------------------------------------------------------------------

David Kuck, [16]

--------------------------------------------------------------------------------

Okay. I saw in your press release, you're planning to still opportunistically look at M&A but your capital structure is obviously in need of some tenor extension. Can I -- can you talk about how you're balancing those 2 priorities?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [17]

--------------------------------------------------------------------------------

Yes. I mean, if you look at our capital program for this year, it's probably less than half of what it was last year. So the one store that we really have on the docket is a very small store that's going to -- it's in existence today. It's going to take very little capital to get it up and running. So we're really looking to take more of that free cash flow and put it towards the capital structure rather than new stores. As always, if there was a deal there that could be accretive to our company and allow us to really more normalize our capital structure, we would do that. But right now we're just looking to put more of our free cash flow towards debt service the rather than CapEx.

--------------------------------------------------------------------------------

David Kuck, [18]

--------------------------------------------------------------------------------

Okay. Can you talk about the competitive openings that you're seeing for 2017?

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [19]

--------------------------------------------------------------------------------

Yes. Competitive -- this is John. Competitive openings for this year are very, very few. There actually no Walmarts opening up in the foreseeable future in any of our marketing area, with a Whole Foods opening in just 1 or 2 others. So generally speaking, the competitive set is very, very stable. And I'll just remind you that what we had seen since the mid-2000's was really the build-out of our biggest competitor, Walmart, in our marketing area. And at this point, for the most part, they are fairly well-built out in all of our marketing area with some pretty good penetration numbers. So I think they're pretty well built out. I'm not sure that we'll see much competitive openings from them in the future.

--------------------------------------------------------------------------------

David Kuck, [20]

--------------------------------------------------------------------------------

Okay. And then last from us. I believe we're now at the end of Q1. Can you provide any color on how things have trended in 2017?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [21]

--------------------------------------------------------------------------------

I think we've already said that deflationary trends have really continued into Q1. We kind of see that more normalizing going forward from here. I think other than that, I think some of the same trends have continued and we're -- we'll go forward from there.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question comes from the line of Hale Holden with Barclays.

--------------------------------------------------------------------------------

Hale Holden, [23]

--------------------------------------------------------------------------------

I had just a couple quick ones. With regard to the price and promotion actions that you took in the fourth quarter to drive traffic, I heard you say to Bill's question that you really didn't see much competitive change. But I was wondering if -- the first quarter, if you'd seen your competitors match you at that sort of level of intensity?

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [24]

--------------------------------------------------------------------------------

Yes, just to be clear, we didn't see much competitive change in terms of the openings of new stores. We certainly saw a competitive change and competitive reaction in the fourth quarter and ongoing in terms of promotions, deeper price reductions and advertising and marketing campaigns from our competitors. So didn't see any additional openings, certainly saw increased activity in their go-to-market plans. So all of our competitors for -- they really -- they intensified their efforts in the fourth quarter and continued to intensify their efforts in the first quarter.

--------------------------------------------------------------------------------

Hale Holden, [25]

--------------------------------------------------------------------------------

And then my follow-up to that would be -- I read in your release the comments around deflation kind of easing into the second half of this calendar year. What -- when you sort of model out the year going forward, how much risk do you see in the market that, as we shift to a more normalized inflationary market or net neutral, that your competitors would take price as they would historically? Or is there some risk that they'll just keep jamming the promotional pedal down pretty far?

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [26]

--------------------------------------------------------------------------------

That's really a good question, and we have some pretty good visibility to understand when the actual cost deflation will cycle. So that goes into that second quarter and the third quarter as we have referenced. So we're pretty sure we understand when the cost deflation hits. The real question will be whether or not the market bears those inflationary increases. And we'll be very responsive to what we need to do in the market to raise or to adjust retails appropriately.

--------------------------------------------------------------------------------

Hale Holden, [27]

--------------------------------------------------------------------------------

Okay. And then my last question was maybe you could just talk me through some of the organic changes you made in the last couple of months, how the stores look different. I apologize, I haven't made it into one of your stores in the last 6 or 9 months.

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [28]

--------------------------------------------------------------------------------

Yes, sure. So it really starts with -- in 2016, we made a concerted effort towards increasing our product mix around the store. So fresh and grocery-type items as well as household items around the store. So we simply -- we started with simply bringing in more items and many of those revolved around our private brand, Full Circle. So we increase the variety there. More displays involved and many more promotions, specific promotions, on-air marketing and advertisement, radio, TV. A real full-line concerted effort with meaningful displays throughout the store. And by the way, making sure that our private brand, organic line, Full Circle, is at a very competitive entry-level pricing, so we can open up the availability of organic foods for all of our shoppers.

--------------------------------------------------------------------------------

Hale Holden, [29]

--------------------------------------------------------------------------------

And I just one -- last follow-on, sorry. Any chance you can give us of the RP capacity up to the HoldCo?

--------------------------------------------------------------------------------

David Langless, Tops Holding II Corporation - CFO and EVP [30]

--------------------------------------------------------------------------------

Yes. It's between $30 million and $40 million all-in at this point when you consider unrestricted capacity and the builder basket.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Our next question comes from the line of Scott Simon with UBS.

--------------------------------------------------------------------------------

Scott Simon, [32]

--------------------------------------------------------------------------------

I was hoping to get an update on the status of the Teamsters litigation?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [33]

--------------------------------------------------------------------------------

Yes, so that continues, unfortunately. It's really dragged out. It's -- and the dragging out is really due to the scheduling conflicts of the arbitrator. So we've put on our case. Our testimony is done. The testimony is now coming from the other side. We expect that to continue through the end of September. The arbitrator will then take up to 6 months to render a decision. We feel pretty good about our case. If anything, during all of this, our conviction has only increased. We think this is one where we'll prevail at the end of the day, certainly, but it's taken way longer and cost way more in legal fees than we anticipated in the beginning but we're pretty steadfast in what the results are going to be.

--------------------------------------------------------------------------------

Scott Simon, [34]

--------------------------------------------------------------------------------

Okay. Given you're, I assume, making acquisitions, it sounds like more fleet -- not fleet, portfolio optimization. Are there stores within that, that you guys are going to look to dispose in the next couple of quarters?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [35]

--------------------------------------------------------------------------------

Yes. Yes, Scott. That's another good question. I think when we look at our portfolio, we're pretty happy with our store base. But there's probably less than a handful of stores that we'll take a look at this year, and if we don't see any future opportunity in them, that we could close, but we're talking maybe 2 to 4 stores. That's kind of what we're looking at for this year. At times like this, you look at everything and we think there's probably a few opportunities to cut some losses.

--------------------------------------------------------------------------------

Scott Simon, [36]

--------------------------------------------------------------------------------

Got you. And I just kind of want to -- I want to clarify the deflationary topic that we're going over. It sounds like you think that the actual food deflation, the trend started to normalize, I just kind of want to see if that's -- I mean, if it's getting less bad so that, I guess, the rate of deflation for you guys was, call it, a little over 1%. But is that being offset by what seems to be more competitive price promotions, et cetera? So we should expect kind of same-store sales to continue to trend like this? Or how is that playing out?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [37]

--------------------------------------------------------------------------------

Yes. I think I'll start off and, hopefully, John will jump in. In terms of deflation, you're right. We look at one 1.1%, 1.2%. That's kind of what we've been up against. That really started in earnest during the year, last year. So in several of the commodities, we'll start cycling that starting in Q2. So we're expecting similar trends here in Q1 in terms of deflation.

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [38]

--------------------------------------------------------------------------------

And yes, I would've -- Frank, I think you're dead on. Those deflationary trends continue and we have the opportunity to see something different when we cycle the cost deflation with, hopefully, some retail adjustments. And at this point, the competitive activities in the markets with us and with our competitors generally stay the same. So there is increased activity.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Our next question comes from the line of Peter Maguire with State Street.

--------------------------------------------------------------------------------

Peter Maguire, [40]

--------------------------------------------------------------------------------

In your quarter, you -- a portion of the same-store sales decline attributed to lower traffic, but you've gained market share. So am I to assume that maybe the market overall has seen lower traffic and you guys are just a bit better? And can you talk about the market a bit? I mean, if so -- that assumption is correct, what are people doing if not buying food from grocery stores? Or is the -- has the food offering and the type of stores that are out there expanded?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [41]

--------------------------------------------------------------------------------

Yes, so another good question. So yes, the answer to your question is yes, the market did decline during the quarter and our decline was less. So -- but we still did have some traffic that went down. But when you look at traffic and basket size and stuff, actually basket size went up, trips went up. So while transactions went down, the other sides of the equation kind of increased. Where [ is ] people going? We -- our all-outlet market share reflects these gains that we had in Q4. And whether people just cut back, we don't really see them going to competition, we don't really see them going online for food here in Upstate New York. It's always been a pretty stable and consistent market, but that's a question a lot of us have been asking. And I don't know that we know the answer to where that's gone except that people have cut back.

--------------------------------------------------------------------------------

Peter Maguire, [42]

--------------------------------------------------------------------------------

And in addition to that, with some of the improvements in market share, how much of that do you attribute to your promotions, like your Christmas promotion? And how much would you say come from your investment in price, investment in your fresh-prepared?

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [43]

--------------------------------------------------------------------------------

Yes, that's a good question. And to be clear, for the fourth quarter, we absolutely saw market share gains in both -- how we measure the food channel and the all-outlet channel. And both of those, as Frank said, were -- the market contractions were more than and what ours were. We do believe that our promotion -- the Christmas bonus promotion absolutely worked. And what happened in the fourth quarter is we actually saw positive household gains in what we consider our upper or our more loyal spending thresholds. So essentially, the thresholds where people spend more than $50 a week. Those number of households for ID stores were positive for the fourth quarter. So the promotional overlays that we had and the go-to-market mix worked very well with people who are our loyal customers or people who spend a lot. It was those lower-threshold transitional or occasional shoppers that we lost some significant movement with. So it seems like those are the ones that really kind of pulled back or maybe there was some polarization to some other competitors. And important to note, too, those tend to be some of the threshold -- or some of the spending tiers where we see significant SNAP dollars in. And there was essentially a 5% decline in SNAP sales for the quarter, so we think some of that plays into those lower-spend thresholds as well. So we do believe the program that we had for the fourth quarter was pretty important and it really helped to drive the top-spending threshold, those most loyal and important customers of ours.

--------------------------------------------------------------------------------

Peter Maguire, [44]

--------------------------------------------------------------------------------

And regarding the minimum wage law that Governor Cuomo signed off on recently, the top line news has up to -- we're up to $20 -- or $15 an hour by 2020, I believe, in New York City, but in Upstate New York, it's far more muted. It could rise about $0.75 a year for the next 4 or 5 years. But I think the vast majority of your contracts are unionized. Can you talk about how you handle that? Or is it a big issue for you folks or something that you can manage through? And one last question regarding competition. Target is refurbishing all their grocery efforts. Do you consider that a new store opening because it's material enough in their refurbishments? Or is it something that's not a big deal?

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [45]

--------------------------------------------------------------------------------

So I'll answer the second question first regarding Target. We saw the conversions to what they're classifying as their pre-fresh -- or PFresh stores. We saw that conversion over the past 3 or 4 years. So all the Targets that we compete with already have a grocery element as well as kind of a small fresh offering. If and when they do refurbish beyond that, we have yet to see that and nor have we seen any of it, but certainly, they have significant grocery offerings in their locations -- in every one of the locations that we compete with already. With regard to the minimum wage. So the minimum wage in New York, where the majority of our stores are, has been going up for the past 4 years, actually. And this past January, it went up $0.70 and it will continue to go up, as you referenced, again. In Upstate New York, the threshold is $12.50. So it'll go up until that point. And what we've been doing is, of course, with a big portion of our workforce being part-time and first-job type of associates, that is an impact if we did nothing else to negate that impact. And so what we've done over the past couple of years, and we continue to do, is put a concerted effort towards initiatives that would mitigate that. So for instance, we had a crew complement initiative that we just completed this year. It was essentially 100 associates -- salaried associates that we were -- through attrition or reassigning. All-in that's at $4 million -- excuse me, a $5 million or $6 million offset to go against the minimum wage increases. Moving forward, we're working with a number of manufacturers locally and regionally to help us produce a number of our product -- prepared product items, so we don't have to produce them in-store any longer and they're ready for sale when they reach the store. So there's a number of different things, including some technology that we're in the process of implementing that will help us offset those labor increases.

--------------------------------------------------------------------------------

Peter Maguire, [46]

--------------------------------------------------------------------------------

And one last question going back to the fresh-prepared and the market share gains in the relatively higher income brackets. What's the potential for that market? What kind of penetration do you think you've made? And what do you think the possibilities are? And can you bring it down to a same-store sales capacity?

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [47]

--------------------------------------------------------------------------------

I think that -- well certainly, there's a significant trend in the marketplace and in the industry towards fresh-prepared foods. Our competitors, Wegmans, in particular, is very developed in that area. So we know that there's significant runway for us to do some catching up. So it's not surprising that our growth rate is fairly significant relative to the rest of the same-store sales because we have some making up to do. We believe we'll easily be able to keep those trends that we've been seeing and grow it further. We've seen -- through the entire year, we've seen significant household penetration gains with those particular categories, but we still know that we're only reaching a quarter of our customers. So we know that there's significant runway. I don't have the exact penetration number, and I apologize, but this is an area that we've identified relative to our current penetration as a significant growth area for us.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Our next question comes from the line of Lou Cherrone with Southpaw Asset Management.

--------------------------------------------------------------------------------

Lou Cherrone, [49]

--------------------------------------------------------------------------------

I had one question sort of related to a previous question about the 10-K disclosure, about the ongoing mediation between the Teamsters and Erie Logistics. I'm just wondering if you could maybe discuss a little bit about the likelihood that you'll reach some kind of agreement before the standstill expires on April 29th?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [50]

--------------------------------------------------------------------------------

Well, there are 2 -- I guess, the arbitration will go beyond the 29th of April, but the standstill agreement will be extended beyond that. We have our HR person here.

--------------------------------------------------------------------------------

Jack Barrett, Tops Holding II Corporation - EVP of HR, Assistant Secretary and Director [51]

--------------------------------------------------------------------------------

Yes, this is Jack Barrett. I'm the Executive Vice President of Human Resources, including Labor Relations. We've had ongoing discussion with the leaders of Teamsters Local 264 and we're jointly working with the fund to resolve the issues as a corollary to the arbitration. So I'm very confident, as Frank just described, that the collective bargaining agreement extension will be extended once again. We have verbal assurances of that. We're not facing any imminent work stoppage or any future planned work stoppage. We're working together with our employees and their union.

--------------------------------------------------------------------------------

Lou Cherrone, [52]

--------------------------------------------------------------------------------

Okay, great. And just one other quick question on SNAP. We saw in the fourth quarter some softness there, some from reductions in SNAP. I'm just wondering if that was expected? And how you guys are looking at potential reductions in SNAP going forward into 2017?

--------------------------------------------------------------------------------

David Langless, Tops Holding II Corporation - CFO and EVP [53]

--------------------------------------------------------------------------------

Yes, I think really -- the reduction we saw was in line with the decrease in the federal funding that occurred nationally. So approximately 10% of our snail -- sales are SNAP sales. There was a 5% decrease in funding, so we saw a 50 basis points impact on our same-store sales. As we move forward, the level of our SNAP sales is really going to be tied to the continued federal funding of the program. Our understanding is that a big reason for the decrease in federal funding is just because of a decline in the unemployment rate. So as unemployment stabilizes and is more consistent, we wouldn't necessarily expect perhaps the same level of declines. But it's really going to depend on federal funding going forward.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

Our next question comes from the line of [ Dan Patzelt ] with Oracle.

--------------------------------------------------------------------------------

Unidentified Analyst, [55]

--------------------------------------------------------------------------------

Just a quick question. I know that convenience, value and friendly service are all a part of the culture. There's a lot of headwinds. I know you say that internet buying and kind of convenient distribution, disruptive models are not localized threats. But as you expand regionally, does that necessarily represent a threat? For instance, expanding into Massachusetts, a millennial-shifted market and kind of a broader-ranging demography? Do you have ways to differentiate as you enter those market spaces built into your long-term planning?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [56]

--------------------------------------------------------------------------------

Yes. I think, Dan, when you look at our marketplace in Upstate New York, that hasn't been a big threat at the moment but we're certainly looking at ways to combat that for the future. But Upstate New York, people still have cars. They drive around. We've tried to identify, through our Nielsen partners, how much of the market is going to online sales and it's so small that they can't measure it at this point. So in our traditional markets, we think we still have some time there. And again, that's not something that we're ignoring but it's not a burning platform at the moment. The further East we go, the more that becomes important. We do have some stores in the Hudson Valley, which is a little bit different customer base. But again, there, we haven't seen a lot of impact at the moment. But it's something that we have our eye on and are looking to develop our own click-and-collect type programs over the coming years

--------------------------------------------------------------------------------

Unidentified Analyst, [57]

--------------------------------------------------------------------------------

Yes. Okay. And then, as far as your app, you say about 2/3 of those customers are engaging through the app. Do you have a demography around them and where that engagement is really coming from because, obviously, you have a pretty segmented market between baby boomers and millennials?

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [58]

--------------------------------------------------------------------------------

Yes. It's a good question, and I don't have it in front of me, but what I can tell you is that all attributes -- we're beginning to measure the generational cohorts and all attributes are engaging. Certainly heavily weighted in Gen X right now, but millennials are absolutely engaging as well. Very heavily weighted in Gen X at this point, which, by the way, is really where all of the sales spend comes from, so that's okay. But having that forward look towards the millennial shopper as well.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

Our next question comes from the line of Ben Fisher with Merced Capital.

--------------------------------------------------------------------------------

Ben Fisher, [60]

--------------------------------------------------------------------------------

I have a question on capital leases. Is it fair to say that going forward, your annual cash obligation will be in the $32 million range?

--------------------------------------------------------------------------------

David Langless, Tops Holding II Corporation - CFO and EVP [61]

--------------------------------------------------------------------------------

Yes, Ben. All-in, when you include principal payments and interest associated with those, in the $32 million neighborhood. That's a good estimate.

--------------------------------------------------------------------------------

Ben Fisher, [62]

--------------------------------------------------------------------------------

Okay. And then a follow-up on minimum wage. I was curious on your thoughts. Being a highly-unionized operation, are you more or less affected by the minimum wage increases compared to your nonunion competitors in Walmart and Wegmans?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [63]

--------------------------------------------------------------------------------

It's really the same, Ben. When you look at our average wages compared to our competitors, they're really dead on. The fact that we are a union company, on the wage side, it really doesn't put us at any advantage or disadvantage with our competitors. We're all around the same. We'll have some different benefits and pension stuff, but on the wage front, we're pretty equal with everybody. So no positive and negative there as it compares to competition.

--------------------------------------------------------------------------------

Ben Fisher, [64]

--------------------------------------------------------------------------------

Okay. And then finally, going into 2017, should we expect the professional and legal expense related to the Teamsters litigation to be kind of the same as 2016?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [65]

--------------------------------------------------------------------------------

I think it should probably a little bit less, actually, because some of the upfront costs of preparing for the litigation are heavier than the ongoing costs. Quite frankly, we go months without anything happening here because of the arbitrator's schedule. So for instance, we know we're not going to see any more testimony until June, is the next scheduled testimony. So we go months without seeing anything. It's the most aggravating thing I've been -- ever been involved in. But I think our costs will probably be a bit less this year.

--------------------------------------------------------------------------------

Operator [66]

--------------------------------------------------------------------------------

Our next question comes from the line of Karru Martinson with Jefferies.

--------------------------------------------------------------------------------

Karru Martinson, Jefferies LLC, Research Division - Analyst [67]

--------------------------------------------------------------------------------

My apologies. I joined the call late, so if you already said this, but when do you anniversary the 5% decrease in funding for SNAP?

--------------------------------------------------------------------------------

David Langless, Tops Holding II Corporation - CFO and EVP [68]

--------------------------------------------------------------------------------

Yes. I don't know if there's a particular date that we would say we would anniversary that. The continued trend is really going to be tied to federal funding. So again, our sales are about 10% SNAP sales. So assuming that the trend here is in line with what the federal funding trend would be, we would expect a similar correlation going forward.

--------------------------------------------------------------------------------

Karru Martinson, Jefferies LLC, Research Division - Analyst [69]

--------------------------------------------------------------------------------

Okay. And then just lastly, when you guys talked about, I mean, you're putting free cash flow to work to -- for the debt service here with the pending maturities, given that you've got $30 million to $40 million of RP capacity there, utilizing your buckets, why not address parts of your capital structure now when they're trading well below par? Or is it that you want to wait until that cash is actually on the balance sheet before you utilize it?

--------------------------------------------------------------------------------

David Langless, Tops Holding II Corporation - CFO and EVP [70]

--------------------------------------------------------------------------------

Yes. I think consistent with our prepared remarks, we are absolutely actively looking at some options related to our capital structure. And unfortunately at this point, we can't say much beyond that, but hopefully we have some information to share in the very near future.

--------------------------------------------------------------------------------

Operator [71]

--------------------------------------------------------------------------------

Our next question comes from the line of Rosemary Sisson Susan with Guggenheim.

--------------------------------------------------------------------------------

Rosemary Sisson, [72]

--------------------------------------------------------------------------------

Just 2 more. I was curious if you've seen any deflation in produce?

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [73]

--------------------------------------------------------------------------------

Just starting to see some veg deflation in produce certainly. So it absolutely has hit us. As far as fruit, generally fairly stable, but -- and I think some of that produce deflation -- the produce impact with veg is probably going to correct itself with some issues out in the West. So very volatile with produce obviously. There's typically some ups and downs throughout the course of the year, but yes, we absolutely did see that.

--------------------------------------------------------------------------------

Rosemary Sisson, [74]

--------------------------------------------------------------------------------

Would that -- the impact of that have any bearing on how you would view deflation kind of subsiding maybe as we get towards the middle or end of this year? Or is it not that much of an impact -- or consistent impact to make that difference?

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [75]

--------------------------------------------------------------------------------

It's certainly an impact. It's just not as big of an impact as the substantial effects that we saw in the protein categories and in dairy. Eggs continue to be 40%, 50% deflated, in terms of retail, to last year. Chicken, beef, those commodities continue to be substantially deflated to last year. So I don't want to minimize the effect but certainly not to the magnitude of the other categories.

--------------------------------------------------------------------------------

Rosemary Sisson, [76]

--------------------------------------------------------------------------------

Okay, great. And then I just want to check, how many properties do you have that are unencumbered at this point?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [77]

--------------------------------------------------------------------------------

We're mostly a tenant in our stores. I think we have...

--------------------------------------------------------------------------------

David Langless, Tops Holding II Corporation - CFO and EVP [78]

--------------------------------------------------------------------------------

We have 7 owned locations from a retail perspective. We also own our warehouse and distribution center. One retail location and our warehouse and distribution facility are specifically identified as collateral for our OpCo notes.

--------------------------------------------------------------------------------

Operator [79]

--------------------------------------------------------------------------------

Our next question comes from the line of Kenneth Williamson with JPMorgan.

--------------------------------------------------------------------------------

Kenneth Williamson, [80]

--------------------------------------------------------------------------------

I just had a couple of quick follow-ups, and most of my questions have been answered. But you mentioned that CapEx spending likely to come down in 2017. Have you put a number around what you expect you'll spend in CapEx for the year?

--------------------------------------------------------------------------------

David Langless, Tops Holding II Corporation - CFO and EVP [81]

--------------------------------------------------------------------------------

Yes. We estimate $20 million to $25 million, less than half of what our run rate has been in recent years. And that decrease is primarily attributable to fewer new stores that are anticipated at this time.

--------------------------------------------------------------------------------

Kenneth Williamson, [82]

--------------------------------------------------------------------------------

Got it. And then, I guess, this is similar to the last question that was just asked. But as you're looking at food deflation and what items are affected, are there particular items that you're worried about being able to raise prices from a -- when you look at how competitors promote their brand? Like are there particular categories that are more problematic to raise prices in the back half of the year? Or is it -- you generally feel like -- that you'll be able to kind of pass that along if you do get -- if we do get some inflation towards the back half of the year?

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [83]

--------------------------------------------------------------------------------

Yes. In general, I would think the categories that we're probably most concerned about if -- and that question would be the dairy categories. So milk and some of the other dairy categories. As far as meat, I think certainly some potential in beef as well as we get into quarter 2 and quarter 3. But it's probably the dairy categories more than anything.

--------------------------------------------------------------------------------

Kenneth Williamson, [84]

--------------------------------------------------------------------------------

Got it. Okay. And then last one, I just wanted to clarify. I know you talked about your RP capacity for funds sent to the HoldCo. Are there any covenants in the revolver that restricts your ability to use a drawdown on the revolver to pay down debt?

--------------------------------------------------------------------------------

David Langless, Tops Holding II Corporation - CFO and EVP [85]

--------------------------------------------------------------------------------

No real restrictions. In terms of restricted payments, there would be -- there's a consolidated fixed-charge coverage ratio that comes into play. There's an availability condition that we would certainly expect to meet, but no further restrictions beyond that.

--------------------------------------------------------------------------------

Operator [86]

--------------------------------------------------------------------------------

Our next question comes from the line of [ Robert Fuchsia ] with Morgan Stanley.

--------------------------------------------------------------------------------

Unidentified Analyst, [87]

--------------------------------------------------------------------------------

I just had 1 question. I know you gave the EBITDA number of the stores you acquired for the fourth quarter. Do you have that number for the full year or for the third quarter?

--------------------------------------------------------------------------------

David Langless, Tops Holding II Corporation - CFO and EVP [88]

--------------------------------------------------------------------------------

Yes. Because we brought those stores on late in the third quarter, the full year and quarter 4 numbers are virtually the same.

--------------------------------------------------------------------------------

Unidentified Analyst, [89]

--------------------------------------------------------------------------------

Okay, so it's the negative 1.9% for the full year as well?

--------------------------------------------------------------------------------

David Langless, Tops Holding II Corporation - CFO and EVP [90]

--------------------------------------------------------------------------------

Correct. Correct.

--------------------------------------------------------------------------------

Operator [91]

--------------------------------------------------------------------------------

Our next question comes from the line of Chris Mandeville with Jefferies.

--------------------------------------------------------------------------------

Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [92]

--------------------------------------------------------------------------------

I know you mentioned you're still seeing some deflation. I'm just wondering if you could maybe talk about how the different categories are trending there? And if you can maybe compare how March has looked versus February in terms of both sales trends and deflation?

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [93]

--------------------------------------------------------------------------------

Certainly. We continue to see deflation into March as we have last year. And it is truly around the same categories, dairy and the protein categories. So beef, chicken. The dairy, milk, egg categories continue to see retail deflation. In most cases, cost deflation as well.

--------------------------------------------------------------------------------

Operator [94]

--------------------------------------------------------------------------------

Our next question comes from the line of Tom Radionov with Corre Partners.

--------------------------------------------------------------------------------

Tom Radionov, [95]

--------------------------------------------------------------------------------

I wanted to go back to some of the questions on your capital structure. So it certainly sounds like you're very focused, for obvious reasons, on dealing with that. Do you feel like, at this point, you already have a pretty clear plan as to what you want to do? And therefore a potential transaction, in whatever form it may take, is likely a near-term event? Or are you still kind of going through the various options that you have at your disposal and, therefore, maybe this would take a little bit longer before you actually have a clear path forward in terms of what you'd like to do exactly?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [96]

--------------------------------------------------------------------------------

Yes. I think we have to stick with what we've already said here and there's really not much more I can provide at this point. We are focused on it. We will have further information as things take place but we can't really provide any more information on that at this time.

--------------------------------------------------------------------------------

Tom Radionov, [97]

--------------------------------------------------------------------------------

Okay, that's fine. That's fair. I guess -- I mean, the reason I was asking the question, so I was just sort of asking myself if you were doing with the Teamsters litigation and it sounds like this will take a while, potentially, before you resolve it. I think you were suggesting September and then maybe another 6 months after that to kind of get the final decision. Does that, potentially, come in the way of a transaction of some sort, I guess, given the size of the potential liability if for whatever reason you actually end up losing that litigation?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [98]

--------------------------------------------------------------------------------

Yes, I think in terms of the litigation, we do feel pretty strongly about what the ultimate outcome of that will be. Quite frankly, all it's done is made our efforts around the capital structure more interesting because of the cash that's gone towards doing the withdrawal payments. Effectively, we're making dual payments now so that's -- even though half of that cash has stayed on the balance sheet. So it's made the whole thing more interesting, but I don't think it will get in the way of any solution.

--------------------------------------------------------------------------------

Tom Radionov, [99]

--------------------------------------------------------------------------------

And just to be clear, actually, I want to understand that a little bit better. So you're paying -- as far as the multiemployer plan, you're paying about $15 million, I think it was the number, in '16, and it seems like maybe it's going to go up a little bit. And then I think that there was a $5 million contribution kind of related to this litigation, but it seems like you actually got that money back. And then there were some incremental. I think it was a $7.7 million number, if I remember correctly, which you actually did end up paying. So should I be sort of thinking of your pensions/, I guess, Teamsters litigation-related payments as kind of $15 million plus $7 million in -- sort of in real cash notwithstanding the $5 million that kind of came back to you in '16?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [100]

--------------------------------------------------------------------------------

Well, I know this could be a confusing topic, so let me try and go through those pieces, and Jack's here with us. So we're making withdrawal payments now.

--------------------------------------------------------------------------------

Jack Barrett, Tops Holding II Corporation - EVP of HR, Assistant Secretary and Director [101]

--------------------------------------------------------------------------------

Yes, let me just take that. This is Jack Barrett. Again, I'm the HR person. So we're making payments of $7.7 million per year in withdrawal payments. So that's money that we fully expect that we're going to get back with interest when the arbitration decision is rendered in early of 2018. That's what we anticipate today.

--------------------------------------------------------------------------------

Tom Radionov, [102]

--------------------------------------------------------------------------------

So you're saying that basically reduces the liability, from your perspective. If you end up losing and if you do not end up losing then that money basically comes back to you, is your point?

--------------------------------------------------------------------------------

Jack Barrett, Tops Holding II Corporation - EVP of HR, Assistant Secretary and Director [103]

--------------------------------------------------------------------------------

That's correct. That's exactly right. So I hope that clears it up. The $15 million that you're talking about has really nothing to do with the Teamsters. That's just our normal contributions for the UFCW pension plan.

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [104]

--------------------------------------------------------------------------------

That's the clerks.

--------------------------------------------------------------------------------

Jack Barrett, Tops Holding II Corporation - EVP of HR, Assistant Secretary and Director [105]

--------------------------------------------------------------------------------

That's the clerks. That's $14.8 million per year. The $5 million that you're talking about is the normal contributions for the Teamsters plan that we expense each year and that comes back to us in terms of returned contributions, but that is our expense. So it's $5 million roughly for the Teamsters, $15 million roughly for the UFCW. The play is the $7.7 million, which we believe comes back with interest.

--------------------------------------------------------------------------------

Tom Radionov, [106]

--------------------------------------------------------------------------------

And you paid that in 2015 and 2016, right?

--------------------------------------------------------------------------------

Jack Barrett, Tops Holding II Corporation - EVP of HR, Assistant Secretary and Director [107]

--------------------------------------------------------------------------------

We started paying that in 2014, actually.

--------------------------------------------------------------------------------

David Langless, Tops Holding II Corporation - CFO and EVP [108]

--------------------------------------------------------------------------------

Yes. It's July '14.

--------------------------------------------------------------------------------

Jack Barrett, Tops Holding II Corporation - EVP of HR, Assistant Secretary and Director [109]

--------------------------------------------------------------------------------

July 1st, we paid half of that in '14, that same amount in '15, that same amount in '16. So there's well over $20 million -- roughly $21 million that's been paid out that we expect back with interest or (inaudible).

--------------------------------------------------------------------------------

Tom Radionov, [110]

--------------------------------------------------------------------------------

Got it. Yes -- no, I got it. That actually makes sense. And last question. I think you mentioned that basically you had to invest in price to maintain or even, in some situations, to win market share. And I think you kind of pointed to December as being very strong from the perspective of winning market share, which, I guess, presumably means that you had to invest more in price at that time. Is it fair for us to assume that since kind of December was at the end of the quarter and you were potentially more price aggressive than you were earlier in the quarter that, that trend generally continued going into 2017? Or was that more of a sort of a December-specific event?

--------------------------------------------------------------------------------

John Persons, Tops Holding II Corporation - President, COO and Director [111]

--------------------------------------------------------------------------------

We have continued some efforts into the beginning of 2017. But as we always do, we're evaluating what we need to do at any given time. We really were focused on winning market share, and specifically, in December of 2016.

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [112]

--------------------------------------------------------------------------------

And as a promotional retailer, we could really tailor those investments to week-by-week effort. And as we see fit, we can make an investment, but it's very short term. So I think we have the ability to really balance this out a little bit better than an everyday low-price retailer can do because of the nature of our weekly ads.

--------------------------------------------------------------------------------

Operator [113]

--------------------------------------------------------------------------------

Ladies and gentlemen, due to time constraints, our final question will come from the line of [ Dan Patzelt ] with Oracle.

--------------------------------------------------------------------------------

Unidentified Analyst, [114]

--------------------------------------------------------------------------------

Just one last one. I've had some expressions of concern from some of your regional competitors that say that the expansion into organic premium and value-add foods has actually created a couple of headwinds at the customer service level that they hadn't been able to answer for. I was wondering if you have a strategy in place to answer for the same because you've essentially created an opportunity to bifurcate your market to commodity buyers and then to premium value-add and higher-end buyers. Is there something to maintain a service level across both channels?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [115]

--------------------------------------------------------------------------------

So I'm slightly confused by your question. I think what you're asking is our expansion into organic and prepared foods, does that create a customer service issue because we can't fulfill the requirements of the customers coming in?

--------------------------------------------------------------------------------

Unidentified Analyst, [116]

--------------------------------------------------------------------------------

Or a greater and premium expectation of customer service when you bring in those customers? And I know you said you were about 25% penetrated into that market share?

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [117]

--------------------------------------------------------------------------------

Yes. I don't really think we've seen that at all. I don't think -- we don't have a concern other than the normal concerns of serving customers when they come in. We have not seen any overreactions there.

--------------------------------------------------------------------------------

Operator [118]

--------------------------------------------------------------------------------

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

--------------------------------------------------------------------------------

Frank Curci, Tops Holding II Corporation - Chairman of The Board, CEO and CEO of Tops Gift Card Company LLC [119]

--------------------------------------------------------------------------------

Well, thank you all very much for joining us today. We greatly enjoyed the questions and the interest and, hopefully, we'll look forward to talking -- to gather again at the end of the first quarter of 2017. Thank you all.

--------------------------------------------------------------------------------

Operator [120]

--------------------------------------------------------------------------------

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.