KR
#Good morning, everyone
Our core business was strong in the third quarter
We're very pleased with our ID sales exceeding 1% in the third quarter
We were especially happy to see the very strong performance on our fresh departments; the results in produce and meat were terrific, and we continue to see double-digit growth in natural foods
Our ID sales results were driven by both, higher spend per unit and strong growth and the number of households
Total visits continue to grow throughout the quarter, and our market share was up
Our businesses gained momentum and our customers are recognizing the investments we are making
We noted at our Investor Conference that over the next three years, Restock Kroger will be fuelled by $9 billion in capital investments, cost savings and free cash flow
We recognized that in order for ---+ in order to be there for our customers today, and more importantly, to be where they are going in the future we need to make investments more aggressively and faster than ever before
We've already prioritized the way we invest capital by both reducing the amount we spend and optimizing our capital allocation process
We now look first for sales driving and cost savings opportunities through both brick-and-mortar and digital platforms; second, we will continue to make sure our logistics and technology platforms keep pace with and scale to those demands that were created through these investments
Then finally, we will allocate capital to storing activity; this process has allowed us to use less free cash flow for capital investments
<UNK>s <UNK> said earlier, we are aggressively managing OG&<UNK> costs and implementing new programs to reduce our cost of goods sold
One example is our recent decision to require on-time and in-fold delivery from suppliers
We're implementing penalties when scheduled deliveries are missed within a designated window
Overtime, this will help keep cost standby on sharing more predictable operations, but more importantly, it won't share that we have the products on our shelves that our customers want and when they want them
We expect Restock Kroger to generate $400 million in incremental operating profit margin over to three years from 2018 to 2020. We also expect to generate more than $4 billion of free cash flow after dividends over the next three years
Our goal is to continue generating shareholder value even as we make strategic investments to grow our business
Fuel performance was also outstanding in the quarter
Our cents per gallon fuel margin was approximately $0.249 compared to $0.179 in the same quarter last year
The average retail price of fuel was $2.46 versus $2.17 in the same quarter last year
This along with our strong core business results demonstrates the diversity of our earnings
The fuel performance in the quarter also created the opportunity for us to make an incremental, a $111 million contribution into our USC consolidated pension plan
Funding these obligations proactively overtime demonstrates our ability to meet our commitment to protect employee pensions while simultaneously delivering value for shareholders
<UNK>s you know, we announced last month our intention to explore strategic alternatives for our convenience store business, including a potential sale
This was the result of review of assets that are potentially of more value outside the company that is part of Kroger; this process is ongoing and there has been a high level of interest
<UNK>s we stressed last month, our convenience store management and associates are an important part of our success; we value what they do and thank them for continuing to put our customer first everyday as we conduct this evaluation
Over the last four quarters we used cash to contribute an incremental $1.1 billion to company-sponsored pension plans, repurchase 59 million common shares for $1.7 billion, take $446 million in dividends and invest $2.9 billion in capital
Our financial strategy is to use our financial flexibility to drive growth while also returning capital to shareholders and maintaining our current investment grade debt rating
We continually balance the use of cash flow to achieve these goals
<UNK>s of the end of the third quarter, our current share repurchase authorization had approximately $590 million remaining
In return on invested capital for the third quarter on a rolling four quarter basis was 12.31%
Now I'm going to spend a lot more time talking about pensions this quarter than I normally would
This is driven by not only what we've done this quarter but also what we've been doing over the past several years
<UNK>bout a decade ago we identified a great amount of exposure on pension plans and recognized then we would need to begin addressing that exposure like we would any big endeavor, one step at a time
Our efforts begin in earnest in 2011 when we negotiated and created the UFCW consolidated pension plan
The keys for us were capping prior service costs, negotiating a new benefit accrual going forward, consolidating four plans into one and sharing both, professional and more efficient management of the assets going forward
We agreed to fund the plan over five years but elected to fund it in January of 2012; this arrangement reduced Kroger's annual multi-employer pension expense and secured the pension benefits for tens of thousands of Kroger associates
Including this agreement, we have since made more than $2.3 billion in payments and funding commitments with two objectives in mind; one, to address the underfunding and the company sponsored pension plans, and two, to address the liabilities of various troubled multi-employer pension plans
We have adopted this approach in a low interest rate environment to provide greater stability for the pension benefits earned by thousands of Kroger associates and retirees, and to manage these liability proactively or frankly, to avoid kicking the can down the road
We have said for some time that we expect our net total debt to adjusted EBITD<UNK> ratio to grow, this is because we're bringing an off-balance sheet item on your balance sheet, we're funding an obligation already on our balance sheet
<UNK>s a result, we are updating our target range for this ratio to 2.2 to 2.4 times
These obligations whether recorded on or off Kroger's balance sheet have generally been considered when our credit profile has been reviewed but since they weren't funded, did not get picked up at our net total debt to adjusted EBITD<UNK> ratio
Our current result of 2.57 times is above this range
We expect to use free cash flow and potential proceeds from the sale of assets to get us back in the range
Protecting associates and retiree pensions is one significant way that we take care of our associates
<UNK>nother is hiring and job creation, Kroger is currently hiring total 14,000 part-time and seasonal jobs, this is in addition to the nearly 10,000 permanent jobs we've already created in 2017. Through Restock Kroger we plan to invest an incremental $500 million in human capital in wages, training and development over the next three years
This will be in addition to our continued efforts to rebalance pay and benefits while also focusing on certifications and performance incentives, career opportunities and training
On the labor relations front, we recently ratified an agreement with the UFCW for store associates in Charleston, West Virginia, and we're currently negotiating an agreement with the team stores [ph] for the master agreement
Our objective in every negotiation is to find a fair and reasonable balance between competitive costs and compensation packages that provide solid wages, good quality affordable healthcare and retirement benefits for our associates
Our financial results continue to be pressured by inefficient healthcare and pension costs which some of our competitors do not face
We continue to communicate with our local unions and the international unions which represent many of our associates
The importance of growing our business and growing it profitably which will help us create more jobs and career opportunities and enhance job security for our associates
Turning now for our guidance for the fourth quarter of '17 and all of '17, we expect fuel margins to moderate in the fourth quarter and we're already seeing that quarter-to-date
We expect fourth quarter identical supermarket sales growth exceeding ---+ excluding fuel to exceed 1.1%
We confirmed our 2017 net earnings guidance for 53 weeks of $1.74 to $1.79 per diluted share and our adjusted net earnings guidance range of $2 to $2.05 a share
Both our G<UNK><UNK>P and adjusted net earnings per diluted share guidance includes the effect of the hurricanes
The low end of this range is $0.04 above where industry analyst consensus forecast has been demonstrating Kroger's ability to deliver shareholder value in a dynamic transition year
Our LIFO expectation has been lower to $60 million from $80 million and we expect capital investments excluding mergers, acquisitions and purchases of leased facilities to be approximately $3 billion for 2017. Before I turn it back to <UNK>, I want to note that in the 8-K we filed earlier today, we reconfirmed our early thoughts on 2018. <UNK>?
What I talked about as far as moderation and margins in the fourth quarter was we expect our few margins to moderate in the fourth quarter and we've already been seeing that
What happened with gross margins this quarter, the 30 basis points without the fuel modern health and LIFO charge that we talked about in the earnings release, we have become significantly more diligent on lowering our cost of goods and negotiations with our vendors
Our sales mix was very strong in the quarter relative to more natural foods and more our brands which helps drive our margin rate up and those did also continued price investments, our costs ---+ our inflation [ph] cost is still above our inflation at retail, if you go back to the chart I used at the investor conference but they are beginning to converge and both of them are now in positive territory
I don't want anybody to think we did invest in price in the quarter because we certainly did in a very big way and it's really the factors I talked about
I walk-in to the habit of revisiting that chart that were both over zero; so we did have cost inflation, as well as retail price inflation that got past on but we didn't pass all of it
I also walk-in into the habit of predicting where gross margins may go on a quarter-to-quarter basis because you never know exactly what negotiations or what benefits may fall on a particular quarter but we do feel good about the results we posted
<UNK>s I sit here today, so there is two components of multi-employer expenses; there is one that we may got a sense per hour basis is part of our contracts to third-party plans that we don't manage, maybe trusting on those
So those will be whatever the hours we work in the contractual rate per hour; my guess is that you would see a slight increase ---+ some increase in that number
I think as you think about contributions to our multi-employer, to the UFCW plan that I talked about we created five years ago, as I sit here today I would expect that to be slightly less next year than this year given the contribution we just made, plus they are having a very nice year from a return on asset basis
No, I mean you hit the nail in the head
We have been and we'll continue to invest in price and we have a lot of plans in place to figure out what is to pay for that
Unidentified <UNK>nalyst <UNK>nd then my follow-up question is, if we to get tax reform and your tax rate go down significantly, how would you look to deploy that benefit to your P&L? Would you just let it flow to shareholders or would you look subsidized investments you might make with that savings?
No, I agree with you
<UNK>nd we obviously, announced our relationship with Instacart that we in Southern California which will be a prime example of what <UNK> said we're on average smaller stores and smaller parking lots and this is a great solution for a market like that where it's just over the customers want but the physical assets we have wouldn't support it
That's very, very much so and as you know, when we merged with Harris Teeter and we solved their insights, it's what caused us to aggressively start doing ClickList and the only changes we made was asking the Harris Teeter team if you had to do it over again, what would you do differently, those things we have done but the patterns that we're seeing would be very similar to what we saw ---+ what Harris Teeter saw before we merged and what Harris Teeter continues to see
Yes, sir
It really doesn't, as we have more opportunities and negotiate more opportunities; if I could get all of these union contracts if I wouldn't want to do it [indiscernible], like I said in my prepared remarks, it's one step at a time on big endeavor like this; I would prefer to bring them all in balance sheet, manage the assets myself, get rid of a lot of friction cost
One of the funds we consolidated, it was unbelievable, the management fees that were aimed, because their assets were so low
<UNK>nd as you get a bigger pool of assets going after the same goal, you obviously get better fees, so there is lots of ways it reduced our cost and generally speaking, the rating agencies do get it and understand it; it's ---+ I think I'll allow this for a second and everybody in the room just kind of looked at me like ---+ but we've actually talked, should we start talking about the leverage ratio closer to exactly how the rating agencies do it, so there isn't this disconnect between the two and we just put everything after the way we believe they look at it, they don't tell you everything but ---+ and then it's not; it's volatile as it seems when we add something, so that's something we're kicking around just to take some of the ---+ what seems like a growth in our leverage when it's just moving it from one part to another
I think I would just go back to what our strategy is and we would allocate our ---+ those proceeds to support all the pillars of our financial strategy, keeping in mind the contribution to the bottom line at those stores to generate; as well as the need to get our leverage ratio down
Well, the expense that we incurred do not penetrate our insurance deductible, so it was contained at less than the $26 million I spoke off last quarter
It was in the $20 million to $25 million range
<UNK>nd when you think about where the hurricane sit and where we have stores, while it certainly helped the Houston division sales, the overall effect on the total company, given we have 20 to 100 stores and a 100 or so affected in Texas by the storm was relatively negligible to the overall number
We've never really tried to look at it as a power struggle and we really appreciate the partnerships we've had with our CBG suppliers
Relative to the find for the late trucks, it doesn't do us any good to have folks around our warehouse expecting trucks to show up and the truck doesn't show up or that we have orders in for products from our stores and we get a truck from a supplier that doesn't have all of the goods on it we expected it to have on it
<UNK>nd not only are we incurring the cost at the warehouse for those ideal workers, it also winds up affecting sales when we can't fulfill the orders that our stores have asked for and then we can wind up with out-of-stocks or low stocks inside the store
<UNK>nd it's really just trying to strengthen that relationship if it's supposed to get here today and it's supposed to be a full truckload, we'll get it to us today and make it a full truckload
You know, this isn't within minutes of a window, this is a relatively wide window at this point and I would say the biggest thing on cost of goods is, we've always at the category manager level done a really good job of negotiating cost of goods
There have been times when they've made decisions historically that somewhere up the chain in the company we may have overturn the decision they made which causes them to think somebody doesn't have my back when I negotiate really diligently and get us a better cost of goods on our product
I can tell you today, the category manager negotiates a price or a product in our store, not in our store; that decision stands there because they are the ones with all the data and information about how that decision is made
It's all those decisions are made, we don't just do this, give us the best price or you're out of the store
It's all made with a powerful data waiting for 51 behind it to understand consumer preferences and substitute ability and things like that
So it's a pretty broadbased approach and I would say those two generally are the highlights
Our ship-to-home is an evolving process <UNK> and you know, as we've said in our conference call in the prepared remarks, we had a record Black Friday and Fred [ph] had a record Black Friday
<UNK>nd when you talk about TVs, that's a record Black Friday relative to a few years ago where electronics would have been a huge part of their Black Fridays
<UNK>nd it's ---+ not every customer wants things delivered to their house, there is still a joy and excitement of going out and shopping for things and we'll continue to offer and overtime offer more opportunities and options for our customers on how they want products delivered but when you think about this year's Black Friday being a record year, I think folks I brick-and-mortar [indiscernible] everything is going to get shipped at home or little bit ahead of themselves
