The Kroger Co.

Good morning and welcome to the Kroger Company fourth quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Rebecca Maness, Director of Investor Relations. Please go ahead.

Thank you, Laura. Good morning, and thank you for joining us. Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want 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. but Kroger assumes no obligations to update that information. Both our fourth quarter press release and our prepared remarks from this conference call will be available on our website at ir.kroger.com. After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one follow-up question if necessary. Thank you. I will now turn the call over to Kroger's Chairman and Chief Executive Officer, Rodney McMullen.

Thank you, Rebecca, and good morning, everyone. Before we get started, I want to acknowledge that the team here at Kroger realizes that we have our work cut out for us, as the market points out this morning. We realize business transformations are hard, but I want to emphasize we are on track to deliver on our restock Kroger commitments. We look forward to our time together to take your questions and try to better lay things out for you. Joining me on today's call are Mike Schlottman, Executive Vice President and Chief Financial Officer, and Gary Millerchip for the first time, Mike's successor, who will become Kroger's CFO on April 4th. As previously announced, Mike will continue to serve as EVP and a member of our senior team until the end of the year. We can't say enough how grateful the entire Kroger team is for Mike's service, leadership, and stewardship of the company for the last 34 years, especially during the last 19 as CFO. We are also incredibly fortunate to have Gary, whose deep finance and business background combined with his successful track record of creating shareholder value as a member of our senior officer team, mixing the right person to carry Kroger forward. This is especially true as Kroger transforms from grocer to growth company. I've talked before about the need for retail companies to constantly reinvent themselves in order to remain relevant. This constant reinvention takes place at least every decade. Gary has been instrumental in helping us think through our transformation as part of Restock Kroger and beyond. He is uniquely positioned to be Kroger's Chief Financial Officer of the future, and as such, will also help shape the future of our omni-channel experience and reporting. During today's call, Mike will provide the financial and operations recap for the fourth quarter and full year 2018, and Gary will outline Kroger's guidance for 2019. In October 2017, we introduced Restock Kroger, our three-year plan to create shareholder value by serving America through food inspiration and uplift. The plan has four main drivers. Redefine the grocery experience, partner for customer value, develop talent, and live our purpose. Combined, these drivers come together to create shareholder value. Specifically, we committed to $400 million in incremental FIFO operating profit growth and $6.5 billion in cumulative restock cash flow by the end of 2020. I'm pleased to report that Kroger solidly delivered on our key year one restock Kroger commitments. When you look at the full year, we delivered against our FIFO operating profit and our restock cash flow goals, which sets us up to reach our 2020 targets. We improved identical sales and delivered EPS near the high end of both our original and adjusted guidance range, giving us both business momentum heading into 2019. And I'm especially proud that we achieved an unprecedented cost savings of more than $1 billion through process improvements in 2018. Restock Kroger is fueled by cost savings that we will invest in associates, customers, and infrastructure. We continue to make significant investments to build an omnichannel platform that will deliver customers anything, anytime, anywhere. At the end of 2018, 91% of Kroger households have access to pickup or delivery. By the end of 2019, with full integration of Kroger SHIP into our ecosystem, we will reach 100% of America. We are very pleased with the growth of digital sales at Kroger. In 2018, our digital sales run rate was about $5 billion. Going forward, we are trending toward a run rate of approximately $9 billion. Kroger also grew our brands to reach a record 30.5% unit share in the fourth quarter. We introduced 1,022 new items in 2018, which helped drive strong year-over-year sales lift across our portfolio of brands. Simple Truth continued to lead the way with a 15.3% sales growth in 2018, making it a $2.3 billion brand. Kroger unveiled several transformative partnerships to create customer value in 2018. Home Chef continues to grow and shape today's meal solution space. In February, we announced Home Chef's expansion to 500 more locations and six new store divisions. Our pilots with Walgreens, Microsoft, and Nuro continue to generate great customer insights. The Nuro pilot in Scottsdale is nearly complete, and we are planning to enter another market early this year. We remain optimistic about all the ways our partnership with Ocado will set Kroger up for accelerated growth in the future. In February, we announced Florida and the Mid-Atlantic region as where we plan to build the next two Ocado sheds, in addition to the first location planned for Southwest Ohio. In 2018, we accelerated investments in associates and significantly improved employee retention in one of the tightest labor markets in years. And we were thrilled to be recognized on Fortune Magazine's Change the World 2018 list for using Kroger's scale for good, engaging our business to solve society's most complex issues through Kroger Zero Hunger, Zero Waste Social Impact Plan. This groundwork positions us to deliver on our 2020 restocked Kroger targets, including financials. and transform the company for long-term growth. I want to take a few minutes to talk in more detail about our alternative businesses. Successful long-term businesses constantly explore new directions and adjacencies to grow their top and bottom lines. That's why in February, we announced the appointment of Stuart Aiken to the newly created role of Senior Vice President, Alternative Business. In this new role, Stuart is assuming oversight for Kroger's successful existing alternative profit businesses, including 8451 and Kroger Personal Finance. Stuart will also lead the development of a full portfolio of alternative businesses to support the transformation of Kroger's business model and to better support our customers in supermarket business. Kroger Personal Finance 84.51 and media all beat their operating profit targets for the year. This was very encouraging as these are the biggest line items in our alternative profit businesses. We used some of the excess profit to invest into other new alternative profit streams to begin seeding our margin-rich asset-light businesses of the future. In 2019, We expect 20% profit growth in our alternative businesses, and we'll also launch a few more new businesses that are both symbiotic to our core and deliver high margins. Plainly stated, Restock Kroger is all about transforming our growth model. We will grow market share by creating a virtuous cycle built on our grocery business. At the core is a winning combination of unmatched local presence coupled with a digital ecosystem that enables us to offer our customers anything, anytime, anywhere. We are enhancing the customer ecosystem with partnerships that are helping us to redefine the customer experience by building incredible physical and digital experiences, a fantastic offering, and unprecedented convenience. A constantly improving customer ecosystem generates traffic, customer data, and insights, which then fuel the growth of adjacent alternative profit streams. We see tremendous potential in these asset-light, margin-rich businesses built on the foundation of an omnichannel grocery experience. The profits generated by these businesses will create shareholder value and generate cash to invest in Kroger's core so we can further redefine the grocery customer experience. This is how Kroger's new growth model is a virtuous cycle. Above all, Restock Kroger positions Kroger to create long-term shareholder value. We have a clear path to achieve the $400 million in incremental FIFO operating profit growth. and $6.5 billion in cumulative restock cash flow by the end of 2020. We finished 2018 with sales and business momentum. We expect earnings growth and an improving supermarket business in 2019. Now, here is Mike to share more details on our fourth quarter and fiscal 2018 results.