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Executives

David Poplar – Vice President of Investor Relations

Steve Davis – Chairman of the Board & Chief Executive Officer

Donald J. Radkoski – Chief Financial Officer

Tod P. Spornhauer – Senior Vice President of Finance & Controller

Analysts

Michael Gallo - C.L. King & Associates, Inc.

Brad Ludington - Keybanc Capital Markets

Will Hamilton - SMH Capital

Stephen Anderson - MKM Partners LLC

Greg Ruedy - Stephens, Inc.

[Michael Toladano – GTHC]

Bob Evans Farms Inc. (BOBE) F3Q09 Earnings Call February 11, 2009 10:00 AM ET

Operator

Good morning. My name is Cynthia and I will be your conference operator today. At this time I would like to welcome everyone to the Bob Evans Farms third quarter earnings release conference call. (Operator Instructions) I would now like to turn today’s 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 third quarter 2009 conference call. This is Dave Poplar and I’m here with Steve Davis, Chairman of the Board and Chief Executive Officer; Don Radkoski, our Chief Financial Officer; and Tod Spornhauer, our Senior Vice President of Finance and Controller. We will start with some prepared remarks and then we’ll open up the call for questions.

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 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, circumstances and such.

And finally some of our comments today will refer to non-GAAP financial measures. In accordance with the Securities and Commission’s Regulation G, we have presented a reconciliation of any non-GAAP information to the most directly comparable GAAP financial measure in our current report on Form 8-K filed with the SEC today. You can also find this reconciliation in yesterday’s earning release which is available on the Investor Relations section of our corporate website at www.bobevans.com.

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

Steve Davis

Thanks Dave and good morning everyone and thank you for joining us as we discuss our third quarter financial results. 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 we have reaffirmed our guidance for fiscal 2009 and Don will provide you with more information about the assumptions underlying our current estimate. After that I’ll have an update on the progress of our best brand builders and then we’ll be happy to take your questions.

The key take-away I’d like to leave you with is that after we exclude the impact of certain charges in the quarter, our operating performance essentially met our expectations and these results have given us the confidence to reaffirm our guidance for the year.

For the third quarter of 2009, we reported an operating loss of $46.4 million and a net loss of $51.4 million. These results include the negative pretax impact of $75.3 million in charges which Tod will explain in greater detail in a few minutes. In the third quarter last year we reported operating income of $32.7 million and net income of $20 million.

Excluding the $75.3 million in net charges this quarter, our fiscal 2009 third quarter operating loss of $46.4 million would instead have been operating income of $28.9 million, which compares to adjusted operating income of $30.4 million in the third quarter of fiscal 2008. Tod will reconcile both of these numbers for you momentarily.

In our Restaurant segment, average same store sales at Bob Evans were down 1.3% in the quarter. At Mimi’s Café our average same store sales were down 6.8%. While net sales were up 3.0% in our food products segment, our operating income was down primarily due to significantly higher sow costs which increased 59% compared to third quarter of fiscal 2008. 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 third quarter financial performance. Please keep in mind that all third quarter fiscal 2008 results expressed as a percentage of net sales reflect the impact of the $6.6 million included in last year’s sales for gift certificate and gift card breakage at Bob Evans Restaurants. This will obviously impact comparisons to this year’s performance as will the 2009 items that I will mention as we go along.

I will start by discussing consolidated results, followed by the results of our two business segments. Consolidated net sales for the quarter were $443.8 million, down 1.3% compared to $449.7 million in the third quarter of fiscal 2008. The decrease reflects same store sales declines at both Bob Evans Restaurants and Mimi’s Café, partially offset by new Restaurant openings at Mimi’s Café and sales increases in the food products segment. Also affecting the comparison was the previously mentioned $6.6 million in pretax income for gift card breakage which benefited the net sales line in last year’s third quarter.

Cost of sales was $139.6 million or 31.5% of net sales in the third quarter of fiscal 2009, compared to $134.9 million or flat 30% of net sales in the third quarter of fiscal 2008. The higher cost of sales is the result of a 59% year-over-year increase in sow costs, which averaged $49 per hundredweight this quarter compared to $31 in the third quarter of fiscal 2008. The food products cost of sales increase negatively impacted our profitability by approximately $6.7 million this quarter compared to a year ago. The impact of the sow cost increase was somewhat mitigated by lower cost of sales in our Restaurant segment.

Consolidated operating wages were $148 million or 33.3% of net sales in the third quarter of fiscal 2009 compared to $150.5 million or 33.5% of net sales in the third quarter of fiscal 2008. This improvement is primarily the result of effective Restaurant segment labor management that more than offset the negative de-leverage from same store sales declines at both Mimi’s and Bob Evans Restaurants.

Other operating expenses were 15.8% of net sales, both this quarter and a year ago and totaled $70 million this year compared to $71.1 million last year. Positive leverage provided by food product segment sales increases and lower Restaurant pre-opening expenses for this quarter offset $400,000 in non-cash charges for unusable spare parts in our food products division and higher Restaurant segment utility costs.

Consolidated SG&A expenses for the quarter were $44 million or 9.9% of net sales compared to $41.1 million or 9.1% of sales in the third quarter of fiscal 2008. The third quarter 2009 results include the negative impact of two pretax charges. One, a $6.4 million non-cash fixed asset impairment charge for six underperforming Mimi’s Café Restaurants and two, $800,000 in cash charges for severance payments and retirement costs. Partly offsetting these total pretax charges of $7.2 million in SG&A is the positive impact of $300,000 in pretax gains from the sale of Restaurant assets.

The third quarter of fiscal 2008 results include the impact of $3.7 million in pretax charges for nine underperforming Restaurants; net gains of $100,000 on the sale of Restaurant assets; and a pretax charge of $700,000 related to the settlement of a dispute with a third party. Our consolidated reporting operating loss for the third quarter of fiscal 2009 was $46.4 million compared to reported operating income of $32.7 million in the third quarter of fiscal 2008.

In addition to the significant items I’ve already noted we recognized non-cash pretax impairment charges of $68 million in the third quarter this year related to Mimi’s Café; $56.2 million for goodwill and the other $11.8 million for the Mimi’s trade name and intangible assets. Excluding the negative pretax impact of the $75.3 million in net charges this quarter, our third quarter 2009 operating loss of $46.4 million would instead have been operating income of approximately $28.9 million which compares to adjusted operating income of $30.4 million in the third quarter of fiscal 2008.

You can find a reconciliation of these adjusted operating income amounts to reported operating income and our current report on Form 8-K filed with the SEC earlier today. You can also find this reconciliation in yesterday’s earning release which is available on the Investor Relations section of our corporate website at bobevans.com.

Net interest expense was $3.2 million in the third quarter of fiscal 2009 and compares to $3.0 million in the third quarter of fiscal 2008.

The reported pretax loss was $49.6 million this quarter compared to reported pretax income of $29.7 million a year ago. Our income tax provision in the third quarter of fiscal 2009 reflects the impact of the $56.2 million goodwill impairment charge which is not tax deductible. Excluding this goodwill impairment charge we estimate that our effective tax rate would have been 26.6% in the third quarter. This compares to an effective tax rate of 32.7% a year ago.

The reported net loss for the third quarter was $51.4 million compared to net income of $20 million a year ago. Diluted weighted average shares outstanding were 30.8 million shares compared to 32.6 million in last year’s third quarter. This reduction reflects our share buyback efforts during fiscal 2008.

Turning to the business segments, net sales in the Restaurant segment were $359.2 million down 2.3% on $367.6 million a year ago. Same store sales at Bob Evans were down 1.3% for the third quarter with a 3.1% decrease in November, a 3.8% increase in December and a 5.7% decrease in January. As we noted in the press release, shift and Thanksgiving and Christmas timings benefited December same store sales but negatively impacted November and January same store sales. Average menu prices at Bob Evans were up 3.3% in the quarter.

Same store sales at Mimi’s Café were down 6.8% for the third quarter. By month, Mimi’s was down 10.4% in November, down 2% in December and down 9.6% in January. Again, shifts in Thanksgiving and Christmas impacted these results. Average menu prices at Mimi’s were up 2.7% in the third quarter.

We reduced Restaurant segment cost of sales 30 basis points and the percentage of net sales to 25.1% of net sales this quarter due to moderating commodity costs, procurement savings and favorable mixed shift. Some of the mixed shift is from the new Just Enough menu at Mimi’s which offers higher margin items.

Restaurant labor costs were 38.7% of sales this quarter compared to 38.6% last year. The increase is primarily due to negative leverage from same store sales declines at both Bob Evans Restaurants and Mimi’s Café, minimum wage increases and higher health insurance claims which are largely offset by a reduction in the labor hours. In the third quarter of fiscal 2009 we reduced total year-over-year labor hours by more than 900,000, including about 650,000 hours at Bob Evans Restaurants and about 250,000 hours at Mimi’s Café.

Other operating expenses in our Restaurant segment were 18.4% roughly flat compared to one year ago. Higher utility costs were largely offset by lower repair and maintenance expenses this quarter. Reported SG&A expense in the Restaurant segment was 7.8% of sales, which was up significantly compared to 6.9% in the third quarter of fiscal 2008. However, this increase is due primarily to the negative net impact of the previously mentioned charges this year compared to last year.

The Restaurant segment reported a third quarter operating loss of $50.7 million compared to operating income of $22.3 million last year. Again, this is due to relative negative impact of the previously mentioned items. Excluding these items, Restaurant segment operating income would have been $24.2 million this quarter compared to $20 million last year. That’s a 21% increase.

Now turning to the food products segment, total net sales were $84.6 million up 3% compared to $82.1 million a year ago due primarily to select price increases on key items as well as lower promotional spending and lower returns and allowances. Comparable pounds sold were down 6% for the quarter.

Sow costs had a significant negative impact on the segment’s profitability during the third quarter as sow costs increased 59% year-over-year from $31 to $49 per hundredweight. This increase resulted in a food product segment cost of sales of 58.6% of sales this quarter, up 800 basis points compared to 50.6% of sales in the prior year. This represents a $6.7 million reduction in third quarter profitability.

Labor costs were 10.6% of sales compared to 10.7% in the third quarter of fiscal 2008 in the food products segment. This reflects the benefit of additional sales leverage and productivity improvements.

Other operating expenses in the food product segment were 4.7% of sales compared to 4.5% last year. This increase reflects the previously mentioned $400,000 non-cash charge this quarter for unusable spare parts. SG&A expense was 18.7% of sales, down 30 basis points compared to the third quarter of fiscal 2008, reflecting some of the benefit of converting the food product segment from a direct store delivery or DSD distribution system to a warehouse system in response to retailer needs. By the end of 2009, we expect 90% of our distribution to be on a warehouse system.

The conversion will result in higher slotting fees and severance related to the elimination of certain DSD routes in 2009, but we believe it should result in a lower cost structure in the long term. So in summary, the segment operating income of $4.3 million was down 59.1% and approximately 770 basis points as a percent of sales from a year ago which is largely attributable to the increase in sow costs as well as the $400,000 non-cash charge for unusable spare parts.

Turning to the balance sheet, cash at the end of the quarter was about $16 million up from $14.6 million at the end of the second quarter. Total debt was $289.5 million compared to stockholders equity of $580.1 million. We repurchased approximately 141,000 shares in the third quarter brining our total for fiscal 2009 to 245,000 shares. Our capital expenditures for the quarter were $20.5 million bringing our year-to-date CapEx to $67.8 million.

As you saw on the release, we are reaffirming our outlook for fiscal 2009 and we will be presenting our guidance in terms of adjusted operating income rather than earnings per share for the balance of the year. To explain the rationale for that along with the assumptions included in our guidance, here’s our Chief Financial Officer Don Radkoski. Don.

Donald J. Radkoski

All right. Thanks Tod and good morning everyone. As Tod mentioned we are reaffirming our guidance for fiscal 2009. Please note that we are now providing our outlook in terms of adjusted operating income rather than earnings per share due to the significant impact of the goodwill impairment charge on our effective tax rate.

Our guidance for fiscal 2009 is adjusted operating income of approximately $91 million to $96 million excluding the aforementioned pretax charges of $75.3 million. This is equivalent to our existing earnings per share guidance.

I will now update the specific fourth quarter assumptions underlying this guidance. Please note that this supersedes the assumptions we provided for the full year on our second quarter call in November. This outlook relies on a number of important assumptions including same store sales estimates and the risk factors discussed in our Securities filings. In particular, we do expect weather related same store sales challenges at Mimi’s Café’s and Bob Evans Restaurants in the fourth quarter.

Other assumptions include consolidated year-over-year net sales declines of 1 to 1.5% for the fourth quarter of fiscal 2009. This assumes same store sales declines of 2 to 2.5% in the fourth quarter at Bob Evans Restaurants. We expect to open one new Bob Evans Restaurant in the fourth quarter for a total of one new and four rebuilt Restaurants for the full 2009 fiscal year.

At Mimi’s Café we anticipate same store sales in the negative 7 to negative 8% range in the fourth quarter of fiscal 2009. We expect to open three new Mimi’s Cafés in the fourth quarter for a total of 12 new Restaurants for the full 2009 fiscal year.

And in the food product segment we expect overall sales growth of approximately 3% for the fourth quarter of fiscal 2009.

In the Restaurant segment we expect fourth quarter operating margins of about 5%. Included in this estimate are these assumptions; continued improvement to cost of sales due to easing commodity prices, positive mix shift and procurement initiatives, also continued pressure in operating wages from minimum wage increases mostly offset by proactive labor efficiency efforts.

In the food product segment we expect operating margins of approximately 3 to 4%. Included in this estimate are average sow costs of approximately $50 to $55 per hundredweight for the fourth quarter of fiscal 2009.

Other key assumptions include depreciation and amortization of approximately $81 million for the full 2009 fiscal year compared to $77.1 million in fiscal 2008; net interest expense of approximately $13 million for the full 2009 fiscal year; and effective tax rate of approximately 31% for the fiscal 2009 excluding the effect of the non-deductible $56.2 million goodwill impairment charge; a diluted weighted average share count of approximately 30.8 million for the full 2009 fiscal year; and capital expenditures of about $90 to $95 million for the full 2009 fiscal year.

As we noted in the release we repurchased 141,200 shares in the quarter and have repurchased 245,332 shares for the fiscal 2009 but we have suspended our share repurchase program for the rest of the year. In addition, we continue to expect lower future capital expenditures for Restaurant development in fiscal 2010 at Bob Evans Restaurants and Mimi’s Cafés. We expect to build just two Mimi’s Cafés in fiscal 2010. We do not expect to build any Bob Evans Restaurants next year. We will provide more specific guidance for fiscal 2010 capital expenditures with our year-end earnings release in June.

And now I’ll turn it back over to Steve.

Steve Davis

Thanks Don and as you know we are all facing difficult economic times. And as we examine our company today, each of our business units is facing significant challenges. I will begin our discussion by outlining the biggest challenges each of our businesses is facing and then outline the best brand builder strategies that we are employing to address them.

At both Bob Evans Restaurants and Mimi’s Café we have the challenge of growing our top line. More specifically, we are focused on growing our same store sales in a challenging economic environment. We also need to improve our Restaurant level economics to enable further Restaurant development at both concepts. At Mimi’s Café we have the additional challenge of taking costs out of the middle of the P&L similar to the productivity gains we have achieved at Bob Evans Restaurants.

In our food products division our primary challenge is to grow our brands, given the anticipated cost to sales challenges coupled with a new warehouse distribution model. To help us meet these challenges, we announced last month some organizational challenges that are consistent with our first brand builder, blend together as a team. This is consistent with how we’ve been building our leadership team both by promoting key performers and selectively bringing in experienced leaders from other organizations.

First, President of Bob Evans Restaurants Roger Williams is retiring at the end of February after nearly 42 years of service. We wish to thank Roger for the contributions he has made during his long and distinguished career at Bob Evans. He has been a driving force in the growth of both our Restaurant and food products divisions for more than four decades and we are grateful for the leadership he has provided in helping to make us the company that we are today.

With Roger’s departure, we have realigned our management structure to achieve a greater focus on top line growth and bottom line profitability. Part of this realignment involves the creation of a President and Chief Concept Officer role at both of our Restaurant brands. The Chief Concept Officers will concentrate primarily on the overall growth and development of the brands with particular focus on increasing sales and new Restaurant development.

We appointed Randy Hicks to this role at Bob Evans Restaurants. Randy has done an outstanding job leading the restaurants to significant improvements in virtually all areas of operations. Randy’s responsibilities will include cost of devolution; building our growth strategy; product innovation among others.

The current position of President at Mimi’s Café has evolved into the position of President and Chief Concept Officer of Mimi’s Café. Tim Pulido will fill this role and much of what Tim has been doing at Mimi’s Café already fits within the role described. The work Tim has led thus far has improved the position of the brand for future growth and development, and in his new role he will be able to focus even more closely on these priorities.

In addition, Harvey Brownlee has joined our company as President and Chief Restaurant Operations Officer. Harvey came to us from Yum Brands where he was the Chief Operating Officer at KFC. He joined Yum Brands in 1987 as an assistant restaurant General Manager of Pizza Hut and quickly advanced his career as an operations leader.

The focus for Harvey will be to continue the process of establishing best in class operations across both our Bob Evans and Mimi’s Café Restaurants. In particular, Harvey will concentrate on standardizing operations processes and procedures across both restaurant brands, as well as identifying additional opportunities for purchasing synergies by consolidating vendors and purchased items. Harvey’s extensive restaurant experience coupled with his executive MBA from Northwestern University makes him ideally suited for this task.

Herbert Billinger will continue in his role as Chief Operations Officer for Mimi’s Café. We have also promoted Kathy North to Senior Vice President Restaurant Operations for Bob Evans Restaurants. Kathy has consistently produced strong operational results, strategic change and leadership development. And finally, our new Vice President of Operations Support, [Molly Surek] will now serve both Mimi’s and Bob Evans Restaurants. Herbert, Kathy and Molly will all report directly to Harvey Brownlee.

We believe these changes have put the right people in place to help us unlock the national potential of our regional brands. Specifically, we believe having a designated President and Chief Concept Officers will create even greater focus on sales, new product pipelines and concept evolution. Similarly, the President and Chief Operations Officer will help us get one best way for operations execution at both restaurant brands and to flawlessly execute our supply chain strategy.

Our second brand builder is to consistently drive sales growth and in food products we recently introduced nine new products last quarter which include Family Size Mashed Potatoes; Family Size Macaroni and Cheese; Family Size Sausage and Gravy; a new Slow Roasted Chicken Breast with Gravy; and five Slow Smoked Sausages. We experienced our first quarter of negative comparable pounds sold in more than seven years due in part to a reduction in promotional discounts offered to retailers. However, we still generated positive sales in the quarter as we continued to introduce new products and expand our relationships with major retailers.

Our restaurant segment battled some top line challenges in the third quarter and as Don mentioned we expect these challenges to continue in the fourth quarter. As we navigate these challenging economic conditions, our product development and innovation process takes on a new heightened importance.

At Bob Evans Restaurants we are evolving our marketing message to insure that we communicate the message, “Unbelievable Food at an Unbeatable Value.” In other words, we want consumers to understand that their dollar goes further at Bob Evans in these challenging times. Consistent with this message we continue to watch value price innovative new products.

We are excited about the launch of our new product, the BOBurrito which we have introduced at a value oriented price point of $5.99. Available in both Meat Lovers and Western Style, the BOBurrito is a grilled flour tortilla, wrapped around a fluffy omelet and stuffed with meat, cheese, diced potatoes and scallions, topped with our zesty queso sauce.

In addition, we have established a special internal task force that is focused on utilizing local marketing in our current challenged geographies at Bob Evans Restaurant such as Detroit. We are exploring different marketing programs we can offer to drive sales in these markets, with particular emphasis on our strong, everyday value message.

At Mimi’s Café we are reallocating existing funds to create a pool of marketing dollars so we can communicate our all day, fresh café message with both print and digital advertising. Our new Just Enough menu which now consists of 12 entrees at prices ranging from $5.99 to $9.29 for lunch and nine dishes ranging at $8.29 to $10.99 for dinner has become the most popular portion of our menu.

We are also in the process of developing new in store merchandising to improve suggestive selling and to build our to go incidents. We are specifically focused on driving bar sales, appetizer sales, beverage incidents, carryout and dessert sales to better suggest a selling, restaurant level execution, and by making better use of our sales and marketing tools.

The third brand builder strategy is to improve margins with an eye on customer satisfaction. Consistent with this strategy we continue to move forward with our project Best Way Project which includes our procurement and supply chain cost savings initiatives. We also eliminated a total of 900,000 labor hours during the third quarter of this year. This is in addition to the hours we eliminated in the first half. Most importantly, we accomplished this while maintaining our customers’ satisfaction, brand loyalty index scores, by better correlating our staffing needs with peak dining hours.

Our food products margin obviously suffered from higher than expected sow costs in the third quarter. But in the spirit of controlling what we can control, the team in our plants is doing a great job of improving sow cost deals and managing plant costs. We have also managed our promotional programs much better in this quarter.

Our fourth brand builder is to be the best at operations execution and we continue to make improvements in this area. Our roll out of a new point of sale system at Bob Evans Restaurants is moving forward. The POS system is now in more than 80 restaurants and we anticipate that the full rollout will be complete by the end of fiscal 2010. We believe this new system will help us simplify our order entry, achieve more precise labor 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 easier to learn than the manual process we are using in most of our restaurants today.

We have made significant progress in reducing turnover at the team member level and manager level at Bob Evans Restaurants to the lowest point in recent years. Our Bob Evans team member turnover is now less than 110% and we believe Mimi’s team turnover remains one of the lowest in the industry, hovering at about 100%.

As I mentioned earlier the addition of Harvey Brownlee in the President and Chief Restaurant Officer’s position will help us concentrate on standardizing operations processes and procedures across both restaurant brands as well as identifying additional opportunity for purchasing synergies, by consolidating vendors and purchased items. Harvey and his team will focus specifically on implementing consistent labor processes and consistent cost of sales and inventory processes among others.

Harvey along with Richard Hall, our Senior Vice President of Supply Chain will also help lead a national distribution RFP to rationalize SKU’s and vendors between our restaurant brands; develop a system for total product cost analysis; and help us develop a national distribution mindset.

Our fifth and final brand builder is increased returns on invested capital and as Don mentioned we are recalibrating our capital expenditures budget to better meet this goal. Specifically we expect lower feature capital expenditures for restaurant development in fiscal 2010 at both Bob Evans Restaurants and Mimi’s Café. We have also made the practical decision to suspend our share repurchase program for the rest of fiscal 2009.

Our decision to scale back future restaurant development and to temporarily suspend our share repurchase program reflects our desire to conserve cash and maintain financial flexibility. However, as I mentioned earlier, we understand that we need to improve our unity economics for both restaurant brands to enable us to begin building restaurants again because development is an important part of our long term plan.

We remain committed to our annual dividend rate which we recently increased more than 14% to $0.64 per share. We will provide more specific guidance for the fiscal 2010 capital expenditures with our year-end earnings release in June.

In our food products division our $16 million, 50,000 square foot expansion of our Sulphur Spring, Texas facility continues to move forward. This expansion will nearly double our square footage in Sulphur Springs where we produce convenience food products such as breakfast sandwiches, fully cooked sausage and breakfast tacos for Bob Evans and the Owens brands. We expect this expansion to be complete by May of 2009 to allow us to capitalize on high gross sales opportunities.

So in summary, we continue to remain focused on the things we can control; sales, margins and the intelligent deployment of our capital assets. And 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 - C.L. King & Associates, Inc.

Michael Gallo - C.L. King & Associates, Inc.

The question I have is on the food products side. Obviously declines in comparable pounds sold for you guys has been pretty unusual. I know you noted that the promotions were a little lower than they had been previously. I was wondering if you can tell us what you’re seeing in that environment. Do you expect the promotions to pick up later in the year? Seems like the guidance for the fourth quarter implies another decline in comparable pounds sold. Thank you.

Steve Davis

Well, I think we’re all in the same situation, anybody who’s in the sausage business where we’ve seen some pretty significant price increases at the resale level and obviously when you have the ability to promote more and you saw a lot of two for $5 and two for $4 promotions obviously that drove a lot of volume across the category. I think everybody in the category is now kind of recalibrating and saying how do you operate with a higher cost structure, which is very different than what any of us have seen in probably several years.

So our challenge now is to say all right what’s the right level of promotion? How do we make sure that we remain profitable when we do promotions? And then what else do we have to do in the middle of the P&L to improve our unit margins? In addition we’ve got the conversion to the DSD system and so – I’m sorry, from the DSD system to a warehouse. And there’s a different demand cycle that you have when the customer orders with a warehouse than you do with direct store delivery.

So in many respects it’s like we’re resetting the table, better understanding our needs and then figuring out how to better promote. So think of this next quarter as we’re still doing that conversion from the DSD to warehouse and we’re still kind of working through what’s the right balance between promoting and what’s the right balance between driving sales and making money.

Michael Gallo - C.L. King & Associates, Inc.

The decline in comparable pounds sold versus obviously earlier in the fiscal year when pounds sold for growing significantly I mean have you seen retailers pulling back on orders? Or any feel what’s happening at the retail level?

Steve Davis

Well, again if you’re a customer and you’re in a tight environment and then one quarter you’re buying sausage for $2.50 a roll and then you walk up to the retail shelf and it’s $3.99 I think that is going to have an impact on the volume. So we’re in new territory and we’re working through it and we’ll continue to give more guidance as we learn more.

Operator

Your next question comes from Brad Ludington - Keybanc Capital Markets.

Brad Ludington - Keybanc Capital Markets

Looking again to the food product segment and kind of the cost of sales, I mean looking at it with your sow costs where they were it seems a little higher than what I would have expected for a 58.6% cost of sales. Was there something involved with production not meeting demand or maybe a different structure with the warehouse system? Did that enter into that as well as higher sow costs?

Donald J. Radkoski

Really, Brad, the predominant factor was just the sow cost. I mean the averages you saw $49 compared to in the quarter compared to $31, so that is a – and $31 in the quarter the year before so that was the biggest by far the biggest component in that. There wasn’t anything that I can comment related to demand or anything.

Brad Ludington - Keybanc Capital Markets

You know, it looks like in fiscal ‘010 you’re going to have some stronger cash flow. You’re cutting out some CapEx and some other issues. And maybe not – I know you haven’t guided to this but maybe not repurchasing shares so much. Will there be more of a focus on paying down debt levels or are you happy with where those balances are at this point in time?

Donald J. Radkoski

Well, let me answer we are in the process right now of evaluating the CapEx for the full year 2010. You’re right and we are cutting significantly back on the new restaurant openings at Mimi’s and Bob Evans. We are also looking at remodels at both Mimi’s and Bob Evans and that’s a level we haven’t came to grips with yet. But yes, I mean we will use some of those cash flows to pay down some of the debt that we have as we move into the fiscal 2010 year. We’ll have a lot more on the guidance for CapEx more specific guidance at the fourth quarter call where we’ll have those numbers and can cover it with you.

Brad Ludington - Keybanc Capital Markets

Just to kind of quantify what the lower development might do, what’s the average pre-opening cost per Mimi’s?

Donald J. Radkoski

Mimi’s is running right around $280,000 pre-opening in that range. Maybe a little bit less now but probably $280 would be a good average. And Bob Evans is around $150 would be a good average to use.

Brad Ludington - Keybanc Capital Markets

And then just last thing restaurant depreciation was that – should we expect similar trends due to the remodels and rebuild going forward? With accelerated depreciation?

Steve Davis

I think you’ll see a little bit of an increase there. I think Don gave the guidance on that number. As he mentioned we’ve done a lot of new builds over the last few years at Mimi’s as well as some re-images and rebuilds off the Bob Evans side. So that’s why you’re seeing a little bit of an increase there. But the guidance that we gave I think we should come pretty close to that.

Operator

Your next question comes from Will Hamilton - SMH Capital.

Will Hamilton - SMH Capital

I was wondering in regards to that certainly you continue to see some flavor improvements in both concepts but could you give us any more color as to how much of the roughly 160 basis point improvement might have come between the two concepts? Is Mimi’s contributing more of that now as a result of some of the initiatives you’ve put in place recently? Any additional color on that?

Steve Davis

Well, I mean really I’d have to say you know first of all we don’t break out between Mimi’s and Bob Evans the specific items. But we have been let’s just to labor Bob Evans has been at a labor management system for a longer time and starts to tweak and working with our hours reduction. So as we noted in the press release we’ve seen a bigger hour’s reduction at Bob Evans than we have at Mimi’s. We are in the earlier stages right now at Mimi’s of doing some of the same things that we worked on with Bob Evans in terms of matching schedules to really meet the demands of our customers.

So I would say we’re in the earlier stage at Mimi’s and more to come as we continue to make strides there.

Donald J. Radkoski

Well, the rationale for bringing in a head of operations is so you can get consistency between the two brands. What typically has happened in the past you know one brand would make a discovery and then there’d be this adoption over time. What we’re trying to do is say hey what’s the best way to run a restaurant company. What are the systems and processes we need to have everywhere and let’s get everybody on the same program at the same time so you don’t have that lag effect. So you hope that over time you’ll see improvement, comparable improvements on both businesses because everybody’s working against the same sheet of music.

Will Hamilton - SMH Capital

In regards to Mimi’s you broke down essentially all the goodwill related to that acquisition. And you’ve as you said slowed the unit growth potential at least for the near term next year which I think is prudent. But can you talk a little bit more about the long term potential you still see in Mimi’s? Is it still going to be that growth vehicle you had thought it would be when the company first acquired it and more recently over the last couple of years as well?

Steve Davis

Well, I think when you look across the entire restaurant industry you see that especially in casual dining people are now saying there’s a little bit of overbuilding. And so now what you do is you kind of step back and say all right we have a brand that’s unique and differentiated and so you start out with that. The answer at Mimi’s Café is yes. I think it’s prudent for us to take a giant step back and say all right let’s look at our unit economics. Get that right and then try to get back into the development game.

Now we’ll continue to give you guidance on when that’s going to happen and the timing of that. But that is the game plan. We still believe that we’ve got a great concept. We’ve got great unit sales. We just have to improve the middle of the P&L. And quite frankly development over the last couple of years has been a lot more expensive; construction costs skyrocketed, real estate costs and land and leases skyrocketed, but now you look three or four years later and you’re looking at a different ballgame.

So I think it’s prudent for us to let that settle itself out. We think that construction costs will be more favorable. We think that land acquisition costs should be more favorable, typically commercial lags residential so I think there’s a lot of commercial real estate that may become more attractive in the future. And we’re going to try to put ourselves in a position to capitalize on that.

Will Hamilton - SMH Capital

Lastly then on the food products side I know that these hog costs have defied your expectations for most of this year. But I was wondering if you could give us any more sense to what you’re looking at or thinking about long term for these hog costs? Do you think these prices are sustainable? You know last time we were kind of at these levels was I guess ’04, ’05 for the company. But they did obviously come back down. Is this a more prolonged spike in your opinion for some of these hog costs?

Donald J. Radkoski

Well, we have historically we have not seen hog prices staying in these ranges for long periods of time. But again when we look at the chart and compare any of the previous years to what we’ve seen here recently it’s kind of off the chart. So to some degree we are in new ground and as we look at our fourth quarter we guided significantly higher, $50 to $55. And I would say as Steve said in his comments we have to think about the food products side longer term with higher hog costs – generally higher hog costs.

And we’ll give more specific guidance for fiscal 2010 on our end of the year call. But I think we’re going to have to learn to operate with higher sow costs in the near future anyway.

Steve Davis

We think it’s prudent to take that approach because then if hog costs come down that’ll be a pleasant surprise. But I don’t think anybody’s been very good at forecasting sow costs this year. When you just look at the chart how could you have predicted exactly what we’re looking at? The thing that’s different relative to what we’ve seen in the past is typically there’s some seasonality where the prices start to come down a little bit. This is running counter to that now. How long that can last who knows. We just think it’s wise to say let’s just assume that we’re going to be living in a higher hog cost environment. How do we deal with that? And then if it comes down then it’s an upside for us rather than an expectation.

Operator

Your next question comes from Stephen Anderson - MKM Partners LLC.

Stephen Anderson - MKM Partners LLC

I wanted to ask have you seen any trends up at the restaurant level food costs? Let’s say the dairy and some of the other proteins. And if you have any color on some of the new contracts I would appreciate that.

Steve Davis

Yes, we have in general seen some lower commodity prices in a number of categories. You know, dairy as you mentioned has been one of them. Oil has been one of them. Grains in general which helps our bakery’s been one of them. So across the board we’ve seen some lower prices relative to where they were last year. In the protein complex I think and there is probably where we’ve seen an easing to some degree. But over the long run where that’s going to end up as we move into next summer is a question mark for us.

But right now we are selectively taking contracts where we can lock them in for periods of time in certain categories where think it’s prudent right now.

Operator

Your next question comes from Greg Ruedy - Stephens, Inc.

Greg Ruedy - Stephens, Inc.

I wanted to go back to the food products. I know the balancing of price and promotion is obviously a significant opportunity for you and I know that you’re converting that Sulphur – you’re expanding in Sulphur Springs but outside of that just any other systems protocols or infrastructure that maybe helps you get better visibility in the projecting some of these margins? Do you shorten the lag on couponing? Any other color or devices you can employ?

Donald J. Radkoski

I’m sorry. Could you repeat your questions so I can give you a clear answer?

Greg Ruedy - Stephens, Inc.

Sure. Outside of the shift from the DSD to the warehousing, what devices can you employ to maybe get better visibility to project the operating income on the food products? Do you push harder on non-sausage products? Do you shorten the lag on couponing? Just what are some things you can do there to get better visibility?

Steve Davis

I think I see what you’re getting at. You know we just met with the food products team yesterday and less than a year ago we launched a new line of grilling sausage and we were looking at our share and we have like a one share grilling sausage. And that’s a large and growing category that we have not been a player in. So one of the things that we talked about is we’re going to really have some challenges in roll sausage but there’s a huge opportunity there that quite frankly we haven’t played in.

We basically redesigned our product, changed the packaging, got some good distribution, started promoting behind that. So you know we’re still in the early phases here but we still have opportunity to grow our sausage business just recognizing that that’s a manufactured product versus a cold pack product. And so that’s going to have better margins.

So we’re going to continue to try to find ways to build our sausage business outside of just the roll sausage and we’re going to continue to put our side dish business so think of it as a one-two punch. We still have retailers where we still have very low distribution so that’s an opportunity. And you know mashed potatoes are our leading SKU’s still only found in 48% of the United States. So we still have growth opportunities, we’re just going to have to shift our priorities and emphasis.

And then the other thing we talked about as a team is we’ve really got to own that top ten. You know, really make sure that we’ve got great promotions. I think maybe our approach in the past was promote with everybody. Now it’s going to be we’re going to be a lot more focused against making sure we’ve really covered the top ten.

Greg Ruedy - Stephens, Inc.

So you’ll continue to lead with sausage and follow on with the I guess the convenience and side item products.

Steve Davis

They’re both important businesses and they both have to grow. So it’s not an either-or. It’s both.

Greg Ruedy - Stephens, Inc.

Switching gears to the Bob Evans concept, where it’s positioned any color on recent trade down from casual dining? And then maybe traffic lost to the QSR. And then any changes as to how consumers are using the concept given the macro pressures?

Steve Davis

I think right now all you’d be doing is speculating when you’re talking about trade off between QSR and casual dining. I mean you can pretty much look at the trends over time and draw your own conclusions. The question you’ve got to ask yourself is why do people trade down? And they’re looking for value offerings and they’re not just looking for a low price. They’re looking for how do I get great filling food and how do I get it at a fair price?

And that’s why we’ve evolved the positioning at Bob Evans to “Unbelievable Food at an Unbeatable Value.” So you’re going to see us really drive that $5.99 price point across all date [parks] and we’ve had success with it in the past. Our timing given the economy is right on. And we’re going to continue to press that part.

In terms of Mimi’s Café Just Enough was just something on a sheet of paper a year ago and now today it’s one of our more popular selling lines. Why? Because we’re giving people the kind of food they want to eat at a value price. So I can’t talk to you about trade off between QSR or casual dining or what-not. All we can do is say look, there’s a very price sensitive consumer out there. People are looking for ways to stretch their dollar at great value. And that’s what we’re going to do in our restaurant business so you’re going to see adjusting of lunch. You’re going to see adjusting of dinner. You’re going to see adjusting of appetizers.

I mean this whole line of Right Size, Right Portion is catching on at Mimi’s Café. And then the $5.99 price point at Bob Evans has really done a great job in terms of getting people to think about us versus maybe some other alternatives.

Greg Ruedy - Stephens, Inc.

Following on there Mimi’s if I’m not mistaken the concept does skew toward the women and maybe a slightly older demographic so given the right sizing, the Just Enough and a remodel program how important is it for you to get better guest frequency from an 18 to 34 year old group versus maintaining traffic with maybe the core customers?

Steve Davis

Well, if you ever get a chance to take a look at our remodels, you know some of our Mimi’s Café are 20, 25 years old. And I don’t know if you know the history behind Mimi’s but it kind of started out as a better family dining concept that over time morphed into casual dining with the addition of beer and wine.

What we’re saying now is we compete in the casual dining space, so we have to put ourselves in the position where we can compete with a Cheesecake Factory, with a California Pizza Kitchen, with a PF Chang. And so what we’ve done is we’ve upgraded the environment; we’ve expanded the carry-out; we’ve made the bar more visible; and we just made it a place that seems a lot more updated. So if you get a chance to go out to California take a look at our re-image and then go to some of our older Mimi’s Cafes, you’ll see the difference.

And that’s how we’ve maintained relevance with our existing user but also attract some new users and younger users as well.

Greg Ruedy - Stephens, Inc.

And with that remodel and I think you’re running an alcohol content of 3 to 4%, is there a longer term target in place that you’d like to move that number towards?

Steve Davis

Yes. We’ve got something called a Ten-Ten-Ten-Ten program which is let’s get the 10% carryout, let’s get the 10% appetizers, let’s get the 10% bar and 10% dessert. Now those are aspirational targets but we’re building our business and we’re building our restaurants to be able to deliver on those types of targets because when you look at some of our competitors and some of those categories they’re either at or above those levels. And we’re a little bit lagging. And so that’s going to be our focal point.

Operator

Your last question comes from [Michael Toladano – GTHC].

Michael Toladano – GTHC

What is the current assets – I’m sorry, what was your operating cash flow for the quarter? Because it wasn’t in the 8-K.

Donald J. Radkoski

Hold on for just a second.

Michael Toladano – GTHC

Yes.

Donald J. Radkoski

I have for through nine months we’re about $100 million.

Michael Toladano – GTHC

For the current assets you have on the balance sheet, what are the other current assets consisted of?

Donald J. Radkoski

Well, it’s mostly – you know we have cash and then we have receivables; [inaudible] inventories; and deferred income taxes and a little bit of prepaid expenses.

Michael Toladano – GTHC

Is most of it receivables you’d say or?

Donald J. Radkoski

Receivables and inventories are even, you know in the $27 million range. And then we mentioned the cash is around $15 million, deferred income tax is around $10 million and prepaid is about $2 million.

Michael Toladano – GTHC

How much is undrawn on the $86.4 million line of credit?

Donald J. Radkoski

The amount of the lines of credit that we have are $165.

Michael Toladano – GTHC

So the undrawn is the $86.4.

Donald J. Radkoski

No, that’s the drawn portion. So we have roughly $100 million undrawn. I’m sorry about $80.

Michael Toladano – GTHC

And then what’s the I guess the maturities on the rest of the long term debt? The $176? Is that – I mean when I guess are the big maturities? In the next couple of years or are they far off?

Donald J. Radkoski

There’s $26 million – I think it’s $26.9 to be exact in this summer and I’d have to look up for future dates. Here I have it. It’s $27 million in ’09 and ’10 and ’11. Those are all in July.

Michael Toladano – GTHC

So $27 million due in summer ’09, summer ‘010 and summer ’11.

Operator

At this time I would like to turn the call back over to management for closing remarks.

David Poplar

Well, thanks again 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 look forward to sharing our year-end results with you in June. So thank you very much and that is the conclusion of our call.

Operator

Ladies and gentlemen this concludes today’s Bob Evans third quarter earnings release conference call. You may now disconnect.

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Source: Bob Evans Farms Inc. F3Q09 (Qtr End 1/23/2009) Earnings Call Transcript
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