Welcome to the Albertsons Companies Fourth Quarter and Fiscal 2019 Earnings 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 would like to hand the call over to Melissa Plaisance, GVP, Treasury and Investor Relations. Please go ahead, ma'am.

Good morning, and thank you for joining us for the Albertsons Companies Fourth Quarter 2019 Earnings Conference Call. With me today from the company are Vivek Sankaran, our President and CEO; and Bob Dimond, our CFO. Today, Vivek will make some opening remarks and touch on our fourth quarter and fiscal 2019 results. Bob Dimond will then provide the details regarding our fourth quarter and full year results. Vivek will then provide a detailed update on the company's response to the COVID-19 pandemic. Bob will provide our fiscal 2020 outlook, and Vivek will 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. These risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements, including those related to the COVID-19 pandemic, about which there are still many unknowns, including the duration of the pandemic and the extent of its impact. 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 and may be in our registration statement on Form S-1 filed on March 6, 2020. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. Please keep in mind that included in the financial statements and management's prepared remarks are certain non-GAAP measures, and the historical financial information includes a reconciliation of net income to adjusted EBITDA. And with that, I will hand the call over to Vivek.

Thanks, Melissa. Good morning, everyone, and thank you for joining us today. Throughout the country, we find ourselves in unprecedented times, battling against the coronavirus and coping with the challenges created by the COVID-19 pandemic. Our highest priority over the last 2 months has been ensuring the safety of our associates and customers while delivering the essential services we provide in our communities. We cannot be thankful enough for the contributions of our store, distribution and manufacturing associates, who have tirelessly served a surge in demand while embracing new safety conditions. In addition, I want to thank our corporate and division associates for working around the clock to innovate on safety and the supply of products as well as their flexibility in adapting to new ways of working. I will elaborate on all this shortly. But before I do that, I want to provide an overview of our results and progress on a number of key areas for the fourth quarter and fiscal year 2019. While none of us can predict the next several months with certainty, it is clear to us as we finish the year that our strategy is working, we are executing better and our locally great, nationally strong approach is allowing us to leverage our scale while remaining nimble. As many of you have seen, we closed the fourth quarter of fiscal 2019 with strong performance, with Q4 identical sales of 1.8% and adjusted EBITDA of $756 million, which was slightly ahead of our internal expectations. Q4 was our ninth consecutive quarter of identical sales growth, and we grew market share during the quarter. For the full year, we had identical sales growth of 2.1% and adjusted EBITDA of $2.834 billion. I will now touch on our progress in several key areas in our fourth quarter…

Thanks, Vivek, and hello, everyone. I'll begin by walking through our fourth quarter in some detail before providing a few updates relative to the full year fiscal 2019 results. Total sales were $15.4 billion during the fourth quarter compared to $14 billion during the fourth quarter last year. Our increase in sales was primarily driven by the extra week in the fourth quarter of fiscal 2019, which contributed approximately $1.1 billion and the company's 1.8% increase in identical sales. Our identical sales of 1.8% during Q4 were driven by increases in both customer traffic and average ticket size. Our fourth quarter sales were negatively impacted by approximately 30 basis points due to the timing shift in the Thanksgiving holiday, whereby the slow sales week following Thanksgiving was the first week of the fourth quarter compared to the last week of the third quarter a year ago. Given the timing of our quarter end, which was February 29, we did not experience significant volume increases related to the COVID-19 pandemic until the first quarter of fiscal 2020. Our gross profit margin decreased to 28.6% during the fourth quarter of 2019 compared to 29% in Q4 2018. Excluding the impact of fuel, our gross profit margin decreased 20 basis points. The decrease was primarily attributable to incremental rent expense related to the company's previously completed sale-leaseback of certain distribution centers, higher LIFO expense and selective investments in price compared to the fourth quarter a year ago. The reduction in our gross margin rate compared to a year ago was in line with our internal expectations. On the expense side, selling and administrative expenses decreased to 26.5% of sales during the fourth quarter of fiscal 2019 compared to 26.9% of sales for the fourth quarter of fiscal 2018. Excluding the impact of fuel,…

Thank you, Bob. Let me pick back up on the last couple of months. We've been relentlessly focused on safety and supply to help ensure the safety of our associates and customers and the supply of product. I'm so proud of our entire team for their work ethic in this crisis, for their unflinching commitment to customers, for their innovative thinking and above all, for the integrity they demonstrate every day in doing the right thing for our associates and customers. The positive response for our customers is simply an outcome of their hard work. Since the close of our fourth quarter on February 29, our business has picked up substantially, with a sharp increase in identical sales of 47% during the first 4 weeks of March and 21% during the second 4 weeks, which is April, making the first quarter-to-date through 8 weeks up 34%. We're also seeing increased demand for eCommerce in fiscal 2020 as a result of the COVID-19 pandemic and are taking rapid action to support this growth. Total eCommerce sales were up 109% during March. Strong growth in demand has continued during April with sales growth of 374% compared to last year, bringing our total quarter-to-date sales to an increase of 243%. To support this growth, we have also hired over 55,000 new associates into our retail stores, into our DCs and plants and into eCommerce. We have partnered with 35 companies across various industries to provide temporary jobs to their employees who have been furloughed or who has had their hours cut. While we expect some of these temporary hires to return to their prior companies at the end of this crisis, we will continue hiring efforts until we have met demand. We have also seen some changes in customer behavior and have adapted…

Thanks, Vivek. Prior to the COVID-19 pandemic, our plan for fiscal 2020 included the following: identical sales of 2%; adjusted EBITDA of $2.875 billion, which represents approximately 4.1% growth after adjusting for the 53rd week in fiscal 2019 and incremental sale-leaseback rent, which we will incur in the first quarter of fiscal 2020 until we are at full run rate on rent expense; operating income of $1.3 billion; and capital expenditures of $1.5 billion. As we just noted, during the first 8 weeks of fiscal 2020, our identical sales increased 34%. And we generated higher-than-normal flow-through to operating income and adjusted EBITDA. Although we are unable to predict the continued impact of COVID-19 on sales, gross profit and expenses for the balance of the year, we currently expect that we can achieve or exceed our original plan. In addition, to preserve financial flexibility during the COVID-19 pandemic, in March 2020, we drew down $2 billion on our $4 billion ABL facility. While we don't anticipate using the cash, the proceeds of the borrowing under the ABL facility was a precautionary measure in order to increase our cash position in light of the uncertainty resulting from COVID-19. Since the start of fiscal 2020, we have experienced a material increase in identical sales, which has led to increased inventory turns, reduced inventory levels and incremental cash flows. As a result, our cash balance as of last Friday, April 24, was approximately $4 billion, which includes the proceeds from the ABL facility. And our total debt, net of cash, was approximately $6.7 billion. And now Vivek will provide some closing remarks.

In summary, we were pleased to see the momentum we gained in fiscal 2019 as our efforts, both in-store and online, resonated with our customers. In the near term, our focus is on taking care of our customers, associates and the communities in which we operate during this unprecedented health crisis. We continue to reflect and refine our long-term strategy. While we assure many elements of our pre-COVID-19 strategy will remain in place, we are also keenly aware that there will be changes and new opportunities. We are very fortunate to have plenty of liquidity and a strong balance sheet. And finally, we will be watching the markets to determine the right timing for our initial public offering. I will now turn the call back to the operator for questions.

[Operator Instructions] Today's first question comes from Karru Martinson with Jefferies.

That's a huge number for the eCommerce expansion. I was wondering, what are the costs associated with ramping up that quickly? And where do we stand today as a percentage of your sales?

Thanks for the patience, everyone. I know it was a little longer than our usual start of a call in the commentary, but these are not usual circumstances, and we wanted to be thorough and transparent. On the eCommerce, we've -- I think of it as in 2 phases, and I think there's many more to go, of course. In March, we saw the surge in demand. And our biggest bottleneck was labor, the ability to pick product and the ability to deliver the product. And so the primary focus in the month of March was to ramp up labor, both for pickers and for delivery. And so you saw the big jump in growth from March to April, and we are still focused on that. We think we can continue to add labor to drive more growth in picking and delivery. But it's important also to recognize that the eCommerce business, the growth that we are getting from eCommerce is new growth, right? There is incremental business over and above the significant business you saw we have, growth we are seeing in our stores. So while we're adding the costs, and it's primarily labor, we're also getting the revenues, Karru, to support that and cover that. Now while the eCommerce business has grown a lot, remember that our store business has grown substantially, too. I mean unprecedented numbers. And so from a proportional standpoint, it's not materially different from where we were in the past.

Okay. And then in terms of the bottlenecks, labor certainly being one, but where are we on the manufacturing and the supply chain bottlenecks that we've been reading about?

Yes. I'll tell you, part of what we do, we are focused -- there's 3 things we focus on relentlessly now. I think of it as it's safety, it's supply and speed. And a part of our organization we've talked about is this notion of being nationally strong and locally great, right? We give our operators in the field a lot of independence to do things around supply. And so we have -- part of -- and we've been working at that since early March in making sure we can get very different ways of, means of supply. Examples of that would be -- even take something as simple as sanitizers for our frontline. Back in March, we had trouble getting sanitizers, enough of it. And we found a source through an executive. We got drums of sanitizers in, bottled it in our factory in our bottling -- in our beverage bottling plant and sent it out to the stores so that we'll never be short of sanitizers. From a supply standpoint, we connected with many of the national food distributors who are distributing into away from home. And we had no problem picking up bulk chicken from them because, as you know, we have butchers in our stores. And so we were able to process those things quickly and make it available. And we're still doing that today. So we've got a good supply chain connection with the away-from-home supply chain. And we are able to make those readily available for customers in what might be more for home consumption. And so we do that. Our produce supply has come back really nicely. And it came back -- about 3 or 4 weeks ago, we started seeing really stable produce supply. Now you're hearing about things in the marketplace, and we'll continue to hear it, right? There are processors who are having trouble in meat and so on. I think we will continue to hear that for several months until this disease is fully under control. And the -- and we just are nimble around it. And so we feel good about it. But -- and what I'll emphasize, I don't think there's any reason for anyone to panic on supply. I think we'll get to a state of steadiness here, and we are in a state of steadiness, and we'll keep that.

And our next question today comes from Bill Reuter with BofA.

The -- my first question, you're -- it seems like you're doing all the right things in terms of increasing pay for your associates. Are you seeing any challenges of finding employees or I know you hired 50-some-thousand people. I guess, are you having any employees that are feeling anxious about working in relatively high-traffic environment?

Yes. So good question. You're right, we -- the biggest -- when it comes to a supply standpoint, there's been product supply and labor supply. And so very early on, we developed a bunch of relationships with airlines, hotel chains, et cetera, as we said, 35 different companies so that we can get their labor and get it locally. We have, from day 1, always said the employee safety comes first. So if somebody has a condition, they don't feel comfortable, if we have any sign of sickness, et cetera, we have encouraged them to stay at home. And we pay them for the first 2 weeks and give them 14 days to either get over the illness or feel better and come back. And so -- and then we also focus so much on safety conditions in the store from day 1. Early March, we had Plexiglas. We got on social distancing very quickly. We had plenty of sanitizer available for everyone. And so we created conditions; that was an important part because we knew that if we don't create the right conditions in store, we won't make -- we won't create a good atmosphere for employees to give their best and importantly, for customers to have -- to feel comfortable walking into our stores. So we haven't had -- I mean, in fact, I would -- when we look at the turnover numbers, our turnover numbers are down in this environment. And I think part of that is because of the conditions that we have created for employees who are, by the way, so committed to serving at this point in time.

That's helpful. And then from the acceleration of eCommerce from March to April, it seems like a lot of customers are trying this for the first time potentially. I guess, how does this change your perspective in terms of where you want to invest? And a lot of people are talking about that this crisis is going to change purchasing behavior permanently. I guess, how does that change your store footprint and eCommerce investment?

Yes. So we -- I mean, you're right. I do think we're seeing a lot of new customers engage in eCommerce. And we are seeing -- and that's part of the growth. So we're getting new customers in because of eCommerce, first of all, and we're seeing our customers engage more in eCommerce. And I think that trend will continue. I think there's a degree of comfort people will feel in having product, either picking it up at the store with our Drive Up and Go or it being delivered at home. So we expect that the eCommerce business, the rate of growth of eCommerce will be higher than pre-COVID, okay? And we are going to continue to invest behind it. We're investing, as I said, in labor, and we'll continue to invest in technology. We've had the plans. So now it's a matter of accelerating those investments commensurate with the growth that we're seeing in eCommerce.

All right. And then just lastly for me, given your sales in the first quarter, obviously, you're producing very strong EBITDA, but there's -- your commentary also suggests that there's a lot of working capital sourced during the quarter. I guess, do you assume that over the next couple quarters after this, we should assume that, that working capital will reverse as you're able to get inventory back in the system?

Yes. I think there will be some of that. I think there's an opportunity, depending upon where we land on ID sales growth going forward that we'll have actually an improved turns rate, which will allow us to end up with better working capital than where we started.

Yes. I think operationally, this is allowing us -- we're operating with much higher velocity at the shelf, right? And therefore, and there's an earnings support, so that should help us a lot on the working capital side.

Our next question comes from Bryan Hunt with Wells Fargo Securities.

My first question is with this massive switch to eComm, you're doing everything you can do to hire people to fulfill picking and delivery orders, but can you talk about how fast you can accelerate your Drive Up and Go program across your store base? And you gave us a long-term goal, but what kind of goal do you have for this upcoming year?

So we've got -- we're going to roll out to 500 more stores at a minimum. And as we continue to get the labor, we'll continue to go forward. But we're going to put 500 small stores. So we'll be at 1,000 stores by the time this year is done. We're also increasing our delivery capacity and capability in different stores. So -- and the only thing stopping us is supply side issues, right, getting -- making sure we have adequate labor in different stores to provide the level of the quality. And then the second thing is supply issues itself. So as we roll this out, we want to ensure -- our belief is that in eCommerce, you need to deliver a high-quality experience for the customer to keep coming back, and we'll always keep that in mind as we build this out.

All right. Great. My next question is, is there any way you can address the total cost of COVID for us in terms of the pay bonuses? I imagine you probably expensed all the Plexiglas, the masks and gloves because some of this is going to be an ongoing expense. Just better to understand maybe the incremental cost of this environment?

Yes. So you're right. We have never made cost the condition for safety. Safety has been the #1 priority. And as Bob said in his comments, we have had good flow-through with these costs in the first couple of periods. The first -- what we are going through and doing now is we're -- the first -- our first instinct was to make sure that we provide a safe environment. And now we're going to go around and optimize it, so that we can have the efficacy around safety and a lot more efficiency as we do this. And so we're going through that journey. That will be the next phase of what we do. I suspect some of those costs will remain, but we also have the volumes to do it, right? And so the P&L is working because of the volumes we have coming in. And it's anybody's guess how all that plays out over the next several months.

And my last question is around margins. When I think about this environment, I imagine your shrink has dropped precipitously. I think people will probably buy a banana that's been run over just so they could have one. But if you think about shrink, your own manufacturing facilities are probably moved from relatively low-capacity to high-capacity utilization. Can you talk about those factors and how they may contribute to this incremental flow-through in the current period maybe going forward?

Yes. Bryan, it's -- you're exactly right. Some of those very things are contributing to a little higher flight flow-through rate. As you saw, we had a real spike in sales in March. We still have solid, solid growth here in April and continuing, but it really depends upon where things level out. I would say that whenever you can have an increase in volume like we are, shrink will definitely be a benefactor to us. And we've got tools in place now that can help us make sure that we manage that properly. Certainly, we're also managing -- our manufacturing plants are kicking out more products. But it's -- we're going to have to kind of get a trend line behind us before we really can quantify all of that for you.

In the current -- Bryan, we've got a volume effect, which is giving us a lot of leverage up and down the P&L, right? There is a mix effect. Because people are buying a whole range of products, not just what's on promotion. And so that is helpful, too. So that we're seeing -- and by the way, we're also seeing larger baskets, right? So that helps because you can optimize the labor for the stores. So we're starting to look at all of those opportunities. But net-net of the mix in the volume are driving more flow-through.

Our next question today comes from Carla Casella with JPMorgan.

This is Sarah Clark on for Carla Casella. We just wanted to dig a little bit more into the capital structure and your thoughts around that. You mentioned that you're reducing leverage. Do you have a leverage target? And do you have any thoughts around the upcoming maturities or your Safeway notes? And then I have a follow-up.

Yes. Thank you for your question. First of all, we're -- as you saw at the end of fiscal 2019, our leverage was net -- our net leverage, I should say, was 2.9x. So that's well on, I guess, we've really achieved that short-term goal that we had of getting down to 3x. And our forecasted cash flow per year over the next few years will allow us to just continue to pay down a little bit more debt each year as well. We have visibility to a clear path of getting down into the mid 2 range within a couple of years. So that is certainly something that we look forward to. In addition, on your question as to maturities, we only have a couple of small Safeway bonds this year and next year, about $130 million each that we intend to be able to pay just out of excess free cash flow. And then beyond that, we've worked real hard this past year in pushing out maturities. And we don't have any large maturities to deal with here for a few years.

Awesome. That's really helpful. And then my last question is around sale leasebacks. You mentioned that throughout the call. Do you have any plans for further sale leasebacks?

As far as sale leasebacks, we look at that opportunistically. It's been a great tool for us to help us reduce debt as you've seen over the last few years. We current -- we still have a significant amount of appraised value of real estate even after the transactions that we've done. It currently totals to about $11.2 billion. So I think I just look to -- it may be a tool that we can use if we need to. Right now, I don't have anything underway. But we continue to evaluate the markets and determine what is -- what helps us hit our goals.

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Well, thank you, everyone.

Thank you, everybody, and thanks for -- and be safe and be well. Thank you.

Thank you. This concludes today's conference call. You may now disconnect your lines, and have a wonderful day.