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Executives

Steven A. Davis – Chairman, Chief Executive Officer

Donald J. Radkoski – Chief Financial Officer

Tod P. Spornhauer – Senior Vice President - Finance

Analysts

Michael Gallo – CL King and Associates

Brad Ludington – Keybanc Capital

Amy Greene – Avondale Partners

Steve Anderson – MKM Partners

Michael Wolleben – Sidoti and Company

Greg Ruedy – Stephens Incorporated

Will Hamilton – SMH Capital

Michael [Tolidano] – DGHD

Bob Evans Farms, Inc. (BOBE) Second Quarter 2009 Earnings Call November 12, 2008 10:00 AM ET

Operator

Good morning. My name is Brandy and I will be your conference operator today. At this time I would like to welcome everyone to the Bob Evans second quarter earnings release call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions). I would now like to turn the call over to David Poplar, Vice President of Investor Relations. Please go ahead, Sir.

David Poplar

Good morning and thank you for joining us today for the Bob Evans second quarter 2009 conference call. This is Dave Poplar and I’m here with Steve Davis, Chairman of the Board and Chief Executive Officer, and Don Radkoski, Chief Financial Officer. Also joining us today is Tod Spornhauer, Senior Vice President of Finance and Controller.

We will start with some prepared remarks and then we’ll open up the call for questions. Let me first remind you that our comments today contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include projections regarding anticipated future results. A number of risks and uncertainties could cause actual results to differ materially from these forward looking statements. Please refer to our recent filings with the Securities and Exchange Commission for a discussion of these risk factors.

We caution investors not to place undue reliance on these forward-looking statements which speak only as of the date of this presentation. We undertake no obligation to update our forward-looking statements to reflect future events or circumstances.

With that I’ll now turn the call over to Steve.

Steven A. Davis

Thanks, Dave, and good morning, everyone. Thank you for joining us as we discuss our second quarter financial results. Let me begin by saying we are very disappointed with our second quarter results. While we have several reasons for our weaker than expected performance we won’t make excuses for it. What we’ll do is tell you as much as we can about the primary factors that caused a decline in our profitability for the second quarter, as well as our outlook and strategies going forward.

I’m going to start with a few highlights and then Tod will provide us with the financial details on the quarter. As you saw in our release yesterday, we have lowered our guidance for fiscal 2009 and Don will provide you with more information about our exceptions underlying our new earnings per share estimates of $1.75 to $1.85. After that I’ll have an update on the progress with our BEST Brand Builders and then we’ll be happy to take your questions.

Our reported diluted earnings per share for the second quarter of fiscal 2009 was $0.37 a share compared to $0.45 in the second quarter of fiscal 2008. This represented a 17.8% decline.

Reported operating income was $20.3 million in the second quarter of fiscal 2009, a 21.9% decrease compared to $26 million in the second quarter of fiscal 2008.

In our restaurant segment Bob Evans saw a string of eight consecutive quarters of positive same-store sales broken with same-store sales down slightly a half a percent in the quarter. At Mimi’s Cafe our average same-store sales were down 8.3% consistent with trends at the end of the first quarter.

While net sales were up 11.6% in our food products segment during our 27th consecutive quarter positive comparable pounds sold our operating income was down a disappointing 85% due to a dramatic increase in sow costs which nearly tripled in a 35-day period early in the second quarter and increased 27% compared to the second quarter last year. Tod will explain these issues in more detail now as he reviews the quarter’s financial highlights. Tod?

Tod P. Spornhauer

Thanks, Steve, and good morning, everyone. I’m going to take a few minutes to walk through the income statement to help explain our second quarter financial performance. Our consolidated net sales for the quarter were $435.5 million, up 2.3% compared to $426.3 million in the second quarter of fiscal 2008. The increase reflects new restaurant openings at Mimi’s Cafe and strong sales in the food products segment.

Consolidated cost of sales was $137.2 million or 31.5% of net sales in the second quarter of 2009 compared to $128 million or 30% of net sales in the second quarter of 2008. The higher cost of sales ratio was the result of a year-over-year increase in sow costs which averaged $51 per hundred weight compared to $40 per hundred weight in the second quarter of 2008. While we had expected sow costs to increase the speed and magnitude of the increase were much greater than we had anticipated. The impact of the sow cost increase was somewhat mitigated by lower cost of sales in our restaurant segment, which benefited from our productivity initiative.

Consolidated operating wages were $150.4 million or 34.5% of net sales in the second quarter of 2009 compared to $149.5 million or 35.1% of net sales in the second quarter of 2008. This improvement is primarily the result of effective restaurant segment labour management that more than offset the negative leverage from same-store sales declines in both of our restaurant concepts.

Other operating expenses were $71.2 million compared to $79 million in the second quarter of fiscal 2008, down six basis points as a percentage of net sales. The improvement is due mostly to positive leverage provided by strong sales in the food products segment. In addition, a $1.2 million reduction in restaurant marketing expense partially offset higher utilities costs in that segment. As you may recall, we recorded a $1.9 million higher restaurant marketing expense in the first quarter this year due to a shift in timing of our media spend. As expected, $1.2 million of that $1.9 million incremental marketing expense reversed in this second quarter.

SG&A expenses for the quarter were $36 million or 8.3% of net sales compared to $33.9 million or 8% of sales in the second quarter of fiscal 2008. The second quarter 2009 results includes net pre-tax gains of $700,000 on the sale of real estate assets compared to gains on asset sales of $1 million in the second quarter last year. Also affecting this line was $1 million in expense for performance based incentive compensation compared to $700,000 a year ago. As well, the $1.2 million year-over-year increase in food products segment marketing expense.

Our operating income for the second quarter of fiscal 2009 was $20.3 million, a 21.9% decrease compared to $26 million a year ago.

Net interest expense was $3.4 million in the second quarter of fiscal 2009 compared to $2.7 million in the second quarter of fiscal 2008. The increased interest expense is primarily the result of additional debt incurred to fund the company’s share repurchase program.

Pre-tax income was $16.8 million, down 27.7% compared with $23.3 million a year ago. The tax rate was 32.7% in the second quarter. This compares to 33.6% a year ago.

Net income for the second quarter was $11.3 million compared to $15.5 million a year ago, a 27% decrease.

Diluted weighted average shares outstanding were $30.9 million compared to $34.4 million in last year’s second quarter. This reduction reflects our share buy-back efforts during fiscal 2008. As Steve mentioned, diluted earnings per share for the second quarter of fiscal 2009 were $0.37 compared to $0.45 in the second quarter of fiscal 2008. This represents a 17.8% decrease.

Turning to the business segments, net sales in the restaurant segment were $357.2 million, up three-tenths of a percent from $356.2 million a year ago.

Same-store sales at Bob Evans were down 0.5% for the second quarter with a 0.6% decrease in August, a 0.1% increase in September, and a 0.9% decrease in October. Average menu prices at Bob Evans were up 2.9% in the quarter.

Same-store sales at Mimi’s Cafe were down 8.3% for the second quarter. By month, Mimi’s was down 7.2% in August, 8.2% in September, and 9.3% in October. Average menu prices at Mimi’s were up 2.7% in the quarter.

We reduced restaurant segment cost of sales 30 basis points as a percentage of net sales to 25.3% due to our favourable mix shift and efficiencies from our purchasing and productivity initiatives. Some of the mix shift is from the new Just Enough menu at Mimi’s which promotes higher margin items.

Labour costs were 39.7% of sales, the same as one year ago. Both restaurant concepts made excellent progress in adjusting labour scheduling to eliminate hours as we took more than 480,000 total hours out of our comp store base, including about 220,000 hours at Bob Evans and around 250,000 hours at Mimi’s. This initiative helped offset the negative impact from federal and state minimum wage increases over the last two years. Most importantly, we have managed to do this while maintaining our customer satisfaction ratings and decreasing the year-over-year number of customer complaints that we received in the quarter.

Other operating expenses in our restaurant segment were 18.8% of sales, up 30 basis points from 18.5% one year ago. The change is due primarily to higher utilities expense partially offset by the $1.2 million year-over-year reduction in marketing expense at Bob Evans restaurants that I mentioned earlier.

SG&A expense was 5.6%, down 14 basis points compared to the second quarter of fiscal 2008. The restaurant segment’s second quarter operating income decreased 2.3% from $19.8 million last year to $19.4 million this year for an operating margin of 5.4% compared to 5.6% one year ago.

As noted in the press release, we are concerned about Mimi’s sales and profit sharings, especially in parts of the country where economic conditions have adversely impacted consumer spending particularly hard. Most notably in California, Florida, Arizona, and Nevada. These trends could affect our future development plans and our capital spending for Mimi’s.

Now looking at the food products segment. We had an exceptional quarter of top-line growth with total net sales of $78.2 million, up 11.6% from a year ago. Comparable pounds sold were up 11%. However, a rapid increase in sow costs had a significant negative impact on the segment’s second quarter profitability as sow costs increased 27% year over year and tripled in a 35-day period early in the second quarter from $19 per hundred weight to $59. This rapid increase resulted in a $4.4 million or 39.3% year-over-year increase and second quarter promotional expense as we honoured commitments with retailers for promotional price discounts that we made during the first quarter while sow costs were substantially lower.

Food products profit sales was 59.7% of sales, up 730 basis points compared to 52.4% of sales in the prior year. As I mentioned, the increase is the result of the 27% year-over-year increase in sow costs.

Labour costs in the food products segment were 11.1% of sales compared to 11.4% a year ago and other operating expenses improved to 5.2% of sales compared to 5.6% last year. Both of these improvements reflect the benefits of the additional sales leverage in the food products segment.

SG&A expense was 20.3%, up 130 basis points compared to the second quarter of fiscal 2008. This increase is primarily due to a year-over-year increase of $1.2 million in marketing expense. The food products marketing budget for the year is relatively unchanged from last year, but the spending was more heavily weighted in this year’s second quarter. I should also mention that we are in the process of converting from a direct store delivery, or DSD, distribution system to a warehouse system in response to retailer needs in certain key markets. As of the end of the second quarter we have converted approximately 70% of our distribution to the warehouse system and we plan to move increasingly towards this distribution model. The conversion resulted in higher severance costs and higher slotting fees, but should result in a lower cost structure in the long term.

In summary, the segment’s operating income of $912,000 was down 85% and approximately 760 basis points as a percent of sales from a year ago; a disappointing performance largely attributable to the rapid increase in sow costs.

Turning to the balance sheet, cash at the end of the quarter was about $14 million. Total debt was $306 million compared with stockowners equity of $633 million.

During the quarter we repurchased 104,000 shares and our capital expenditures for the quarter were $25.7 million bringing our year-to-date CapEx to $47.3 million. As you saw in the release, we are lowering our EPS guidance for fiscal 2009 to a range of $1.75 to $1.85 due to weaker than expected second quarter results and current trends in this very challenging economic environment.

I’m now going to turn you over to Don, who will walk you through the assumptions included in this revised estimate. Don?

Donald J. Radkoski

Thanks, Tod. Good morning, everyone. As Tod mentioned, we are lowering our guidance for fiscal 2009 diluted earnings per share to $1.75 to $1.85. Please note that this outlook relies on a number of important assumptions, including same-store sales estimates and any of the risk factors discussed in our securities filings. In general, we are cautious about the consumer environment for the second half of the year and we continue to see a difficult cost environment.

I’ll now walk through the specific assumptions underlining the estimate. First, net sales. We are now expecting overall net sales growth of 0.5% to 1% for the second half of the 2009 fiscal year and 1.5% to 2% for the full year. This guidance includes same-store sales in the negative 1.5% to 2.5% range in the second half of the fiscal year for Bob Evans Restaurants. We plan to open one new Bob Evans Restaurant in the second half, for a total of one for the full year, and four rebuilt restaurants for the full 2009 fiscal year.

At Mimi’s Cafe we are anticipating same-store sales in the negative 5% to 7% range in the second half of fiscal 2009. We expect to open five new Mimi’s Cafes in the second half of the year for a total of 12 new restaurants for the full 2009 fiscal year.

In the food products segment we are expecting overall sales growth of 8% to 10% for the second half of the fiscal year with strong continued growth in comparable pounds sold, as well as expanded retail distribution.

We now expect average sow costs of approximately $45 to $50 per hundred weight in the second half of the fiscal year. If you would like to track sow costs during the quarter the information’s available to the general public on the USDA’s Agricultural Marketing Service website.

We expect continued pressure from minimum wage increases partially offset by proactive labour efficiency efforts in the restaurant segment.

We anticipate depreciation and amortization of about $81 million for the full 2009 fiscal year compared with $77.1 million in fiscal 2008.

Looking at our operating margins, we anticipate restaurant segment operating margins of approximately 5% to 5.5% for the second half of the fiscal 2009 and approximately 5% for the full 2009 fiscal year. In the food products segment we expect operating margins of approximately 8% to 10% for the second half of fiscal 2009 and approximately 7% for the full 2009 fiscal year.

We now expect interest expense of $14 million to $15 million for the full 2009 fiscal year.

Predicting a tax rate is always somewhat difficult, but as of now we believe our effective tax rate will be approximately 33% for both the second half of fiscal 2009 and for the full 2009 fiscal year compared to 32.6% for the full 2008 fiscal year.

As far as our share count goes, we expect our diluted weighted average shares count to be approximately $30.5 million to $31 million for the full 2009 fiscal year compared with $33.3 million in fiscal 2008.

We expect to repurchase approximately 1 million shares during the 2009 fiscal year, but we are authorized to purchase up to 3 million shares during that period.

Finally, we expect our capital expenditures to be in the $100 million range for the full 2009 fiscal year with approximately three-quarters of that allocated to the restaurant segment and the rest allocated to the food products.

Now I’ll turn it back over to Steve, who will review our progress with the brand builders.

Steven A. Davis

Thanks, Don. We are now in the third year of implementing our internal approach to leading the company which we refer to as our BEST Brand Builders. As we do each quarter, I’d like to quickly review our progress in each of the five brand builder. As a reminder, the five brand builders are: win together as a team, consistently drive sales growth, improve margins with an eye on customer satisfaction, be the best at operations execution, and increase returns on invested capital.

Let’s start with winning together as a team, which means getting everyone at the company strategically on line and focused on the same common goals. With all the economic uncertainty we’re facing we are staying laser-beam focused on what we can control, such as productivity initiatives, including procurement and purchasing consolidation.

One program that has helped us win together as a team is what we call Project BEST Way, which we rolled out during fiscal 2007. The goal of this effort was to achieve efficiencies and productivity in all business units over the next five years. For example, we’re making progress on the new POS system at Bob Evans Restaurants, which I’ll tell you more about in a minute.

Also falling under the Project BEST Way umbrella is labour forecasting and scheduling, as well as other productivity initiatives, such as identifying purchasing efficiencies. Both initiatives have helped us offset commodities and labour cost increases.

Another example of winning together as a team is Mimi’s new Project 2010, which consists of a cross-functional team whose mission is to improve sales and profitability of Mimi’s Cafe over the next two to five years. Don Radkoski is now heading up this team and will share more about this effort as we move forward and make progress.

Let’s move on to the second brand builder, which is to consistently drive sales growth. In food products our sales momentum remains very strong as we continue to introduce new products and expand our relationships with major retailers. As Tod has mentioned, comparable pounds sold were up for the 27th consecutive quarter with 11% growth in the second quarter this year.

The food products group introduced several new products during the quarter including smoked sausage in five varieties, family sized mashed potatoes, family sized macaroni and cheese, family size sausage and gravy, and slow roasted chicken breast with gravy.

Our restaurant segment battled some top-line challenges in the second quarter and, as Don mentioned, we expect these challenges to continue in the back half of the year. Bob Evans Restaurants experienced negative same-store sales for the first time in the past nine quarters and about down half of a percent. Accordingly, our product development and innovation process takes on a heightened level of importance as we navigate through these challenging economic conditions.

Among the new products that we have recently introduced in our Bob Evans Restaurant is the new Chicken Fried Chicken Deep Dish Dinner, the latest addition to our very successful Deep Dish dinner line. Also, we launched the Cranberry Apple Pork Loin, which gives us a higher guest check.

In the past year we have also added more than 800 new points of distribution with our gift cards, including the addition of two major retailers: Wal-Mart and Myers Foods. In addition, we are using in-store bounce back coupons to encourage guests to return at dinner and we are utilizing local store marketing in some of our more challenged geographies.

We said last quarter that we’d be ramping up our marketing efforts at Mimi’s Cafe and we have recently hired three new people to focus on bringing our new positioning of the All Day Fresh Cafe to life. We are currently reallocating existing funds to create a pool of marketing dollars so we can communicate this message with print and digital advertising. We are also in the process of developing new in-store merchandising to improve suggestive selling and to build our to-go business, which is very low.

Early in the second quarter Mimi’s rolled out our new right-sized, right-priced Just Enough dinner menu featuring six new entrees beginning in price from $8.29 to $11.49. We also launched our New Beginnings and Endings menu, which features our petite treats line up of six smaller individual sized portions of dessert for just $2.49 and some new appetizers to build our guest check. Our new desserts complement our larger dessert portions that currently range in price from $4.99 to $5.99 with the idea of getting people to try at a lower price.

As part of our new to-go strategy we rolled out our new Party Packs for the holidays featuring sandwich selections, slow-roasted turkey, pot roast, meatloaf, and pasta jambalaya, all for our featured price of $29.99 to $39.99. We will also be offering our popular heat-and-serve Holiday Feast to Go during the Thanksgiving and Christmas period which serves six to eight people for the price of $79.99, which is an all-inclusive meal.

Finally, from an operations standpoint, we have implemented suggestive sell training for our servers to help drive average check at the point of sale in our restaurants.

Our third brand builder is to improve margins with an eye on customer satisfaction. We have eliminated a total of $2.6 million labour hours from our restaurant segment during fiscal 2008 and have taken out more than 480,000 hours during the second quarter this year. This is in addition to the 560,000 hours we eliminated in the first quarter this year. Most importantly, as the brand builder suggests, we accomplished this while maintaining our customer satisfaction scores by better correlating our staffing needs with peak dining hours.

Our margins obviously suffered a bit from higher than expected sow costs in the second quarter, but in the spirit of controlling what we can control the food products team is doing a great job of improving sow yields and managing plant costs.

Our fourth brand builder is to be the best in operations execution. Our roll out of a new point of sales system at Bob Evans Restaurant continues to build momentum. The POS system is now in a total of 44 restaurants and we anticipate that the full rollout will be complete by the end of fiscal 2010. As we have mentioned, this new system will help to simplify our order entry, achieve more precise labour scheduling, and help control food costs. We also believe the new POS system will be a helpful tool to attract and retain employees as it is relatively easier to learn than the manual process we’re using in our restaurants today.

We have made significant progress in reducing turnover at Bob Evans Restaurants from about 150% in fiscal 2006 to about 120% at the end of fiscal 2008. Year to date turnover at Bob Evans Restaurant was less than 110% and we’re trying to drive that number even lower. Mimi’s turnover remains one of the lowest in the industry at about 100%.

From an operations standpoint at Mimi’s Cafe our Mindshare Technologies national guest feedback system has been up and running for a quarter now and we are fine tuning it to be more diagnostic and to focus on key issues, such as speed of service. We have also created a new to-go survey to focus on our carry-out guests. This system is allowing us to get much better insight regarding customer satisfaction because we are now receiving restaurant-specific feedback. We believe this insight will be invaluable to help us improve our operations execution at the individual restaurant level as we have already received more than $60,000 responses since late July. When combined with the 90,000 customer names who are already in our E-club, this provides us with a substantial database for our direct marketing efforts.

Our fifth and final brand builder is to increase returns on invested capital. While we are not building significant numbers of new Bob Evans Restaurants, we expect to build 12 new Mimi’s Cafes restaurants this year. However, as Tod mentioned, challenging economic conditions could adversely affect our future development plans.

We continue to move forward with our plans to remodel restaurants. Bob Evans has re-imaged 14 restaurants since fiscal 2009 and Mimi’s Cafe has recently remodelled two restaurants in the last quarter where sales and guest responses have been very favourable.

In our food products division our $16 million, 50,000 square foot expansion of our Sulphur Springs, Texas, facility continues to move forward. this expansion will nearly double our square footage in Sulphur Springs where we produce convenient food products such as breakfast sandwiches, fully cooked sausage, and breakfast tacos for both Bob Evans and the Owens brand. We expect this expansion to be complete by May of 2009.

Despite the challenges we are facing, our confidence in the strong financial position of our company and expectations for future cash flows enable our board of directors to approve a dividend increase as part of our commitment to increasing stockholder value. The new quarterly cash dividend is $0.16 per share, a 14% increase from the $0.14 per share.

Our strong balance sheet also gives us the confidence to repurchase at least a million shares over the course of the year. Keep in mind, we have authorization to repurchase up to a total of 3 million shares for the 2009 fiscal year.

In summary, even though we had a tough quarter we remain focused on the things we can control such as building sales, improving margins and, most importantly, the intelligent deployment of our capital assets and cash flow. With that we’d like to open up the call and take any questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Michael Gallo – CL King. Michael, your line is open. We’ll move to the next question.

Your next question comes from Brad Ludington – Keybanc Capital.

Brad Ludington – Keybanc Capital

Good morning. I got a couple questions on – First off, congratulations on COGS control on the restaurant division, COGS and labour definitely. In relation to that I wanted to ask, just to follow up on the comment that the 480,000 hours that you cut out here in the second quarter was on top of the 560,000 or so in the first quarter, so you’re at about a million hours year over year better.

Steven A. Davis

[Inaudible].

Brad Ludington – Keybanc Capital

Okay. Looking at the labour line as well in the restaurants, over the last couple quarters there have been favourable insurance cost comparisons. Was there any of that here in the second quarter?

Tod P. Spornhauer

Insurance cost comparisons there was some favourability in the second quarter when you look at insurance at around $500,000.

Donald J. Radkoski

Yeah.

Brad Ludington – Keybanc Capital

Okay. Now, on the.... How can you get past having to, I understand honouring the promotional prices. You can’t do anything about that here in the second quarter. Does that go, do you have a similar situation where some of those promotional prices extended into the third quarter or beyond?

Steven A. Davis

I would say very little. So much of this spending is about timing. Some deals are set at the beginning of the quarter and then other ones are set during the course of the quarter. I would say the majority of that impact is behind us. There might be some residual with some key accounts. But we took a customer-first viewpoint, which is if we made a commitment it’s not the customer’s issue that hog costs ran up the way they did. So we honoured those commitments in the spirit of partnership. But now going forward we understand that we’re going to have to all, and that’s the whole category, we’re just going to have to live in a world potentially with higher hog costs and we’re making those adjustments.

Brad Ludington – Keybanc Capital

Okay. And right decision, I think, for the long-term health definitely. Looking at the timing of marketing in the second half of 2009 will there be any significant shifts in the third or fourth quarter year over year?

Steven A. Davis

Not significant. Bob Evans you’ll see pretty much the same comparison and same thing with food products. Mimi’s Cafe is more of a, it’s not a shift, it’s more if you take the base costs structure and take some things out of maybe labour and some other places and put it into some of the marketing expenses the total impact will be about the same year over year. But what we’re doing is we’re shifting more dollars into some of the marketing initiatives that I described.

Brad Ludington – Keybanc Capital

Okay. And then finally, I know I’m carrying on here, the lower diesel costs. Is there any significant impact that maybe you saw in the second quarter or we should expect in future quarters if they maintain on restaurant COGS or in the food products division?

Steven A. Davis

You can expect, and I’ll turn this over to Don and Tod, you would expect the see some improvement over time, but one of the things that we’ve learned is that depending upon who we’re doing business with the fuel surcharge calculation varies by the party that we’re dealing with and when we signed the contract. So one of the things we’re trying to get our arms wrapped around is this whole fuel surcharge and trying to get some standardization around it. Don or Tod, do you want to add anything to that?

Tod P. Spornhauer

No. I think we would expect to see some declines just with kind of what we see here in the quarter, but offsetting that would be really cost, some of the commodity costs we can still see some fairly high costs in many of the commodity areas including protein. So while the fuel costs may be down I think in general the cost environment is difficult.

Brad Ludington – Keybanc Capital

Okay. Well, thank you. I’ll let somebody else get on.

Operator

Your next question comes from Michael Gallo – CL King.

Michael Gallo – CL King and Associates

Thank you. The question I have is on Mimi’s. Obviously the trends have been challenging all year. I think you rolled out the smaller portions. It doesn’t seem like anything’s really stemmed the tide yet. I was wondering whether you might take more aggressive action at Mimi’s, whether their stores are underperforming or not, cash flowing positive at this point. At one point I guess you look at Mimi’s and have to start taking more drastic action. Thank you.

Steven A. Davis

What do you mean drastic action? What are you referencing?

Michael Gallo – CL King and Associates

I mean, you know, in terms of, you know, either significantly curtailing new store openings and/or starting to actually have to close units.

Steven A. Davis

Well, let me back up and let’s start with the big picture macro. I want to talk about aggressive action that’s been taken. We have essentially brought in a new president and new chief operating officer, a new CFO, a new chief marketing officer, a new head of human resources, and we’ve also done some redeployment in the field organizations. So there’s the very aggressive action taken at Mimi’s Cafe. You also have to let that group of individuals find out where the opportunities are, which they have been doing. And I think you’ve heard more from the marketing front on this call than you’ve probably heard last quarter due to the fact that we brought in three new very energetic people who have great backgrounds, have hit the ground running, and have put some great marketing out for the team to execute. In terms of aggressive action from a leadership perspective, that action is pretty much fully completed. We just hired a new human resources leader last week.

In terms of our development, we actually took our account down from the prior year for the 17 to 12 and we’re not giving guidance for next year until we get to that point. But we are cautiously watching our performance, recognize that when Mimi’s shows up in a new environment there aren’t any other Mimi’s to cannibalize. So everything that we get should be incremental if we do our jobs right. We’ll post you as we give guidance for next year on any development targets.

The one thing I do want to point out, and it’s early in the game but we’ve seen some good performance, at least in the last 30 days, on one of our new remodelled restaurants where we actually retooled the front entry and retooled the whole bar area to make it more conducive to sell appetizers. Just upgrading the look and the feel. We have some Mimi’s Cafe restaurants that are 27 years old and really haven’t been touched. Our goal is to make sure that as we build new restaurants our legacy restaurants represent the brand and represent the all-day fresh cafe brand positioning. So we’ll post you more as we have experience with that.

In terms of making progress, you heard it earlier on the cost of sales and cost of labour, there is a lot of progress that has been made in that front. Even though the sales haven’t turned around and I don’t have to bore you with the macroeconomic trends – you can look at [Maptrac] and some of the other California-based competitors, where they have a high concentration of restaurants in Florida, Las Vegas, Nevada, and California, unfortunately we’re right along trend with them. I’d like to think that the team that we put in place and the systems and programs and accountability at the operational level you’ll continue to see improvements in Mimi’s Cafe.

Michael Gallo – CL King and Associates

Good to hear. Just a follow up to that. Any feel for what the capital cost of that kind of remodel would be on a per unit basis and how many units in the system might potentially, I know it’s early, benefit from a remodel?

Steven A. Davis

It is early and we’ve only got two done. I don’t know how much experience you have with this, but any time you do a remodel your first one is probably the one that’s the most cost laden. So then the next two, three, four, five that you do you set up a value engineer on the cost. So maybe on the next call we’ll be able to give you a range of what that number might be. I would figure that maybe 50 to 75 restaurants might be candidates for re-imaging and remodelling of the total portfolio of Mimi’s Cafes.

Michael Gallo – CL King and Associates

Okay. That’s helpful. Thanks a lot.

Operator

Your next question comes from Amy Greene – Avondale Partners.

Amy Greene – Avondale Partners

Good morning, gentlemen. Quick question. Steve, if you were to kind of bifurcate the Mimi’s store base could you give us an idea of what the costs look like outside of those four markets?

Steven A. Davis

We don’t release that information, but I think you can go on [Naptrac] and just look at California, if you just go on [Naptrac], take California, Arizona, Florida, and Las Vegas, and then take the rest of the country, that will kind of give you what I think you’re looking for.

Amy Greene – Avondale Partners

So would it be, I mean, would it be correct to say that you’re not the, that you feel relatively comfortable with the performance of the Mimi’s that you’ve got further east and that those are still kind of performing at the levels that you’re looking, that you’ve been kind of targeting.

Steven A. Davis

Well, let’s put it this way. When we look at our restaurants east of the Mississippi some of those are overlapping the Honeymoon. So you gotta factor that out. I’ll never be satisfied until we’re positive, so I’ll just leave it at that.

We are optimistic with the team that we have in place. They’ve cranked out more marketing in 90 days than we’ve probably seen in the last year. They’re really making great progress on developing our product pipeline. Pretty much the program that we put into Bob Evans two and a half years ago when we put in the new pipeline process, these are individuals who have experience with that and, no disrespect to the prior team, but that was not a core competency. So we now have that pipeline building capability in our organization.

Amy Greene – Avondale Partners

So the Just Enough menu that, I guess the dinner menu that went in during the quarter, is purchase incidence and consumer acceptance of that within the stores in line with what you’ve been looking for?

Steven A. Davis

Absolutely. We’ve gotten great acceptance. It really hit the mark because I think everybody would agree that we had very generous portions at Mimi’s Cafe. But one of the things we noticed is that we have a very high carry-out packaging expense even though we had a low carry-out percentage for the business. That’s because a lot of customers are just taking food home. I think everybody knows that folks are being more health conscious and watching what they’re eating. With our heavy female skew it made sense to introduce this line. This line now ranks, if I took our business and put it in lines, this is now probably one of our top five sales drivers in terms of mix. So the consumer acceptance has been very strong and now that we have the Mindshare data we can actually go in and get feedback on individual dishes, but everything we’re seeing on the Just Enough is high favourability both at lunch and at dinner.

Amy Greene – Avondale Partners

Last question and then I’ll let you guys go. You mentioned an additional focus within the Mimi’s brand on carry-out or to-go. Is that, do you see, I guess with the east of the Mississippi stores I see where you’ve got a good opportunity there given the real estate placements that you’ve taken. In the older stores is it as viable within that store base or is it really something that you can focus at on this side of the country more so than other?

Steven A. Davis

Actually, on the west coast, I used to run an operation for another brand out in the west coast, but because in California people spend more time in their cars carry-out actually runs at a higher percentage. At the time when I was running restaurants in Southern California we had the highest carry-out percentage in the United States. I think where the opportunity is with Mimi’s, I mean, we didn’t even have a carry-out menu. So now when you go into the restaurant, hopefully, in all 139 restaurants you will find almost the equivalent of a menu board that features a series of meal deals. We’re also training our people to answer the phone to suggestively sell, not put people on hold, take the carry-out order, and really make carry-out a strategic competitive weapon. This is similar to what we did on Bob Evans two and a half years ago. The only advantage that Bob Evans has over Mimi’s is we put a five-second tag for carry-out on the Bob Evans commercial to build the business. Mimi’s it’s going to be more store level and you’re going to continue to see us continue to push the carry-out side of the business because we are way behind our competitive base in terms of the percent mix of our carry-out business relative to other casual dining peers.

Amy Greene – Avondale Partners

Okay. Thanks, guys.

Operator

Your next question comes from Steve Anderson – MKM Partners.

Steve Anderson – MKM Partners

Good morning. A couple quick questions, first with regard to the spike and sell prices. Can you attribute, especially in such a short period, can you attribute one or two reasons for the price spike. When you see, like, in other proteins you didn’t see that spike.

Tod P. Spornhauer

Yeah, it was a dramatic, as you saw increase from Q1 to Q2. I think in a nutshell, I think in Q1 we saw some liquidation of the sow herd, which maybe pushed prices lower than we might expect. So as Q2 came around our supply became constrained. The biggest probably issue with it is the export market during Q2 was very strong. So we had a lot of demand coming from the export market and the supply, which had been liquidated to some degree, or liquidating during the first quarter got constrained. So really it was a supply and demand issue and it was very severe. In that spike we saw hogs go from, or sows go from the teens up into the high 50s. So in my tenure here at Bob Evens I certainly haven’t seen that type of dramatic price movement.

Steve Anderson – MKM Partners

Now, Steve, I have a question for you in regard to the point of sale system. You mentioned full implementation will be done by, are you still looking at the second half of fiscal 2010?

Steven A. Davis

Yeah. We’re progressing along at a good clip. As we said in the script, that will be done hopefully by the end of fiscal 2010.

Steve Anderson – MKM Partners

And how many units do you have right now on the new point of sale system?

Steven A. Davis

Forty-four.

Steve Anderson – MKM Partners

Forty-four. All right. Thank you very much.

Operator

Your next question comes from Michael Wolleben – Sidoti and Company.

Michael Wolleben – Sidoti and Company

Hey, guys. I just wanted to touch real quick here on those promotional prices that you had during the quarter. Moving forward is there a plan to kind of scale the prices back and how often have you done these in the past and obviously been running into the same sow price spike issues?

Steven A. Davis

Well, I think you’re going to see the entire category cut back on very aggressive pricing. I mean, some of our competitors were out there with 2-for-$4 one pound rolls and that was probably during the time frame where you had some of the sow costs at their lowest. I think just in general you’re going to see more competitors, as well as ourselves, pulling back on the depth of the promotion and just, you know. It isn’t often that you see a swing like this, so it’s just like we got whipsawed; I'm sure a lot of other people did as well. We’re all adjusting.

Michael Wolleben – Sidoti and Company

All right. And just one more thing here. On the share repurchases, you know, kind of tying into your debt levels here and how willing are you to draw out on your line of credit here to complete some of these share repurchases moving through this year?

Donald J. Radkoski

Well, we have, as we mentioned on the call, we have a 3 million share authorization. In our guidance we’ve actually said a million shares is what we’re planning and we bought a little over 100,000 shares in the quarter. We have room in our lines, absolutely, to fund that. As well as cash flow from operations.

Michael Wolleben – Sidoti and Company

All right. Thank you.

Operator

Your next question comes from Greg Ruedy – Stephens Incorporated.

Greg Ruedy – Stephens Incorporated

If I understand it right, you’ll often coupon away from projected cost pressures in the food product segment. If you have normal volatility there can you fully offset those pressures by shifting product mix?

Steven A. Davis

I’m sorry, Greg. Could you repeat that again? I think you got cut off on the front part. We missed something.

Greg Ruedy – Stephens Incorporated

All right. If I understand it right you’ll often coupon away from where you’re going to where you feel like you’ll experience price pressure on the food product side of it. If volatility’s normalized can you fully shift the product mix away from where those price pressures are with the couponing strategy.

Steven A. Davis

Now, when you say coupon are you talking about in store or are you talking about [inaudible]?

Greg Ruedy – Stephens Incorporated

In store.

Steven A. Davis

My guess is you probably won’t see as much in-store couponing because as we move to a warehouse situation you’ll see a lot more consistency in the way we do our couponing. When you have a direct-store delivery system you get tremendous flexibility to do some things at the local level. Now that we’re doing more national program, not national, but more regional programs set in advance you’ll see a lot less o the in-store activity happening and more of the national kind of events happening.

Greg Ruedy – Stephens Incorporated

Okay. I know you’re not giving guidance yet on development for 2010, but how should we view it from a return on investment capital perspective when we look at remodels in core markets versus unit development outside of the areas that are being impacted?

Donald J. Radkoski

Well, as you know, from a Bob Evans standpoint we’ve slowed development just one restaurant this year and we’ve said that our really returns on capital were not up to standard. That’s why until we make some improvements there we are continuing to slow development. We do or have a number of remodels in place and some rebuilds that as we look at that use of capital it appears that with the sales lift that we’ve seen in those stores that’s a good use of capital. And at Mimi’s just recently with the two remodels and soon to be three remodels that we’ve had, and it is very early certainly to tell, but it looks somewhat positive in the sales lifts that we’ve seen and from that could be a very efficient use of capital as we move out. And new built at Mimi’s, as you know, we’ve scaled back some. Development is a long process. As you know, it’s 18 to 24 months in the making. So any slowdown in that would be in the future as we plan ahead.

Steven A. Davis

The other thing is we’re going to take the next quarter to really take a look at the performance of the re-images and the rebuilds and then we’re going to look at it as part of our whole CapEx process. When we’re ready to give guidance it will be based on the success of what happens with new restaurants, what happens with anything we’ve rebuilt and anything we’ve re-imaged. But on the re-images it’s still early, so we want a little bit more time to pass so that we can give an accurate projection of what the return might look like. But suffice it to say, you’ll probably see us mixing in more re-imaging on both brands as we go forward.

Greg Ruedy – Stephens Incorporated

Okay. And then with respect to the restaurant level performance, you have cut many labour hours out of both concepts. How far along are you with that? What’s the opportunity to get further labour hour cuts before you feel like you’ve pushed the envelope with the guest experience?

Steven A. Davis

We’ve been doing this with systems and processing, so one of the things that we’ve really been trying to get people to think about is your peak hour staffing and then the ramp down as a result of when, you know, just basically just looking at your business. I think on both brands we didn’t have those tools in place, so we’ve captured a lot of the low hanging fruit. One of the other initiatives we have in place is with a consulting firm called SRE who is doing time and motion studies with us and looking at where some of our bottlenecks might be. You can’t just keep cutting your way to success. So the course we’re taking is looking at the business, lining up our labour with when the business happens, and then also asking where in the back of the house or in the pass-through window or in the ordering process, where is that causing bottlenecks and creating some later opportunities? I think we’ve captured a lot of the low hanging fruit. We’ll continue to work on that. I’ve been in this business for 15 years now and you never stop working on labour. But suffice it to say, it’s top of my force and we continue to make progress. Don, is there anything that you want to add?

Donald J. Radkoski

Yeah, the only thing I would add is we are continuing to monitor our guest satisfaction scores along the way because clearly you have to, as you started out with in your comment there, we have to maintain that or increase our satisfaction scores.

Steven A. Davis

Like for example in the Mimi’s, speed of service pops up it’s a huge opportunity. We’re going back and looking at why that issue exists in the first place. If we solve that first and then find a way to say how do we do this more efficiently so that people can get their food faster it really does become a win-win because you shorten the amount of time it takes for people to get their food which invariably will probably have some impact on labour in a favourable way. We’re starting out with what is the issue we’re trying to solve going after the customer issue and then seeing the resulting benefit in terms of labour management.

Greg Ruedy – Stephens Incorporated

That’s great insight. I appreciate it. Thanks.

Operator

Your next question is a follow up question from Brad Ludington – Keybanc Capital.

Brad Ludington – Keybanc Capital

Hey, guys. Thank you. I just wanted to ask if you could provide a little more detail on the bounce back promotion. How it works and what kind of response you’re seeing with that.

Steven A. Davis

Certainly on the response, but the whole thought process is it’s always easier to get a customer who comes in to come back more frequently than it is to try to get new users because the acquisition cost of new users is much higher. Our bounce backs have been things that we do in store. So in the case of Mimi’s Cafe, which has an incredible opportunity to build breakfast, since 80% of our business is lunch and dinner we’re giving out a bounce back coupon for up to $5 off of your next breakfast purchase. So again, these are people who are coming in for lunch and dinner but aren’t coming in for breakfast. The other one that we’ve had some very good success with at Bob Evans is free kids meal. So if you come in up until 4:00, customers should be getting a coupon inviting them to come back for a free kids meal. What’s great about that program is, as I always tell my team, no 4-year-old has ever walked into a restaurant by himself and said, can I please have a table for one. Children are accompanied by their parents, so people are willing to say, hey, it’s a great deal. Bob Evans has great food items relative to some other kids meal alternatives, and they’ll come in with their parents. So it’s early, but the strategy is about filling in the day parts where we aren’t strong by leveraging the day parts where we are strong and getting people to bounce back to those occasions where we don’t see them as frequently.

Brad Ludington – Keybanc Capital

Okay. And then on the right-size portions what is the margin impact of that?

Donald J. Radkoski

Well, Brad, we don’t break out individual margins, but I’d have to say a piece of our cost of sales improvement in this quarter is definitely from the Just Enough menu and has favourable cost of sales impact.

Brad Ludington – Keybanc Capital

All right. Thank you very much.

Operator

Your next question comes from Steve Anderson – MKM Partners.

Steve Anderson – MKM Partners

Yes, this is a follow up on some of the questions about labour hour reductions. Can you tell me about any progress on the consolidation of some of your sales functions at the Bob Evans and Owens on the food products side?

Tod P. Spornhauer

Yes, those areas have actually been totally consolidated here over the last few years. Even though we operate two brands it’s one team that’s operating that. So that situation is basically completed at this point and has been for a while.

Steve Anderson – MKM Partners

Okay. Thank you.

Operator

Your next question comes from Will Hamilton – SMH Capital.

Will Hamilton – SMH Capital

Good morning. A couple questions on the food products side. First, I was wondering if you could provide a little bit more detail as to how the DSD system affects the P&L in the near term and then also long term where the benefits come from.

Donald J. Radkoski

The thing in the short term, we mention it in the release –

Will Hamilton – SMH Capital

Is that in the other operating expense line, then, the slotting fees and –

Tod P. Spornhauer

The severance is in the wages area and SG&A, and then the slotting fees are other operating.

Donald J. Radkoski

But we had mentioned that those, in the short term we will see some negative costs incurred there. The offset is that over time we expect to see increased sales easier to sell, get pounds sold to the warehouse, lower returns on allowances over time we would expect to see as we move into the warehouse.

Tod P. Spornhauer

And just obviously more gross margin from the higher volume.

Will Hamilton – SMH Capital

Okay. And then just regarding the second half outlook for food products for margins, can you elaborate a little bit more how you think you’re going to get back to 8% to 10%? If you take out some of the promotional expenses or make them even with last year that will probably give you maybe 500 basis points, but I was wondering where maybe that additional amount would come from. Is it sales mix or some other initiatives going on?

Donald J. Radkoski

Well, it definitely starts with the top line because we’ve estimated our top line gross and expect sales of 8% to 10% gross in Q3 and Q4, so continuing with significant top line growth I think the balance that we didn’t have in this quarter with promotional spending. As we mentioned on the spending really impacted margins this quarter is we balanced that over the next two quarters that will in effect help margins. We have some price increases that we have in select areas billed in during the next two quarters. You know, we expect even though hog costs are relatively high, we said $45 to $50, still that’s moderating from the high $50s that we had and mid-$50s at times during the quarter. I know we average $51, but that’s still relatively high hog costs. Then I think we really need to have good margin management with our plan expenses and absolutely stay on top of our returns and allowances. So it’s a combination that we think we can kind of bounce back with some pretty strong margins in the second half of the year on the food side.

Will Hamilton – SMH Capital

Okay. Thanks. And then on the restaurant side, can you provide an update as well on the pricing strategy you have for both of the concepts. At the beginning of the year you talked about letting some price lap, but if Bob Evans were still running close to 3% and Mimi’s just under 3%, which is similar to the second half of last year.

Donald J. Radkoski

Yeah, I think our strategy for the second half of the year is to stay somewhat conservative on our pricing increases in both concepts. Mimi’s will be right around that 2.7% range for the second half of the year. Bob Evans we will, for the full year, be about 3%, a little over 3% now. For the second half of the year it will average just slightly over 3%, like about a 3.2% or so after the second half of the year. So we have a little more price built into the Bob Evans menu.

Tod P. Spornhauer

And we’ve probably taken a little bit less price than a lot of our competitors over the last year, so it’s a little bit of a catch up on that.

Steven A. Davis

Well, not only that. We also know that casual dining as a category is struggling more than family dining. Mimi’s Cafe we’ve been much lower on our pricing than we were historically. Not only on pricing, but also the Just Enough menu, you could argue, is a lower price as well. I would be cautious just kind of lumping it all into one pricing exercise. We’ve been very vocal about trying to get after productivity with the strategy of let’s not price up because commodities go up. Let’s really work hard on the middle of the P&L and then be very conservative with our pricing relative to our competitive set because we’re in this for the long haul.

Will Hamilton – SMH Capital

With Bob Evans did you get a lot of concern about the talk in Michigan with the auto companies and potential layoffs from that given the concentration of your stores in the Midwest there? Is that something you’re trying to begin, I guess, to your second half estimates for the Bob Evans?

Steven A. Davis

I think the simple answer’s yes, but in the spirit of there are restaurants still in Michigan and Ohio and California and every place else. We’re just doing to do what we do well. We’re going to go after the customer not only with better service but also the right incentive. We’ve had some history over time where maybe we weren’t as intelligent about the way we deployed those things, but we’re being very strategic about any discounting that we do with the purpose, like we said earlier, of getting people in for breakfast at Mimi’s when they don’t come in because that’s an opportunity. At Bob Evans it’s dinner. That’s our soft spot and that’s our opportunity. So you will continue to see us go after those softer geographies with the right incentive strategies and a little bit more focus on localized marketing. And just continue to take care of the customer satisfaction. We just rolled out something we call Operation Leaky Bucket. We talked to the operations team about the fact that we do bring in customers and we do have repeat customers. When you look at our complaint base, even though we’ve seen forward movement in the right direction we still have a high aggregate number of customer comments. And then the other challenge we gave our team is take a look at your customer metrics and rank it against the best in class. Not an individual competitor, but let’s just say, you know, Company A might be good at service, Company B might be good in [inaudible] service, Company C might be good in atmosphere, Company D may be great at food quality. Figure out who’s the best and then use that as your benchmark because it’s all about a share of stomach right now and that’s what our teams are focused against.

Will Hamilton – SMH Capital

Okay. Thanks. Appreciate that colour.

Operator

Your final question comes from the line of Michael [Tolidano] – DGHD.

Michael [Tolidano] – DGHD

Hey, guys. Sorry, you may actually, now that I think about it, may not be able to answer this. You were mentioning the sow liquidation in the first quarter. Sorry, I pronounced that wrong also. Was that from increased green costs or what was the big reason behind that?

Donald J. Radkoski

The biggest reason was that feed costs, which had really skyrocketed during some of last year particularly in the first quarter. We believe that’s probably the biggest piece of what’s contributed to some of liquidation.

Michael [Tolidano] – DGHD

Okay. And has that come down, the feed costs?

Donald J. Radkoski

Yes. Yes. Some, the relative corn costs and some of the feed costs over this last quarter have come down some.

Michael [Tolidano] – DGHD

Okay. So you expect that things will maybe be more normalized as in 2007 levels or 2006 levels for sow prices?

Donald J. Radkoski

Our guidance was, our guidance is $45 to $50 range. Hog costs, like we mentioned earlier, they spiked extra high during the quarter. Currently they are lower than that. I mean, right now we’re in the mid-$40s, slightly below that range. We’ll see, but our guidance is $45 to $50 for the second half of the year.

Michael [Tolidano] – DGHD

And, sorry, just where were the costs two years ago? Sorry, I don’t have that up.

Donald J. Radkoski

Two years ago, last year our average –

Tod P. Spornhauer

We were at $35 for the whole year last year and in 2007 we were at $38.

Michael [Tolidano] – DGHD

Okay. Great. Thanks a lot guys.

Operator

At this time there are no further questions. Are there any closing remarks?

Steven A. Davis

Yeah, we just want to say thanks again to everyone for joining us today. If you have additional questions please feel free to give us a call. If we don’t hear from you in the meantime we’ll look forward to sharing our third quarter results with you in February. So have a great day and, like we’ve said in our call, we’re going to remain focused on what we can control. Have a great day.

Operator

This concludes today’s Bob Evans second quarter earnings release call. You may now disconnect.

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Source: Bob Evans Farms, Inc., F2Q09 (Qtr End 10/31/08) Earnings Call Transcript
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