A Five-Question Interview of Four Kentucky CEOs
"Blue Chip 35" corporate chiefs reveal business strategy

Ashland Inc.

Based in Covington, Ashland Inc. is known for its oil refining and specialty chemical business. The company's products include Valvoline motor oils, Zerex antifreeze, Eagle One and Pyroil auto products. Ashland's highway construction firm, APAC, has provided an additional boost to its healthy bottom line.

Ed Lane:Since the restructuring of its core businesses in 1998, Ashland's stock price has declined. To what factors do you attribute a diminished stock valuation?

Paul Chellgren:In absolute terms, our stock price has declined, largely due to the tripling of crude oil prices last year, from $10 a barrel to $30 a barrel. This has compressed our earnings, especially in the refining business. Frankly, our stock performed similar to other companies in the refining and marketing sector. Secondly, the U.S. stock market is down somewhat. Additionally, there has been a shift of capital to growth stocks and away from value stocks like ourselves.

EL:How long will it take the "new" Ashland to benefit from its restructuring?

PC:We are seeing early signs now. For example, earning growth in our four wholly owned lines of business were up 21 percent in 1999 over 1998. With crude prices beginning to decline, we have seen our stock outperform the S&P 500 over the last few months. So, we believe the early stages of our restructuring are paying off now.

EL:How strong will the U.S. economy be during the balance of this calendar year and what is your outlook on inflation?

PC:The economy is, in some ways, even stronger than the macro-economic statistics show. I certainly understand why the Fed is raising interest rates and I predict they will do it again before the end of the year. For the next three or four quarters we should see real economic growth in the range of three to five percent, with inflation on top of that. The inflationary concerns are real. They are already beginning to show up in increased housing prices, increased labor costs and other factors.

EL:Unemployment is at historically low levels. How has this factor affected the day-to-day operation of your business?

PC:Some of our labor-intensive business units, such as our highway construction group, APAC, are beginning to experience a labor "tightness." In general, it is more difficult to find employees and employee turnover has increased. In this environment, it is sometimes necessary to adjust wages or benefits to attract and retain employees.

EL: What recommendation to improve the overall business environment in Kentucky would you make to Gov. Paul Patton?

PC:Paul Patton is a strong, efficient and effective governor. He works hard at being governor and he's doing a fine job in my view. In the 2000 General Assembly just concluded, he and the legislators expanded funding and continued his emphasis improving higher education, not to mention K through 12. Coupled with his "Education Pays" program, I would say to the governor, "stay the course."

Humana, Inc.

Based in Louisville, Humana, Inc. is one of the largest publicly traded managed health care corporations in the United States, and generated more than $9.9 billion in revenue last year.

Ed Lane:Legislation and government regulations have severely impacted the U.S. health care system. How long will it take for this sector to achieve financial health?

Mike McCallister:The industry has been affected by a number of factors, including consumer backlash against medical network restrictions, employer anxiety about rising costs, the proliferation of class-action lawsuits and a pharmaceutical spending explosion. On the other hand, the pricing environment is better than it's been for the past five years and health insurance is a necessity. Financial results for Humana and most of our peers are going in the right direction and I expect that to continue.

EL:What business strategy is Humana utilizing to increase profitability and return to shareholders?

MM:Humana has taken a number of positive steps over the last six months. We're now pricing our products to reflect underlying medical costs. We've strengthened our balance sheet, selling non-core assets and using the proceeds to pay down debt and make infrastructure investments. And we've initiated a huge strategic and tactical push to take advantage of the Internet's ability to produce cost savings for the company and efficiency gains for our members and affiliated physicians.

EL:How strong will the U.S. economy be during the balance of this calendar year and what is your outlook on inflation?

MM:Health care inflation has risen faster recently than overall inflation, fueled by new medical technology, direct-to-consumer drug advertising, changes in federal regulations and new mandates from state governments. This may be a signal that general inflation will soon be on the rise ‹ even in what looks to be the continuation of a strong U.S. economy for the rest of the year.

EL:Unemployment is at historically low levels. How has this factor affected the day-to-day operations of your business?

MM:It's always tough to recruit and retain top-notch employees. The current labor market makes that even more difficult. With a new 'cultural transformation' initiative that emphasizes the value we place in our employees, we expect to do a better job of finding and keeping the labor force's best and brightest.

EL:What recommendation to improve the overall business environment in Kentucky would you make to Governor Paul Patton?

MM:I'd recommend significantly reducing the amount of new legislation aimed at saddling health insurance companies in Kentucky with expensive new mandates. The unintended consequences of health insurance legislation passed in 1994 are higher health insurance premiums for employers and lower wages for employees. Another result is that numerous insurance companies have left the state and the possibility of their return is still in question.

NSGroup, Inc.

NS Group, Inc., based in Newport, makes tubular steel products (often used in oil and natural gas drilling and operations), special bar quality steel products, and industrial adhesives. Sales for 1999 totaled $274.9 million.

Ed Lane:NS Group's stock price recently achieved a new high. Why have stock values increased significantly over the last year?

RenÚ Robichaud: NS Group, Inc. serves the energy industry and is a leading producer of oil country tubular goods, or OCTG products. The energy market is very cyclical and driven by the price of oil and natural gas. Due to a sharp increase in U.S. drilling activity in the last year, the demand for and price of these commodities have been high. As a result, shipments and selling prices of OCTG products are moving up significantly and the earnings outlook for NS Group is greatly improved.

EL:What business conditions caused NS Group's sales to increase more than 60 percent through its second quarter ending April 1, 2000 and when will the company become profitable?

RR:Due to higher energy drilling activity and increased demand for and sales of OCTG products, NS Group expects to be profitable in the fiscal quarter ending September, 2000.

EL:How strong will the U.S. economy be during the balance of this calendar year and what is your outlook on inflation?

RR:A reasonably healthy economic performance is anticipated this year. The U.S. economy has grown very substantially and will continue to grow ‹ possibly at a slower rate in years to come. We do not anticipate a recession. The broad indicators show inflation is under control, but we remain cautious with a strong economy and a low unemployment rate.

EL:Unemployment is at historically low levels. How has this factor affected the day-to-day operation of your business?

RR:Very high employment levels in NS Group production areas continues to be a concern for these reasons:

• It is difficult to find skilled people.
• Retention is an issue, especially when good job alternatives become increasingly available. Employees understand the cyclical nature of our business and some choose alternative employment, sometimes at lower pay in exchange for stability.
• Higher employee turnover increases training costs.
• A lack of skilled labor and high turnover makes it difficult to lower production costs.
  

EL:What recommendation to improve the overall business environment in Kentucky would you make to Gov. Paul Patton?

RR:

• The state should provide the same opportunities to existing businesses as it offers new businesses entering the state.
• Providing tax advantages and various funding to entice new business to Kentucky creates an unfair playing ground for existing businesses and causes competitive disadvantages in labor and raw material costs.
• Take a harder look at economic development in areas where it is truly needed, i.e., Appalachia.
• The quality of education is very important. Attaining a basic education -- a high school education or its equivalent -- should be stressed.
• Create a more cooperative effort between industry and state regulatory bodies such as OSHA, EPA and EEOC.
• The state legislature should be actively involved when the federal government makes decisions in areas, such as unfair imports, that have an effect on the business environment in Kentucky.
  

Tricon Global Restaurants, Inc.

Based in Louisville, Tricon Global Restaurants, Inc. is the world's largest restaurant owner with almost 30,000 company-owned, franchised and licensed restaurants in more than 100 countries and territories. The company's three brands ‹ KFC, Pizza Hut and Taco Bell ‹ are the global leaders of the chicken, pizza and Mexican-style restaurant categories, respectively. Total worldwide system retail sales for the brands were nearly $22 billion in 1999.

Ed Lane:What has Tricon done since spinning off from PepsiCo in 1997?

David Novak:Over the past two and a half years, we have re-engineered Tricon from the ground up. We've created solid financial strategies that are driving results, implemented a consistent operations platform around the globe and improved franchisee relations.

In 1999, Tricon achieved 41percent in ongoing operating earnings per share (EPS) growth on top of 35 percent growth in 1998. We paid down more than $2.1 billion of debt. We also conducted a successful refranchising program. The cash from refranchising and operations generated over $1 billion in free cash flow in 1999.

In the first quarter of 2000, Tricon reported 28 percent growth in operating EPS, the seventh consecutive quarter of more than 20 percent growth. But the most important thing we've done to date is to create a recognition culture around the globe that focuses on belief in our people.

EL:What is Tricon's strategy for growth?

DN:We've made same-store sales growth a top priority. We're driving margin improvement worldwide by putting process and discipline around what really matters: strong operations, training, labor retention and cost management. We have a much-more focused approach to international and are continuously exploring new growth opportunities while improving our return on company assets in the countries in which we operate. We've built a new unit growth machine and are building and upgrading more stores.

EL:How will overseas sales affect Tricon's future growth and profitability?

DN:Tricon Restaurants International (TRI) is a growth engine enabling us to become a global powerhouse. TRI represents over one-third of our sales. In 1999, TRI achieved 39 percent increase in ongoing operating profit. In the first quarter of 2000, international ongoing operating profits were up 33 percent on top of 34 percent growth last year.

Our strategy is to focus company ownership in key countries, while expanding around the globe with our growth-ready franchisees. We have brands that translate well around the world, in fact, the Colonel is one of the most recognized icons. We see great opportunity internationally so we invest in key markets with substantial growth potential.

EL:How does Tricon address the tight labor market?

DN:We believe the key is to focus on retention and creating an environment where everyone feels valued and appreciated. In addition to providing competitive salaries and benefits, we've created a unique recognition culture that rewards our Restaurant General Managers as our number one leaders. They build and motivate the teams that satisfy our customers.

EL:What is the future of co-branding in the quick service restaurant industry?

DN:Multibranding is the cornerstone of our new unit growth opportunity. It gives us a competitive advantage in the marketplace by allowing us to penetrate trade areas where single branding may not be an option. We currently have over 600 multibranded units in the U.S. today and plan to have more than 2,500 units within the next three years. Combining the world's favorite chicken, pizza and Mexican restaurants under one roof gives consumers greater freedom of choice.

Ed G. Lane (edlane@lanereport.com) is chief executive of Lane Consultants Inc. and publisher of The Lane Report.

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