The Kroger Co.

low single digits compared to last year. I'd now like to provide a brief update on associates and labor relations. We continue to invest in our associates as part of our long-term strategy, resulting in an average hourly rate of $19 an hour and a rate of nearly $25 with comprehensive benefits factored in. During the first quarter, we ratified new labor agreements for our Houston Clerks and Meat, Mid-Atlantic Division Stores in West Virginia, and South Carolina stores in Columbia and Myrtle Beach, and Portland Distribution Center and drivers covering more than 21,000 associates. Turning to cash flow, Kroger continues to generate adjusted free cash flow, strong adjusted free cash flow, through consistent operating results, which is enabling us to continue deleveraging in anticipation of our merger with Albertsons. At the end of the quarter, Kroger's net debt to adjusted EBITDA ratio was 1.25, compared to our target range of 2.3 to 2.5. Our strengthened balance sheet provides ample opportunities for Kroger to pursue growth and enhance shareholder value. We continue to take a disciplined approach to deploying capital with a focus on projects which drive long-term sustainable net earnings growth, while remaining committed to our investment-grade debt rating, increasing our dividend over time subject to board approval, and returning excess capital to shareholders when we are able to do so. As part of our capital investment plans for 2024, we shared last quarter our plans for approximately 30 major storing projects focused on higher growth geographies where we have traditionally achieved a strong ROIC and operating profit growth. We've made good progress on our projects so far and remain on track with our plans. While early, we're happy with the results from projects completed in the first quarter. We are confident these new storing projects will help advance our omnichannel strategy and be an important component to our sales growth and TSR model going forward. During the first quarter, we announced we had entered an agreement for the sale of our Kroger specialty pharmacy business. As part of our regular and ongoing review of our portfolio, we determined that specialty pharmacy was not part of our core strategy going forward, and a sale would enable us to focus on our health and wellness strategies that revolve around our retail pharmacies. Due to the sale, a non-recurring health for sale tax adjustment of $31 million was recognized in the quarter, and it has been reflected as an adjustment item in our results. The sale of KSP is not expected to have an impact on our 2024 guidance. I'd now like to provide some additional color on our outlook for the rest of the year. Today, we reaffirmed our annual guidance, reflecting both positive momentum we are seeing in our business, along with a more cautious customer environment in the near term. In terms of quarterly cadence, we now expect a decline in adjusted EPS for the second quarter, similar to the rate we observed in the first quarter, as we expect pharmacy business profitability pressures to carry over into the second quarter. This reaffirms where we expected to be through both the first half of the year as well as the full fiscal 2024. In closing, our first quarter performance reflects the strength and resiliency of our models. We are strengthening our grocery business, which drives the data and traffic to accelerate growth in our alternative profit businesses, and we remain confident in our ability to drive attractive and sustainable returns for our shareholders. I'll now turn the call back to Rodney.

Thanks, Todd. As you've heard from both of us, our grocery business is performing well, and we are building momentum across our business. Kroger is operating from a position of strength. We have the right strategy, which is resonating with customers, and we have the financial strength to pursue growth and enhance shareholder value. As we continue to prepare for our merger with Albertsons, I'd like to thank our associates for their incredible commitment. Since we announced the proposed merger back in October of 2022, our associates have done an exceptional job preparing for the integration with Albertsons, while never once taking their eye off the ball of serving our customers, advancing our strategy, operating our business, and driving results. Because of their efforts, we will be prepared to hit the ground running as a combined company, ready to serve more customers from day one. As a more general merger update, in April, we announced an expanded divestiture plan with CNS, which directly responds to the concerns raised by federal and state antitrust regulators regarding the original agreement. We believe the package, which includes a modified and expanded store set and more non-store assets, bolsters Kroger's position in regulatory challenges to the proposed merger. including our upcoming court proceedings. It also positions CNS to be a strong and successful competitor. We are prepared to defend our merger because it will produce meaningful and measurable benefits for customers, for associates, and for communities across the country. Customers will benefit from lower prices and more choices following the merger close. We have committed to investing $500 billion to begin lowering prices day one following close, along with an additional $1.3 billion to improve Albertson stores. Employees will benefit from Kroger's commitment to invest a billion dollars to raise wages and comprehensive benefits, further building on our $2.4 billion in incremental investments since 2018. As union membership continues to decline nationwide, this merger will secure union jobs and communities will benefit from the strength and the ability of the combined company to accelerate Kroger's commitment to ending hunger. As a combined company, Kroger has committed to donating 10 billion meals to families across the U.S. by 2030. In closing, Kroger is off to a solid start to the year, positioning us well to deliver on our commitments. We continue to invest in associates and the associate experience because when they have a better experience, our customers do as well. Grocery results are off to a better than expected start, which provides the foundation for growth in alternative profit businesses. And our model is generating strong free cash flow, which has strengthened our balance sheet and positions us for future growth. With that, Todd and I look forward to taking your questions. Because we are in litigation, we will not be taking questions on the merger this morning.

We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. And if you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. And our first question comes from Rupesh Barik from Oppenheimer.