1
Exhibit 99.2
Second Quarter, 1999
Investor Conference Call
September 14, 1999
Kathy Kelly: Good afternoon. Before we begin today's call, I must inform you
that the discussion today will include forward looking statements. We wish to
caution you that such statements are predictions, and actual events or results
can differ materially. A detailed discussion of the many factors that we believe
may have a material effect on our business on an ongoing basis is contained in
our SEC filings.
comments by: Joe Pichler
Good afternoon and welcome to Kroger's second quarter investor conference call.
We are pleased that you could join us. With me today are Bob Miller, Kroger's
Vice Chairman and Chief Operating Officer, and Rodney McMullen, our Chief
Financial Officer. Dave Dillon, Kroger's President, is joining us by phone.
I will begin today's call with a discussion of Kroger's second quarter results.
Bob Miller will provide an update on the exciting activities underway to
generate the $225 million of synergies that we have projected from the
combination of Kroger and Fred Meyer.
We will then be open for questions.
This morning Kroger reported the results of an absolutely outstanding second
quarter.
Total sales were $10.3 billion dollars - an increase of 6.2% over the comparable
period in 1998. In order to calculate the 1998 sales figure, we adjusted Kroger
sales to coincide with the new fiscal year and excluded sales from divested
stores.
Food store sales rose 5.8%.
On the same basis, identical food store sales rose a strong 2.6%.
The identical store sales calculation excludes expansions, relocations, and
stores which were converted to different banners during the last 12 months.
These include primarily the Smith's stores in Phoenix and Tucson which were
converted to the Fry's banner and the Smitty's stores in Phoenix which were
converted to Fred Meyer Marketplace stores.
Comparable store sales - which include expansions and relocations, but exclude
banner changes - rose a strong 3.6%.
page 1
2
Bob Miller and I are very pleased with the strength of our sales and we
congratulate our operators on a terrific first half.
EBITDA:
Second quarter EBITDA, which by definition includes synergy savings, but
excludes costs related to the merger, totaled $704.6 million dollars. This was a
solid performance by our operators.
The gross profit rate, excluding all costs related to the merger, was 26.4% of
sales. OG&A expense was 18.1% of sales.
Both gross profit and OG&A improved as compared to the first quarter of 1999.
The "new" Kroger remains committed to reducing ALL costs - as a percent of
sales, year over year.
Synergy savings totaled $5 million dollars in the quarter. These were primarily
attributable to overhead elimination, and savings in manufacturing and insurance
premium. We are well on our way to achieving the $40 million of synergy savings
for fiscal 1999. As we have said, these will be back-end loaded.
I am very confident that Kroger will achieve the $225 million of synergies that
are projected within the first 36 months following our MERGER.
The Fred Meyer synergies from their previous mergers reached a $115 million
dollar annual run rate toward their $155 million projected savings at the merger
closing. We are on track to achieve the additional $40 million of synergies as
Fred Meyer has previously outlined.
Beginning with the third quarter Kroger will report synergies as a combined
total.
Costs related to the merger totaled $230 million in the quarter, including costs
from Fred Meyer's earlier transactions.
Of the total:
$200 million is made up of severance pay, investment banking fees,
closing costs, and amendment fees.
Earnings per diluted share, before all costs related to the merger and
extraordinary item, totaled 24 cents, an increase of 26% over estimated results
for the second quarter 1998. We estimate that 1998 diluted earnings per share
would have been approximately 19 cents on a comparable basis.
At the end of the second quarter, there were 859.6 million diluted shares
outstanding.
page 2
3
I am delighted by Kroger's strong performance and proud of the way that our
organization has come together to achieve the two primary goals that we
established following the merger:
First, to make sure that our customers don't notice that we have completed a
huge merger but do notice new product offerings, competitive prices, superior
private label and first class customer service.
Second, to achieve the $225 million of projected synergy savings.
Kroger's results demonstrate that we are achieving those goals. We are off to a
solid start and I continue to feel good about our ability to generate earnings
per share growth at the targeted rate of 16 - 18% beginning next year.
Looking ahead, I am comfortable with the range of analysts' estimates for the
third and fourth quarters and with the consensus estimate for fiscal 1999.
I also want to mention that we will include with our 8-k filing today, the
estimated sales and earnings per share for the 3rd and 4th quarters of 1998.
This is in response to the many requests that we have received to provide this
information in advance of the quarterly reports.
CAPITAL INVESTMENT:
Kroger invested $404 million in capital projects in the second quarter. We
expect to invest approximately $1.6 billion dollars this year, excluding
acquisitions, and we plan to grow square footage by 4.5 - 5%. In addition, we
will invest $100 million dollars in projects related to the Kroger/ Fred Meyer
merger, bringing total investment to $1.7 billion, excluding acquisitions.
During the quarter Kroger opened, acquired, expanded, or relocated 19 stores
versus 24 in the comparable period of 1998. We had 25 operational closings and
completed 28 within the wall remodels. Square footage increased 4.1% over 2nd
quarter 1998 to 114.5 million square feet.
Kroger ended the quarter with 2192 food stores, 796 convenience stores, and 380
jewelry stores.
LIFO: The LIFO charge for the quarter was zero. This is directly attributable to
better buying as a result of our centralized procurement program; the stable
grocery cost environment in which we are currently operating; and the synergy
savings that we are beginning to achieve.
WORKING CAPITAL:
Working capital for the quarter increased $156 million dollars to a level of
$124.8 million dollars. Working capital reduction is a high priority going
forward and we expect to make significant progress over the next two years.
page 3
4
DEBT/INTEREST EXPENSE:
Net total debt increased $204 million dollars to $8.3 billion dollars because of
all the fees related to the merger closing and the increase in working capital
usage. Net interest expense totaled $148 million dollars and, for the full year,
should be in the $625 million dollar range, plus or minus $10 million.
LABOR:
Kroger has made substantial progress in the labor relations area. We have
successfully completed the UFCW contracts in Los Angeles, Denver, City Markets,
Indianapolis, Toledo, Louisville, and the Teamster master contract covering
three warehouses. All were signed for 4 or 5 years.
We are very pleased with these contracts.
During the remainder of 1999, we will negotiate UFCW contracts in Cincinnati,
Memphis and Charleston, WV. Based on our current knowledge, we do not anticipate
unusual problems in resolving these in a timely fashion. Of course, no contract
is assured until it is ratified.
With that summary, I would like to ask Bob Miller to review the progress of the
Kroger merger integration teams.
Bob . . .
comments by: Bob Miller
Thanks Joe. I too am very pleased with our second quarter results and all that
we have accomplished in the 3 short months since we completed the merger. This
is a fantastic combination and I am thrilled to be a part of the "new" Kroger
organization.
The integration teams have made tremendous progress in integrating Kroger and
Fred Meyer. There are seven specific areas that I would like to highlight:
1. Arizona
- ------------
First, all 35 Smith's stores in Phoenix and Tucson have been converted to the
Fry's banner. Customer acceptance has been very positive. All of the stores
required to be divested by the FTC have been sold.
The Fry's stores, as well as the Fred Meyer Arizona stores, are now receiving
all grocery and perishables from the Tolleson warehouse which formerly served
the Smith's and Fred Meyer stores in Arizona. The former Fry's warehouse is
still being used for outside storage during the transition, but there is no
order assembly being done at that facility. The warehouse conversion was a bit
bumpier than we anticipated, but now we are back on track and service levels are
improving daily.
page 4
5
2. Private Label
- ------------------
Our new private label grocery and perishable strategy that offers a "good,
better, best" product selection is being rolled out across the divisions.
The primary brand which uses the name of each division will continue to offer
quality that is as good as or better than the national brand. We are beginning
to consolidate vendors. This house brand tier offers the industry's largest
selection of private label sku's and, by pooling company-wide volume, we will
achieve substantial reductions in product costs across our 2200 supermarkets.
We have introduced a premium tier of superior quality products in selected
categories such as upscale premium frozen entrees and gourmet coffee.
This premium product is called "Private Selections" in all of our divisions. The
"Private Selections" line will provide exciting merchandising and gross margin
expansion opportunities. We will launch 100 Private Selections products during
1999 and are working on a total of 350 sku's under that label.
The third private label grouping is a price impact tier, targeted in quality
between the national brand and generic. These products are labeled FMV
designating "For Maximum Value" and will be used in selected trade areas to meet
competitors that emphasize generic brands. For example Sav-a-lot, and Aldi's. We
will have 80 sku's of FMV in distribution by year end.
Private label accounted for 25% of grocery dollar sales and 30% of grocery unit
sales in pre-merger Kroger. We expect private label to grow across the entire
company.
In the health and beauty care area, the Kroger bannered divisions will continue
to use Kroger as the private label brand. All of the other divisions will use
"Perfect Choice" as the private label HBC product. We have moved rapidly to
achieve the volume synergies in HBC. During the 2nd quarter, our Peyton system
began to ship 119 SKU's of Perfect Choice and we expect to add another 120 SKU's
in the next six weeks.
We are very pleased with our private label strategy and the product cost
reductions we are achieving. This is an area of substantial growth.
3. Leveraged Buys
- -------------------
We have begun to leverage our purchasing power across a broad array of products
and services.
page 5
6
There are four areas that will provide the biggest opportunities:
1. GM/Seasonal
- ---------------
First, in the general merchandise and seasonal area. Kroger has begun to feature
general merchandise products purchased in corporate-wide volumes by Fred Meyer.
During the 2nd quarter, we completed the first corporate wide buy of candy for
the Valentine holiday and achieved substantial cost savings.
We have also begun offering some general merchandise products in the C-stores.
This has been a "surprise" success.
Three of Fred Meyer's private label lines of bath and body products called
"Splash", "Bath and Body Therapies" and "Spa" have already been introduced in
the Kroger divisions. This category offers tremendous merchandising
opportunities at attractive margins.
2. Pharmaceuticals
- -------------------
Second, Kroger's Peyton warehouses are now providing pharmaceuticals to the Fred
Meyer and Smith's divisions at substantial cost reductions --on time and with no
hitches. We have closed the pharmacy warehouse in Salt Lake City.
3. Centralized perishable procurement
- --------------------------------------
The third area is in coordinated procurement of perishables. Pre-merger Kroger
had historically procured perishables centrally. So far, we have added 2 of the
West divisions to the Company wide purchase of produce. By adding this volume to
the Kroger volume, we are achieving even further cost reductions across the
entire company.
4. Store Supplies
- ------------------
Finally, store supplies. We are consolidating vendors and brands and, by pooling
company-wide volume, are achieving substantial reductions in product costs
across our 2200 supermarkets. Tee-shirt bags, produce bags, cleaning supplies
are but a few of the many items generating huge savings.
4. Best Practices
- -------------------
The merger also allows us to share "best practices" of both companies to
optimize operating efficiency across 2200 stores. The economic leverage of "best
practices" is very large. For example, one hour saved in each store per week
will be multiplied by 2,200 stores generating annual savings of approximately
$1.5 million dollars.
page 6
7
5. MIS
- --------
The Smith's MIS platform integration is completed. The conversion of the Smith's
stores in Phoenix and Tucson to the Fry's platform has begun and is expected to
be completed soon. QFC has begun their MIS platform conversion to the Fred Meyer
system, with completion expected on plan by November 1.
6. Manufacturing
- ------------------
All 43 manufacturing plants now report to Kroger's Senior Vice President for
manufacturing. He and his team have made tremendous progress in leveraging the
size of our combined private label operations to purchase raw materials for the
plants. Here is an example: The Layton bakery in Utah now provides pies to most
of the Central region as well as the entire Western region. We not only improved
the quality of our pies, but were able to substantially reduce the cost by
leveraging the raw material costs across a much larger store base. Going the
other way, Kroger's central bakery is now providing iced cakes to our Western
divisions. And, Kroger plants are beginning to supply the former Fred Meyer
divisions with private label products such as peanut butter, coffee and some
spice sku's. Manufacturing opportunities are very strong and we have just begun
to scratch the surface.
7. California
- ---------------
A quick update on our progress in California. As you know, in June we announced
the purchase of 41 stores from Albertson's which are mostly in Northern
California. To date, we have converted and opened 14 stores. Customer acceptance
has been phenomenal! During the next two months, we will convert 21 more
locations. We are very excited about our future in Northern California,
especially Sacramento.
I am also very pleased with our employee response in our new stores. We expect
Northern California to be an exciting growth area for Kroger.
I am now going to turn the floor back to Joe for a few closing comments. Joe ...
comments by: Joe Pichler
Thanks Bob. In summary, Kroger's second quarter was outstanding! Our divisional
operators kept their focus on customer service to produce a strong increase in
sales and earnings while, at the same time, working closely with corporate
leadership to begin implementing the strategies that will generate $225 million
of synergies.
The "new Kroger" is building on the strength of our combined companies: leading
market shares in some of the nation's largest and fastest growing metro areas;
solid managers throughout the company, who share a strong commitment to
achieving the merchandising and consolidation
page 7
8
opportunities generated by our merger; sophisticated technology and logistics
systems that support retail operations effectively and efficiently; a powerful
set of manufacturing plants that provide a strategic advantage in private label
categories; and a clarity of purpose throughout the organization
These assets form a solid base for generating the exciting, new economies of
scale made possible by our merger. We are off to a great start. Our team is
heavily incentified to achieve the full value of our merger and will be
handsomely rewarded as we build shareholder value through our projected EPS
growth rate of 16 - 18% beginning next year.
We will now be happy to take your questions.
page 8