Albertsons Companies, Inc. (ACI) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Albertsons Companies' Labor Relations and MEPP Overview Conference Call, and thank you for standing by. [Operator Instructions] As a reminder, this call is being recorded. [Operator Instructions] I would like to turn the call over to Melissa Plaisance, GVP of Treasury and Investor Relations. Thank you. You may begin.

Good morning, and welcome to our first Albertsons Insights call for investors and analysts. Thank you for joining us for the first event of what will be a series of interactive discussions with the investment community. We intend to cover a variety of topics that we believe will provide additional perspective on key aspects of our strategy and the initiatives we're undertaking to achieve our long-term growth goals. 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. On our first call in this series, we are going to cover Albertsons' approach to managing labor relations and how we are managing our multiemployer pension plans, or MEPPS, supported by our strong financial position and cash flows to ensure we protect the benefits for our employees while prudently managing our risks. Joining me on today's call are Bob Dimond, our CFO; and Dan Dosenbach, Senior Vice President of Labor Relations. We'll begin with a brief panel discussion that I will moderate and then open up the call for your questions. We have posted slides on our Investor Relations website at albertsonscompanies.com that includes some background on our approach to labor relations, an overview of multiemployer pension plans and a brief description of our single employer pension plan. You will also find a listing of the top 15 MEPP plans and our contributions to each of them for the last 3 years in the appendix. Finally, before we begin, we want to make sure these calls are productive and insightful as possible for you, our analysts and investors. To that end, if you have ideas on topics that you would like us to cover in the future, please feel free to reach out to me, and we will consider them for future events. With that, let's move into the panel discussion. Dan, I'll start with you. For those on the call unfamiliar with Albertsons' approach to labor relations, would you please provide a brief overview?

Yes, and thanks, Melissa. We have approximately 400 union contracts covering a little more than 2/3 of our workforce, approximately 215,000 of 305,000 employees. And we have built strong relationships and are working with union leaders all the time to be sure our associates feel appreciated with an attractive and fair package of wages and benefits and to be sure they're in a safe working environment. Our contracts typically are 3 years in length, but some go as long as 5 years. As a result, we sometimes have heavy bargaining years like 2019, when we had open contracts covering about 106,000 employees, and in 2020, we only have open contracts covering about 44,000 employees. In many cases, we work with other employers to negotiate contracts in the areas that we operate. The facts and circumstances of our participation in these plans are unique to each one. In general, we work with union leaders to allocate the funds available across wages and benefits, the latter, which includes health care and retirement benefits. This is all normal course, and we have a long track record of working successfully to achieve mutually beneficial outcomes.

Following up on that, Dan, in regard to a topic that is of interest to investors, we participate in a number of multiemployer pension plans. Would you please provide some background on those?

Yes. And that's a great question, Melissa. We currently contribute to 28 multiemployer pension plans covering approximately 107,000 employees. These are pension plans in which more than one employer participates, and the funds contributed benefit all employees in the plans. Our top 15 plans represent the vast majority of our contributions. And Melissa, as you mentioned, they are disclosed in our 10-K. And a list of these plans are in the deck posted on our Investor Relations website this morning. Our obligations related to these multiemployer pension plans are generally set through the bargaining process and are contained in our collective bargaining agreements as a "cents per hour worked" contribution to the plan. As I mentioned, there are typically a number of other employers in the plans we participate in, and it's worth noting that when we are a large employer in the plan, we have representation on the plan's Board of Trustees, who help guide the investments and policies related to the plan.

Okay. Thank you. Now for Bob, what was our MEPP underfunding amount as of fiscal year-end 2019?

Hello, everyone. At the end of fiscal 2019, our share of the underfunding of the MEPP plans in which we participate was $4.9 billion. As Dan mentioned, you can find these details in our 10-K. And as Dan also mentioned, our contributions to these plans are set by the collective bargaining process on a cents-per-hour basis and are well-known and are very predictable on an annual basis.

Thanks, Bob. Can you also give our listeners some background on the contributions to MEPPs over the last few years as well as our expectation for fiscal 2020? It would also be helpful if you would explain how those contributions are recognized in our financials.

Sure. Our contributions to MEPP plans were $431 million in fiscal 2017, $451 million in fiscal 2018 and $469 million in fiscal 2019. The expense tends to increase about $20 million to $25 million per annum, and we expect the amount this year to be about $490 million. These contributions are expensed as part of labor cost and are represented in our SG&A line of our P&L and are fully reflected in our EBITDA and are also tax-deductible. The good news is the expense has been very predictable and is manageable.

Okay. Bob, would you please now share how the funding status of each plan is calculated and how often they are updated? It would also be helpful if you would describe what can impact the funding status. And finally, would you ever see a scenario where we would have to pay off all these obligations in a lump sum?

Sure. The funding status for each plan is calculated annually and is based upon a point in time. It is reflective of the contributions to the plan, returns on the assets in the portfolio of the plan, benefits provided and discount rates applied to future benefits. We have various ways to manage these plans over time, and we don't see a scenario under which we would need to provide a lump sum settlement for any of these plans. These obligations are not like debt. That's a very important point. They do not have due dates, and they don't have call provisions like debt would.

Okay. Thanks, Bob. Turning back to Dan. Although you said facts and circumstances of our participation in these plans are unique to each one, can you share some general insights into how we approach solving issues related to underfunded plans?

Certainly. We take a very thoughtful approach to how we manage our plans to ensure we protect -- to protect the benefits of our associates. There are various ways to solve underfunding issues in these plans, such as increased contributions on an hourly basis, reduction of benefits, freezing future benefit accruals in the plans and implementing other retirement plans in their place, such as variable pension plans that reduce the risk of underfunding dramatically.

Thank you. And Dan, would you please share some of the actions we are taking to reduce the risks associated with these plans while continuing to provide these valuable benefits to our associates?

As I mentioned, we've been taking some actions to freeze plans and have implemented alternative retirement plans, such as 401(k) plan and variable pension plans that provide our associates with competitive retirement benefits and reduce financial risk. We are committed to working to ensure our associates feel appreciated with an attractive and fair package of wages and benefits and have kept this goal in mind as we practice prudent risk management.

Okay. Well, how many plans have we taken action on recently?

We have taken action on 8 plans recently, including the Tri-State plan that covers our Acme employees; the Sound Retirement Trust that covers employees in our Seattle division; the Southern California UFCW Union Joint Pension Plan; the FELRA plan in the Mid-Atlantic region; Desert States in Arizona; the NorCal plan in our Northern California division; the Midwest Plan that covered employees at Safeway's former Dominick division in the Chicago area, and the National Fund.

Can you give us some specific examples?

Sure. Let me talk about 3 examples. In the case of Tri-State pension plan, Acme contributed approximately 96% of the contributions to the Tri-State plan pursuant to collective bargaining agreements with 4 participating local unions. After negotiating an agreement with one of the local unions that, first, freeze accruals in the existing pension plan; second, implemented a 401(k) plan; and third, offset increased costs with reductions in the cost of health benefits, the trustees then voted to freeze future accruals of the other 3 local unions as well. In the case of the Sound Retirement Trust, we contribute approximately 46% of the plan. The second largest employer has approximately 29%. In this case, an agreement was reached among the trustees of the plan, the 2 largest contributors and union representatives to spin off certain liabilities and assets to the second largest employer's own defined benefit plan. The remaining plan that we participate in has been frozen, and a significant amount, approximately $150 million of future contributions that would have gone into overfunded health plans, have been redirected to this plan, substantially improving its funded status and also offset the increased cost of the new variable pension plan providing future service benefits. Finally, with FELRA, a plan that we inherited and was close to insolvent, we are the second largest contributor, and along with the largest contributor, we represent 94% of the contribution to FELRA. In the case of insolvency, the Pension Benefit Guaranty Corporation, also known as the PBGC, is obligated to step in to provide certain benefits. Together, we agreed in separate negotiations with 2 local unions to have MAP, a related plan, combined into FELRA to create a FELRA combined plan. The parties are negotiating with the PBGC to freeze the FELRA combined plan, and we will be obligated to pay a little bit less than our 2019 contribution to the plan, a reduction of approximately $3 million annually for the next 25 years. In return, we will receive a release of all withdrawal liability from the FELRA, MAP and FELRA combined plan. We will also establish a new variable pension plan for future service benefits like we did in the Sound plan. This is another example where reduction in health and welfare benefit contributions will offset our pension contributions.

Thanks for those examples, Dan. So when you've taken that approach, am I hearing that it does not require withdrawal from the plans, and you've been able to offset increased costs with overfunding in other aspects of the contract, for instance, overfunded health care benefit plans?

Yes, Melissa. That is correct. We've been able to offset increased costs by reducing contributions to overfunded health plans, and we also work with the UFCW and local union to improve the efficiency of providing health benefits. We continue to pursue additional opportunities to reduce underfunding and protect the benefits for our associates, both those earned in the past and future accruals.

And can you remind our listeners why we recently decided to exit the national plan?

The analysis we and our actuaries performed indicated there could be very large increases to contributions required or significant benefit reductions for our associates in the future. If 2 big employers left, their withdrawal payment into the fund would help for a short while, then the problem would likely get much worse. We determined the best path for us was to withdraw now, along with the other 2 large employers, to derisk our future funding requirements and protect future benefits for our employees.

Thank you. And Bob, how do you think about the manageability of your obligations under MEPP plans? Some people treat them as debt. Is there a scenario under which these obligations would become due and you'd have to pay them off in a lump sum?

Thanks, Melissa. These obligations are very predictable, first of all, and they require us to contribute cents per hour for each employee under a collective bargaining agreement. As I mentioned before, the change in contributions to these plans over the last few years has increased by $20 million to $25 million per year and are expensed with labor costs through SG&A and are reflected in our EBITDA. Keep in mind that MEPP obligations do not constitute debt-like obligations. We rarely withdraw from plans, and we have no intention of withdrawing from any other plans going forward. But in these rare circumstances, it's also important to note that we have the opportunity to pay into a fund at roughly existing contribution levels for up to 20 years. And as Dan said, we are actively looking at ways to freeze future accruals in existing plans to protect those previously earned benefits while setting up new plans, such as 401(k)s, and variable pension plans for future earned benefits. Let me add that we are confident in our ability to generate significant free cash flow, our strong financial position and our ability to manage our liabilities effectively and continue to invest in the growth of the business.

Thanks, Bob. And finally, Bob, would you please provide a brief overview of our single employer pension plans and how they differ from the multiemployer pension plans?

Sure. We have sole responsibility for our single employer-defined benefit plans covering certain Safeway, Shaw's and United employees. At fiscal year-end 2019, the unfunded amount of these plans was $793 million. Unlike MEPP plans, this liability is carried on our balance sheet. In addition, cash contributions to these plans were $11 million in fiscal 2019, and we anticipate paying $62 million into these plans in fiscal 2020. The Safeway and United plans, which constitute 85% of the employees covered by these plans, have been frozen, and we put a 401(k) with matching contributions in its place to provide a lower-risk retirement plan available to these employees.

Okay. Thanks, Bob. Before we turn to Q&A, I'd like to just briefly summarize some of the key points I heard during this discussion today. The first is that our MEPP strategy is part of our broader contract negotiations, where we have a long history of reaching agreements that provide fair wages and benefits, and we protect pension benefits by freezing existing plans and providing future benefit accruals in a 401(k) or a variable pension plan. The second is that future variable pension plans are often funded through cost reduction in other parts of the labor contract, typically by reducing health and welfare contributions, where the health and welfare plan is overfunded, or where we have partnered with union leaders to improve the efficiency of providing health benefits. The third is that MEPP underfunding is not debt. There are no due dates, there are no call provisions. And I understand that we do not guarantee benefits or certain MEPP funding levels through collective bargaining. The MEPP underfunding amount is simply a calculation that sets forth our portion of the underfunding in any plan. While we have no intention of leaving plans going forward, in the rare instance we have chosen to do so in the past, we controlled the decision. And the terms of the exit can be bargained to be quite manageable and can be paid at roughly current contribution levels for up to 20 years. And one -- in the MEPPs in which we have a large number of employees participating, we have members of our labor relations team serving as trustees, and they take an active role in administering plans. And finally, on an ongoing basis, the growth in contributions to MEP plans are predictable, and annual increases are typically quite small compared to our $3 billion in cash flow we generate each year. We now welcome your questions. Our CEO, Vivek Sankaran, will join us for the Q&A. And in addition to Bob, Dan and me, Ron Richman, a partner at Schulte Roth and Zable, who has extensive experience with multiemployer pension plans, has advised us for many years, will be on hand to answer your questions. Operator, please begin the question-and-answer session.

[Operator Instructions] Our first questions come from the line of Karen Short of Barclays.

So first question I had is the cents per hour contribution component was new to me. I guess the first question I have is why are contributions and liability calculations based on cents per hour versus rate of return and discount rates. And then the second question just tied into that was in this current year, obviously, you're going to have much higher labor hours. So why wouldn't the expense increase more than your typical annual increase? And then I had one other question after that.

So I'll take the first part of it. This is Dan. And with regards to the cents per hour, you have to understand -- and by the way, thank you very much for the question, Karen. You have to understand, our contribution rates are bargained. So -- and they are part of an overall package. So we bargain a collective bargaining agreement that provides we will pay X on wages, Y on health and welfare and Z on pension. The impact of the assumed rate of return or discount rate does not change what we have collectively bargained. So those are -- rates are set forth and that's what we follow, and it's part of an overall package. With regards to the upcoming year where hours have increased, the hours have increased with a number of new employees into the business, and we have different contribution levels based upon the seniority of our employees. So the addition of new employees largely will not impact our overall contribution rate for the upcoming year.

Okay. But generally speaking...

And this is Ron Richman. If I may add to that, I think there is -- what your question indicates is a distinction between contributions to single employer plans, which are generally not bargained and are determined by the company, in contrast to contributions to multiemployer plans.

Okay. But generally speaking, say, if comps increase -- so we can't look at a comp -- so if comps were to increase 3% in like a more normal year, presumably ours don't increase by that full amount but they increased by some portion of that, is that how we should think about the increase in the multiemployer expense?

So when you take comp -- go ahead, Bob.

As Dan indicated a second ago, the thing that deviates from that a little bit is that we -- with the spike due to COVID in adding new employees, those new employees are under a different provision of the plans, which don't qualify them for benefits for a certain time period. So even though we've had a spike in workers and hours from them, we don't necessarily have a MEPP plan expense this year. When things -- whatever things normalize to, over time, it may end up being at a slightly higher rate due to this. But we shouldn't expect a spike this year as I believe, Dan, what you were describing.

Correct.

Okay. And so last question, just assuming all else was equal, taking your year-end balance in 2019 on the liability and factoring in with the withdrawal, what should the pending liability be for 2020?

Let me just tell you how that works a little bit. Our $4.9 billion that you're talking about there, that is calculated at a snapshot in time, and we won't get that new number until later -- after the end of the year. So I won't know what exactly that will be until that point in time. There's a lot of factors that play into that. And each of the actuaries for the various plans submit those, and then we aggregate them together once a year.

Our next questions come from the line of Edward Kelly of Wells Fargo.

This is actually Stephanie on for Ed. I guess in light of the National Fund announcement last month, how are you thinking about future exits? And do you think we should expect to see additional cash outlays for these types of transactions going forward?

So we don't anticipate any other exits. That was a unique set of circumstances. Our labor strategy is to look at each pension plan, and we are looking at ways to freeze those plans, move to variable pension plans or 401(k)s that adjust with the overall rate of return. And any increase in contributions that would result, we are looking to balance from other parts of our labor contracts, such as our health and welfare funds. We have health and welfare funds that are overfunded, so we have opportunities there. And then a really, really important part is we are partnering with our union -- with our unions to look at more efficiently deliver health care benefits. It's no different than cost of goods. It's leveraging our size to get a better price on health care. And we're looking to partner with the unions to leverage our size and get better deals to lower our health and welfare costs that we can invest then into other parts of our business.

Okay. And then just to confirm on the MEPP expense, so is it reasonable for us to assume the base case going forward is in line with the $20 million to $25 million increases you've seen in recent years? Is that reasonable to apply for the next couple of years going forward?

Yes. It's been very predictable over time, and we don't see a change in that going forward.

Our next questions are from the line of Kelly Bania of BMO Capital Markets.

A couple of questions, I guess. I hear what you're saying in terms of your not -- you don't foresee ever a lump sum payment for this -- for the MEPP. It's rare that you do take it in-house. I guess, just for argument's sake, so I think what would help investors, if you were to decide to take that in-house and maybe take on some debt to bring that on to the balance sheet, would it be about the same amount as that $4.9 billion? I think there's some maybe just questions as to the accuracy of what that figure represents. So maybe you can just help us think about the factors that do play into identifying that figure and how it would change or not if you did decide to take it in-house.

Yes. Let me take that one, Kelly. That $4.9 billion, just to clarify, gives an estimate of what our percentage of all net plans under funding is based upon our percentage of contributions of each plan -- each plan's ongoing actuarial assumptions. So we get provided information once a year as to what our underfunding amount is per plan, and then we simply aggregate that up. So it is kind of a simplistic calculation from that perspective. Now if we were to -- we don't really focus on what the -- that higher amount is because that only gets triggered if we decide for a plan to withdraw. And as Dan discussed, we have really made some great inroads with 8 plans alone over the last year of being able to come up with changes to our plans, which should really solidify them going forward. So we think the risk is very low, and we have no plans of further withdrawing from other plans.

And I just want to reiterate, we control those terms. That is in with our control. It will be under our circumstances. And not only do we control it, but we control the payment schedule so that it could be balanced out over 20 years and from a cash flow perspective, at an amount that's likely comparable to our current contribution rates.

Great point, Dan. Very good.

And I guess maybe just, again, thinking about that number as you contribute $400 million to $500 million per year, should we think about that underfunded liability coming down by a commensurate amount every year? Or it sounds like there's a lot more to that, but simplistically, is that the rough ballpark? Or how should we think about that going forward?

I think there's a lot of factors in the calculation. There's discount rates that are out there. And depending upon what's going on with interest rates, that factors in, of course, to that. So I think what we focus on is every 3 to 5 years, depending on the plan, we're locking in what our go-forward contribution rates are, as Dan discussed earlier, and that allows us to have some very good predictability as to what our contribution rates are. And I think that's really what you need to focus on there.

Our next questions come from the line of Tom Palmer of JPMorgan.

You mentioned a couple of times on the overfunded nature of some of these multiemployer health plans. Are those included in the $4.9 billion deficit? Or would they be an offset that is not disclosed? And if so, could you maybe give us some color on how big of a surplus they are running?

First of all, the $4.9 billion is specifically just the pension underfunding amount. It does not include how much the health insurance plan may be overfunded. That is not disclosed anywhere, but Dan and Ron, who work with these plans in the negotiation on an ongoing basis, that's something that they have privy to and are obviously utilizing as we consider how we come up with the strategy and the mix of how to manage these plans going forward.

Yes. So let me jump in there. Let me jump in there. With regards to the multiemployer health and welfare funds, we have built up reserves over time by being very thoughtful about how we save money. So we bargain a contribution rate. And we have been able to deliver -- through prudence at the trust table, deliver benefits that have been lower than what we bargained and the contributions or the reserve levels have built up. We're now able to reallocate those reserves to other parts of the contract, and what we've been focusing on is the pension piece to deliver a long-term solution. In addition, and this is critical, we are looking to develop further efficiencies to even generate more savings, and a lot of this is looking at how do we leverage the overall size of both our union partners and our company to get reduced costs. So that is an ongoing strategy that we've implemented to develop and provide an overall compensation package that is -- that rewards our employees.

Okay. I mean any order of magnitude would be helpful, like if we're talking hundreds of millions of dollars or something smaller, but understood if you don't have that disclosure.

Yes. I don't -- I couldn't be specific with that number right now.

Okay. And then I had another question on the multiemployer contribution. How much of the $450 million or so is related to accrual of incremental service versus other factors such as addressing the deficit itself?

It's not broken down in that manner. There's no breakdown along those lines.

I mean is it mainly accrual of incremental service time each year? I mean it would sound like that if it's based on hours worked.

Ron, do you want to take this one?

Sure. The $4.9 billion is the basis of the funding status of the plans, and that looks at benefits that have already been earned, not benefits that are projected to be earned. And so it is a snapshot in time of the assets of the plan and the liabilities of the plan as determined by the actuaries to each of the plans using actuarial assumptions that those actuaries adopt.

No. Just to be clear, I meant the contributions themselves, not the deficit.

The -- I'm not sure of the question, but the contributions that Dan has talked about are determined in collective bargaining. And those are sometimes particularly related to a deficit the plan may have and sometimes they're less related. So trying to correlate the contributions to the deficit a plan may have is -- I don't think it's particularly helpful because there are lots of other factors that go into play.

Our next questions come from the line of John Tompkins of Schonfeld.

Thanks for taking on a very difficult topic. I think some things -- there's a lot of confusion on the call. I can hear it in the questions that are being asked. So let me come at it 3 different questions. I'll start, and I'll go in sequence. So the first question is can you explain really crisply the difference between a multiemployer plan and a traditional pension plan. And specifically, can you tell us when is the benefit for the workers actually guaranteed?

So this is Ron Richman again. The -- a multiemployer plan is a plan in which a number of employers contribute. Single employer plan, there is only one employer that contributes. There are different rules with respect to the funding of the plans and in terms of the benefits earned and when they are recognized by the company. What the company's obligation is, is to contribute to the plans in accordance with the collective bargaining agreement. One of the things to take into account, when we talk about the $4.9 billion, that is the number used to match the assets and liabilities of all of the multiemployer plan, our share. These plans very rarely get funded at 100% of the -- their liabilities. They have enough assets on hand to pay benefits as the benefits need to be paid out.

Okay. I'm sorry. Let me ask you a little different. Okay. So if I'm in a multiemployer plan, my understanding is the benefit is not guaranteed until the day I retire as opposed to a traditional ERISA plan where I'm actually accruing a known benefit. And thus, there is flexibility in terms of the plan, how the trustees manage the plan and, therefore, the ultimate liability up until the time when the employee retires, and that's very different than an ERISA plan. Is that true?

No. That's not true. The same vesting rules apply to single and multiemployer plans. And it's an employees vested in a benefit they have, the usual vesting period is 5 years of service, then they are entitled to that benefit. Now what Dan has focused on is our freezing of the traditional defined benefit plan, which is similar, not the same, but similar in the single and multiemployer cases. We are moving towards freezing and have been successful freezing the traditional defined benefit plan and instituting variable defined benefit pension plans. And in those plans, the actual benefit that is paid to a retiree can change along with the funding status of the plan.

But if a plan is underfunded -- and my understanding, the trustees of the plan include labor, a third party as well as the employers, which is unique to multiemployer plan. If the plan is underfunded, then Dan can go into the negotiations, and there's obviously a lot of different components in the negotiation, and they can change the benefit going forward as trustees of the plan as well as negotiating the forward contract. So with -- so for example, just making numbers up, if it used to be -- you got $50 a month per year worked, they could change that to, say, $40 a month or $45 a month in recognition that that's underfunded, but yet they're going to make other changes. Is that -- that's not the case? Because I think that's where people are confused because you have this $4.9 billion liability. It's obviously a huge overhang for the company. It's a huge overhang for investors, and people don't understand this, saying it feels like this ticking time bomb. And so the question is, if that $4.9 billion liability on the multiemployer side seems to be different than with the traditional ERISA plan. And that's where trying -- I think people are trying to understand -- I think you're trying to articulate that it's different and it's part of multilateral negotiations, and these negotiations are always going forward. But yet, it hasn't really -- it hasn't really codified, I think, in a lot of people's minds, that it is different and that the ongoing liability of the company really is very consistent and very well-known, particularly in light of this recent buyout plan that you just did.

Okay. So the $4.9 billion, some people on the phone and questions have referred to as a liability. It is not actually a liability as you would record with a single employer plan. The $4.9 billion is a mathematical calculation of the underfunding of the plan, our percentage of contributions to the plan. It is not an obligation legally, statutorily or under collective bargaining to fund that $4.9 billion. And the -- so the view that this is a debt that has to be paid off at any point in time, let alone a certain point in time, is just not the appropriate approach.

But if it's not a liability, but yet the benefit is guaranteed to the employee, then how am I not ultimately required to make good on that commitment to the employee?

Our obligation...

I'm sorry, Dan.

Our obligation is limited to our contribution rate that is bargained under the collective bargaining agreement. So we negotiate a rate, and that is our obligation, and that's what our obligation is limited to.

Exactly. So then my point is...

We do not guarantee...

If you make those contributions over time, and it turns out that in good faith, that the trustees of the plan have overestimated their ability to pay out beneficiaries of the plan, who's on the hook to make up the difference? Because, Dan, what you're saying is it's $0.50 an hour or $1 an hour or whatever it is that's negotiated in the contract. And what -- and I think that's what people are really struggling with because you're saying it's not an obligation but you're describing a situation where it is. That's what people are confused with.

That's a good question. Ron and Dan, can you -- I think it's a good question, important question, and I think you guys can provide it.

The answer is we do not guarantee benefits in a multiemployer plan. The PBGC has guarantees for benefits up to a certain level. We do not guarantee benefits. To the extent that a plan is unable to pay those benefits, the PBGC is responsible for paying out benefits up to a certain level. We do not have the obligation to pay those benefits.

And so the reason why your annual contributions are so predictable is because your liability is what you negotiate at the bargaining table. I think that's what you're trying to say, and that's really important. And the $4.9 billion is an artifact of GAAP accounting, which requires you to actuarialize obligations and benefits yet the reality is, is the company is not on the hook for it. Is that -- I think that's what you're saying. I mean I don't know.

Now the fact that it's just not on our balance sheet, I'll just point out, it's not on our balance sheet.

It's not on your balance sheet but it's in your footnotes.

But it's just not in GAAP accounting.

Yes. Yes. But it's in your footnotes, and investors are concerned about it, right? Okay. And then the final question is how many of these plans are you still involved with where it looked -- where you may have to step in for weaker employers that ultimately may go insolvent and then where you're responsible for essentially taking on their employees, part of a buyout or something else?

Yes. So if an employer that we participate with in a multiemployer goes out of business, okay, the first thing that happens is they're assessed withdrawal liability. And the fund itself turns around and tries to collect the withdrawal liability from them. If the fund is unable to collect the withdrawal liability, the share of the amount that is not collected is allocated amongst the remaining employers as part of their underfunding. Then as bargaining parties, when we come to the table, we have a number of options to address it: First, we can turn around and choose to reduce benefits. Secondly, we could reduce -- or we could turn around and increase contributions to address. Third, we could turn around and freeze the plan and look to come up with a new variable plan on a go-forward basis, either a 401(k) or a variable pension plan, which is our preference as we move forward with this because the variable plan does -- is the best option to derisk us while also protecting benefits. What I would say about the variable plan is, to some extent, think of it like a 401(k). A 401(k) is defined contribution, and it goes up and down with the market. The variable plan, the benefit that is provided goes up and down based upon the overall status of the fund. And that's what we're moving towards as an overall labor strategy, which then positions us to provide a total package that's competitive for our employees, including wages and health and welfare.

Okay. We need to move on to the next question. Thanks.

Our next questions come from the line of Robby Ohmes of Bank of America Merrill Lynch..

And I apologize if I was late onto the call, so I don't know if you guys answered this already, but a little bit of follow-up on John's question is just can you -- philosophically, how are you thinking about this? I mean I guess what I'm asking is, philosophically, how might you be different from Kroger's approach to managing this, where Kroger has been pretty aggressive over the years trying to minimize that off-balance sheet number. Is your goal to minimize the income statement impact basically? And it's sort of okay, what that off-balance sheet number is? Or is there any change in the philosophy that was taken before Albertsons and Safeway merged? I just -- maybe just step back and maybe just tell us where your philosophy might be different than others that have this, like Kroger. And how we should think about that?

Yes. So great question. What I've seen with Kroger in the past is that Kroger has moved towards spinning off assets and liabilities from multiemployer plans into their own defined benefit plan. So it is a defined benefit plan, and that is what the action that they have turned around and taken. And sometimes in conjunction with that, they turn around and write checks. Our strategy is to take the current multiemployer plan, freeze that plan. And when we say freeze, we're freezing future service, but we're contributing at the same level that we were at, and then create a variable plan on a go-forward basis. Now that variable plan, okay, is going to require a new contribution stream. So we will get that new contribution stream from other parts of the contract, health and welfare, other areas, to fund the variable future service. And that variable future service does 2 things: One, it protects the benefit for our associates on a go-forward basis. And then secondly, it derisks us with regards to impact on the fund with regards to investment returns or head count reductions in the fund. So that's our long-term strategy is these variable plans.

And just simplistically, so you would -- the income statement impact of your approach, all else being equal, is more favorable than Kroger's approach, correct?

It could speak to ours, yes.

Yes. I think it's more favorable and more predictable. We shouldn't have big spikes because we're -- in our strategy, we're not incurring big buyouts of plans in certain years versus others.

So with the expected expense for the ongoing plan post these different types of approaches, would, again, all else being equal, size of benefit liability or whatever, this one is -- puts less pressure on the income statement. Is that fair?

Yes.

And I would add to it that this is part of an overall package. So we look at it as wages, health and welfare and retirement, and so that is reflected in our entire SG&A. And what we're able to do is we're able to sit down with our union partners and say, hey, we want to start this variable plan on a go-forward basis. There's going to be some money involved with additional contributions. Let's see how we can save as in -- save in other parts of the contract, which that savings then positions us to grow the overall business, along with Vivek's broader plans for moving the company forward.

The other thing that we won't do is we won't guarantee benefits, and we won't guarantee funding levels of a plan.

Okay. We have time for one last question.

Our next questions come from the line of Karen Short with Barclays. .

Just to clarify, I think it was a question from JPMorgan. On the expense portion, is there any component of the expense annually that is related to increasing the funding or like decreasing the liability versus just the ongoing expenses? So that was my first question. Then I had one other.

Yes, I'm going to -- go ahead. Go, Dan. It's not remarked as what I thought I heard these guys say earlier. They are contributions into the plan, and they're not specifically allocated to one thing or another. They just go into the fund.

Okay. And then with respect to the actual liability, well, 2 separate questions. First of all, when you are doing things like Instacart and you have these gig workers in your stores, how does that conversation go with the unions, specifically in terms of having these nonunion workers stay picking in your stores? But the second question is, don't some of the rating agencies actually -- I thought some of the rating agencies actually included the liability with respect to determining their ratings. Maybe I'm wrong on that, but maybe you could just clarify that.

I'll take the first question then turn the second question over to Bob. Our goal is to get customers through the door, whether they're customers off the street, customers from a bodega who wants to buy products off our shelf or customers such as Instacart, who wants to come in and pick and deliver to a third party. With regards to Instacart, that increases our overall ID sales, which is beneficial to our employees, because as sales increase, the hours for our employees increase. So it's a win for all.

All right. Then on the other question, you're right, different constituencies may look at this differently. At least one of the rating agencies does include it in their denominator. But when they do that, they also add back, which is very key, they add back the -- in this year, $490 million of the contribution that is already in EBITDA. Does that make sense?

Yes. No. It's just like a debt to EBITDA, right? It's just you're adding, doing the same thing with the pension. Yes. And then I understand that. I just -- I was pretty sure that at least 1 or 2 rating agencies added that component onto the numerator and from...

They treat it differently. Yes. They're not consistent in the way they treat it, but they take it into account. All right. Well, thank you, everyone, for participating today. We appreciate it and look forward to future events. Bye-bye.

Thank you.

Thank you.

Thank you. That does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.