Event Brief of Q2 2004 Safeway, Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

CORPORATE PARTICIPANTS

. Brad Fox, Safeway, Inc., VP & Treasurer . Steve Burd, Safeway, Inc., Chairman, President & CEO . Robert Edwards, Safeway, Inc., EVP & CFO

OVERVIEW

SWY reported net income of $155m or $0.35 a share. GM rate has improved steadily since the end of the strike, but the Co. is still operating with much more promotional GM than is normal. The Co. believes that absent the strike and excluding a quite recent and unplanned increase in its Northern California health and welfare expenses of about $30m, it can achieve the low end of $1.95-2.03 a share guidance. Q&A Focus: Southern California, sales trends, ID, GM, and outlook.

FINANCIAL DATA

A. Key Data From Call 1. 2Q04 net income = $155m. 2. 2Q04 EPS = $0.35. 3. 2Q04 O&A expenses = 24.96%. 4. 2Q04 cash flow from operations = $660m. 5. 2Q04 interest expense = $95.5m.

PRESENTATION SUMMARY

S1. 2Q04 Results (S.B.) 1. Highlights: 1. The most significant event in 2Q04 is the recovery from the strike in Southern California.

2. Net Income: 1. 2Q04 net income was $155m vs. $161m in 2Q03.

2. 2Q04 EPS was $0.35 vs. $0.36 in 2Q03. 1. 2Q04 result of $0.35 a share is impacted by the strike recovery that the Co. is going through in Southern California. 1. This strike was not contemplated in any of the Co.'s guidance given last December. 2. Adjusting for the costs associated with the strike recovery, another $0.11 a share will be added to the earnings, leaving the Co. with $0.46 a share on a strike-adjusted basis. 3. In 2003, SWY had a Dominick's impairment charge together with some restructuring and other expenses, which affected last year's number by some $0.12. 4. If the Co. were to adjust last year's number, it would adjust to $0.36-0.48 a share. 1. Absent these unusual events, these earnings would be $0.46

a share this year vs. $0.48 a share last year. 5. Adjusted EPS this year was $0.46 a share, slightly higher than the number that the Co. had contemplated in its guidance last December. 1. The Co.'s guidance didn't give quarterly numbers, but contemplated in the guidance, underlying that was a quarterly plan. 6. At the same time, the reported number of $0.35 per share includes higher recovery costs than the Co. had anticipated at the start of the qtr. 1. These higher recovery costs are due largely to a lower GM rate as the Co. promoted heavily in the qtr. to improve sales. 3. Sales: 1. While SWY's Southern California sales improved steadily for the first 19 weeks post strike, they appear to have plateaued over the last several weeks. 2. SWY believes this plateauing of sales recovery is temporary, but should the Co. fail to fully recover its sales in Southern California, it remains confident that it can recover its previous profit levels by making some additional progress in O&A expense reduction.

4. Gross Margin: 1. GM rate has improved steadily since the end of the strike, but the Co. is still operating with much more promotional GM than is normal. 2. The Co. expects GM to continue to improve through the balance of the year, which will improve the operating performance at Vons.

S2. Key Contributing Factors to 2Q04 Performance (S.B.) 1. Highlights:

1. After adjusting for the strike, the strong sales coupled with

a modest improvement in GM and a flat O&A expenses contributed

most to performance. 2. Sales: 1. Excluding the effects of the Southern California strike, comparable store sales increased 2.3% and identical store sales increased 1.9%. 1. In addition to this, all ten operating divisions of the Co. showed improvement from the results for 1Q04, and seven out of nine divisions produced positive IDs with an eighth division dangerously close to positive.

2. Excluding the effect of fuel sales, comparable store sales

were flat and IDs declined 0.4%. 1. This represents a 0.9% improvement in non-fuel IDs from 1Q, and is the best quarterly result in ID sales in eight quarters. 3. Gross Margin: 1. While the reported GM declined 136 BP, 63 BP of the decline is explained by the Southern California strike recovery effort, at least 73 BP to explain. 1. Of this 73 BP, more than all of it, namely 80 BP results from a much stronger mix of fuel sales, which carries a substantially lower GM than the balance of the business. 2. In addition, there was 23 BP that reflects increases in advertising expense. 1. So, this leaves about 30 BP of improvement in non-fuel,

non-advertising margins vs. 70 BP improvement in non-fuel related, non-advertising GM in 1Q. 3. The 80 BP of fuel-related decline in margins stems from a whopping increase in fuel ID sales. 4. The Co. had a 58% increase in fuel ID sales in the qtr., and there are a combination of factors that led to that: 1. The cost of fuel increased substantially in the qtr., and SWY raised its fuel prices in response to that, so, the Co. had a 21% increase in retail fuel prices over last year. 2. In addition to that, the Co. was able to grow its gallons per station for existing stations by some 16%. 3. The Co. added about 13% to its ID sales count for stations

in the qtr. 4. A combination of factors made fuel a major increase on the reported GM on the qtr. 4. O&A Expenses: 1. The Co. reported O&A expenses of 24.96%, a decline of 82 BP from last year's reported 25.78%. 1. 104 BP or 127% of the decline is explained by the favorable comparisons to 2Q03 which included a Dominick's impairment charge and some restructuring expenses. 2. Excluding the items not in the Co.'s guidance such as Vons strike recovering and last year's impairment and restructuring charges, O&A expenses were essentially flat on the qtr. 1. These flat results were achieved despite some continued increases in benefit expenses and some wage and workers' comp expense increases as well, but substantially much less than what the Co. experienced in 1Q03. 3. Benefits, wages and workers' comp were up about 48 BP in 2Q04 vs. last year, and that contrasts with about a 94 BP increase in those same items in 1Q04 vs. last year. 5. Cash Flow: 1. Cash flow from operations was $660m for the qtr. and $1.48b for the first 24 weeks (Phonetic).

1. This is $24m higher than last year despite the California

strike. 2. YTD, the Co. has generated enough free cash flow to reduce debt by $584m. 6. Interest Expense: 1. Interest expense declined from $102m in 2Q03 to $95.5m in 2Q04. 7. Other Significant Events: 1. Labor: 1. SWY settled a major UFCW contract in Arizona that had been open for roughly eight months. 1. This contract covers 93 urban stores in Arizona. 2. The contract is consistent with all recently signed UFCW contracts, and meets the restructuring objectives the Co. has established more than two years ago. 3. It is also the second major contract SWY has settled since the Southern California strike. 2. Inflation: 1. SWY experienced significant non-packaged or commodity-based inflation in 2Q04. 2. Major increases in: 1. Milk, raw milk costs went up about 29%. 2. Cheese, the Co. experienced increases in cheese. 3. Ice cream. 4. Eggs. 5. Fuel, pretty extraordinary on the period. 6. Meat …