Event Brief of Q3 2003 Safeway, Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

CORPORATE PARTICIPANTS

. Melissa Plaisance, Safeway Inc., SVP of Finance & IR . Steven Burd, Safeway Inc., Chairman, President & CEO . Vasant Prabhu, Safeway Inc., CFO

OVERVIEW

SWY reduces debt during the first 36 weeks of 2003. The co.'s ID sales were positive in 3Q03 as expected. The co. actually recovered its GM from the centralization efforts in 3Q03. The co.'s new hire proposal simply offers the market wage and a market benefit to everyone that would be hired from here forth. Q&A Focus: Shrink, SG&A, OG&A, strike, guidance.

FINANCIAL DATA

A. Key Data From Call 1. 3Q03 net income = $203m. 2. 3Q03 EPS = $0.46. 3. YTD free cash flow = $928m.

PRESENTATION SUMMARY

S1. Financial Review (S.B.) 1. Net income: 1. 3Q03 net income was $203m vs. $281m in 3Q02. 2. 3Q03 EPS was $0.46 share vs. $0.60 in 3Q02. 1. $0.46 a share includes a buyout expense that SWY incurred in 3Q03 for buying out approx. 715 employees in its Alberta

operations. 1. The buyout expense was $9.4m. 2. The co. expects it to generate an annual savings of about $6.5m on a go-forward basis. 3. On the 2Q03 earnings conference call, the co. provided 3Q03 guidance of a range of $0.47-0.50, that guidance was exclusive

of any buyout expenses, which of course the co. knew it would

have, but there was no way to predict how much, and the $9.4m

is a tad more than $0.01 per share. 4. There were three factors that contributed towards these results: 1. Comparable store sales increase of a positive 0.8%, which translates into a positive ID increase of 0.2%. 2. A gross margin decline of some 78 BP. 3. O&A increase of some 91 BP. 2. Same store sales:

1. As expected the co.'s ID sales were positive on the quarter.

2. When the fuel component is excluded, which of course is a fast

growing business for the co., its non-fuel sales were a

negative 1.5%. 1. This negative 1.5% is 0.7% better than the results the co. achieved in 2Q03. 3. Should the current trend, the last 5.5 weeks which are the first 5.5 weeks of 4Q03, continue the co. should experience further improvement in both total ID sales as well as non-fuel ID sales over 4Q03. 3. Gross margins: 1. GM decline of 78 BP looks worse than it really is.

2. It's explained largely by three factors: 1. The dominant factor represented just under 70% of the 78 BP is a mix change. 1. The mix change is a much stronger mix of fuel which carries a much lower margin. 2. The remaining two factors are represented by increases in shrink and advertising expenses. 1. While the shrink results were up a bit for 3Q03, they have been trending down for the last four-week period, and the co. expects that trend to continue throughout 4Q03. 3. There were no transition costs from centralizing the marketing function in 3Q03. 1. SWY's GM rate has recovered which puts it a little bit ahead of schedule. 2. The co. actually recovered its GM from the centralization efforts in 3Q03. 4. Beginning in 4Q03 and certainly next year, the co. will begin

to realize some of the savings from centralizing those functions.

5. Some of these savings in 4Q03 will be offset by some pretty

rapid escalations in the cost of two primary categories, dairy

and meat, with meat being very pronounced and having been

something the co. has experienced for the last couple of

quarters. 1. SWY expects all of these cost increases in both dairy and meat to ultimately be reflected in retail. 4. O&A Expenses:

1. The O&A increase of some 91 BP was largely the result of

increases in healthcare and pension expenses. 1. The other factors in order of influence: 1. A spike in workers' compensation costs. 2. Soft sales. 3. The Alberta buyout was also an impact.

2. The Alberta expense that happened at the front of the new

contract, so that shouldn't happen again. 3. The soft sales, the sales continue to improve, the co. is working on that.

4. Co. did get some significant improvement in workers' comp in

California which represents a large block of its stores,

almost 40% of its sales. 1. The co. thinks that with the new governor there will be even more progress to workers' comp in 2004 and beyond. 5. Healthcare and pension are issues in virtually all of the co.'s labor negotiations. 1. While the co. is having rapid increases there, those increases are all being addressed in those negotiations. 5. EBITDA Margin: 1. EBITDA margin for 3Q03 was 7.93%, excluding the Alberta buyout expense. 6. Interest Coverage: 1. Interest expense increased $5m vs. $87m in 3Q02.

1. This modest increase in interest expense still produces a cash flow to interest ratio of 6.7 times for 3Q03. 2. To-date the co. has reduced its overall debt level on the year, $871m.

3. YTD free cash flow stands at $928m. 7. Others: 1. There are two noteworthy items or events for the quarter. 1. First the co. secured a five-year contract with the UFCW in British Columbia. 1. This contract will ultimately cover 78 stores. 2. The contract is being recommended and the co. expects that it will be through.

2. The second item is not really a 3Q event, but it's certainly

a current event. 1. The co. is in the midst of the strike in Southern

California. 2. It affects the 289 Vons Stores. 3. The co. is bargaining with Albertson's and Kroger in Southern California, and have a "conventional strike lockout agreement". 4. In preparation for this strike, the co. hired and trained approx. 14,000 replacement workers, who are now operating stores. 5. The co.'s hours at this point are still in the seven to nine range. 6. The hours will be expanded as the co. gets more experience of the strike. 7. The issues in the strike are: 8. Healthcare. 9. Pension. 10. New hire rates and the benefits that go with those new hires. 11. The co.'s proposal asks the employees who today contribute nothing for their healthcare, to contribute at the end of this contract, 3% of their entire healthcare costs. The average American worker contributes 26% to their own healthcare. 12. The proposal seeks to take a retirement benefit for full-time employees and is calculated based on somebody who might have 35-40 years experience with the co. and be 62 or more in years. 13. It takes the retirement benefit from something that currently approaches a 150% of their last paycheck when they worked, to something that is still north of a 120%. 14. Even 100% would be higher than typical American pension plans, they would be closer to something like a 70% number. 15. The co.'s new hire proposal simply offers the market wage and a market benefit to everyone that would be hired from here forth. 8. Earnings Guidance: 1. The current public estimates for 4Q03 are $0.63-76 a share. 2. The co. expects 4Q03 EPS guidance to be within the range of $0.66-0.69 per share.

QUESTION AND ANSWER SUMMARY

Q1. Can you explain why shrink is getting a bit worse in 4Q03 and does your guidance include any continued employee buyouts? (Monica Aggarwal - Merrill Lynch)

A. (Steven Burd) On shrink, we expected shrink to be a bit better than it is, because we saw it improving on a per period basis. It still, when you added the numbers for 3Q03, was moderately worse than 2Q03. We don't see that as a problem, because they get better each period, period 9 itself was better. We effectively put together our financials on a four-week basis, so 3Q03 included periods 7, 8 & 9. Period 6 showed an improvement, period 7, period 8 showed an improvement, and then period 9, not only an improvement sort of closing the gap, but was positive relative to a year ago. And period 10, while those numbers are not finalized, will also be positive relative to a year ago. So, what I would tell you is that we feel very good about the shrink results, I may have missed one I thought that would turn positive by a couple of periods which happens to swap into 3Q03. So, we're not at all concerned that we had a modest increase in shrink …