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Bob Evans Farms, Inc. (NASDAQ:BOBE)

March 12, 2013 11:50 am ET

Executives

Scott C. Taggart - Vice President, Investor Relations

Steven A. Davis - Chairman and Chief Executive Officer

Paul F. DeSantis - Chief Financial Officer, Principal Accounting officer, Treasurer and Assistant Corporate Secretary

Analysts

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Joe Buckley, Bank of America Merrill Lynch's restaurant analyst. We're pleased to continue the restaurant portion of our consumer conference with Bob Evans Farms. The family dining segment of the restaurant industry has been doing better as of late, and you've got some very interesting companies in that space. We're pleased that this conference have several of them in attendance.

I'm going to turn it over to Scott Taggart, who runs Investor Relations for Bob Evans. And he, in turn, will introduce Steven Davis, CEO. Scott, thank you.

Scott C. Taggart

Before I begin, I'd like to refer you to our Safe Harbor statement on Slide 2. By the way, the deck is available on the bobevans.com website as well. Certain information that we may discuss today regarding future performance is forward-looking. Various factors could affect the company's future results and cause those results to differ materially from those expressed in our forward-looking statements. Please refer to our recent filings with the Securities and Exchange Commission for a further discussion of these risks factors.

With that, I'd like to introduce Steve Davis, our Chairman and Chief Executive Officer.

Steven A. Davis

Thank you, Scott. [indiscernible] ready today? Good, good to see you. Thanks for having us. Mr. Buckley, it's always a pleasure. This is a investor fact sheet that -- we've gone paperless, so this is available on our website, correct? We wanted you to make sure that this is available. It's a facts and figures sheet of our company.

I want to start with the vision of Bob Evans. People are asking what is Bob Evans Farms? So it's regional brands, trying to drive them and make them powerful national brands. And as you can see, we've got Bob Evans Restaurants and Bob Evans Food Products. And let's talk about what is our long-term earnings per share growth? Our goal is to drive the company 8% to 12% on a compounded basis. And we basically have 3 pillars that drive that. First is to transform our core business to enable expansion. So a lot of our transformation that we've done over the last 5 years is all about getting the company ready and consistent for growth. The second is to selectively invest in high return on invested capital projects and opportunities, both internal and external. An example of this was our recent acquisition of our Kettle Creations business, which for years had been a co-packer, as part of our Growing Food Products business and we had a great business partnership with them and when we look at the combination of the 2 things could do, we decided to enter into an acquisition agreement.

We like to pride ourselves on being very disciplined with the funds that are generated by our business and it's all about driving stakeholder value with disciplined capital allocation. What's the proof of a 8% to 12%? We always say the past is not always a predictor of the future, but it's a good place to start. If you look at -- since fiscal year 2007, we've grown on a compounded basis of about 9%.

You probably heard about the divestiture of the Mimi’s Café business and one of the questions I was asked when I first joined the company in 2006, and it was a good question, is like, how do you get back to the historical margins that Bob Evans used to have prior to the acquisition? So if you look at the margin composition for Bob Evans, as an enterprise, without Mimi’s Café, it was about 9.5%. Now obviously, a lot of things have happened since 2004, commodities have gone up, minimum wage have gone up, other input costs have gone up. I want to show you this chart. This was the last financial disclosure we did at the end of our third quarter and it shows the margin contribution year-to-date for Bob Evans Restaurants, Bob Evans Food Products and Mimi’s Café. So you see the impact on the margins, basically arithmetic.

This is now our fourth quarter guidance for the end of this fiscal year. And you can see that Bob Evans Restaurants and Bob Evans Foods gets us back to the margins that we had prior to the acquisition. So you can see how all of a sudden, through the divestiture, we have completely changed the margin profile. And think about it, now, you'll have upside with the consolidation of the Bob Evans Foods and Bob Evans Restaurants, and I'll take you through some of those initiatives that we believe are going to drive the margins and the sales.

But if you look at some of the recent programs that we've talked about, our Farm-Fresh Refresh, we talked about the Mimi's divestiture and then the Kettle Creations' acquisition. The Kettle Creations' acquisition is important because we are now 90% vertically integrated within our food products business, which obviously will have favorable margin implications. We like to talk about a balanced approach and it always starts out with investing in the business. And the majority of our investments that you'll see this year or next year is in our Bob Evans Farm-Fresh Refresh remodel program that has had great success in terms of reenergizing the brand, driving sales and improving return on invested capital. Our dividend yield is among some of the top tier in the restaurant industry. And just in fiscal year '12, we returned nearly $100 million to shareholders in the form of dividends and share repurchases. And we've got a very strong balance sheet and we used that wisely. We don't borrow money just because money is cheap, we borrow money for strategic reasons. But as you can see, we're less than 2x our EBITDA with our debt obligations.

So we're well-positioned to invest in not only profitable growth, but also continue our track record for rewarding our stockholders. Just a 5-year track record when you look at how this is split out. Of the $550 million returned to stockholders, $270 million was through share repurchases, $110 million was in the form of dividends, but $163 million was in the form of debt repayment. And as you can see, since 2008, we've nearly doubled our dividends with a 92% increase over that same timeframe.

So what are our sales and profit growth strategies? I'm going to highlight them and then I'm going to go into some detail on each of the business drivers. On Bob Evans Restaurants, you're going to hear us talk about sales layers. We've got a conversation earlier with a potential investor, and we talked about the difference between LTOs and, what we call, sales layers. Now, I've spent many years in Yum! Brands, LTOs can be a very good thing for the business. We're taking a slightly different approach. We want to build layers that we can build upon and continue to grow sales on an ongoing basis. Also you'll see us talk about building new restaurants in core geographies and also in new markets.

In the Food Products business continue to invest in the business organically as well as, potentially, inorganically. And our Kettle Creations acquisition is an example of the inorganic growth. You're going to hear us talk a lot more about corporate synergies and how do we make 1 plus 1 really equal 3 and 4. Because as all people in our space, we face some headwinds with some costs that will be coming over the next couple of years. So we have to try productivity in the middle of the P&L in addition to getting the top line growth. And any investment that we make has to exceed our blended cost of 12% capital.

A lot of people ask, why do you have a Food Products business and why do you have a Restaurant business? And this is the chart, I think, I've been showing for about 3 years now, but we add a new year every year and I think you're starting to see a picture emerge. This is percent dollar spent over time. And this blue line represents what's happening with restaurants. This green line is the percent dollar spent over time in the grocery space. And I listening to some of the companies report earnings over the last quarter, and there had been some supermarket change who have said, despite the softness that happened over the last couple of months, they're doing okay. You've heard some restaurant concepts talk about this has impacted the business significantly.

Here's the benefit you have with Bob Evans, at the end of the day, you're going to eat somewhere. You're going to eat in a restaurant or you're going to eat in a supermarket or get your food from a supermarket. We can capture both. And as you saw from our last quarter's conference call, our Food Products sales growth percentage actually eclipsed what happened at Bob Evans. Even though Bob Evans was positive, the percent improvement was actually higher on the Food Products business. And I think now you're starting to see that chart start to play out. Now, I don't have 12, but if I have a guess, I'm going to guess that, that grocery line is still going up and that restaurant line might be headed south. At the end of the day, 1 share point here is worth $12 billion. So either way, it's a big business but we can play in both.

With the divestiture of Mimi's, we now have a new configuration, 76% of our business is now driven by the Restaurants, which is Bob Evans solely; 24% is Food Products. What I'd like to do now is talking to you about Bob Evans Restaurants. This is our family dining chain, 565 restaurants in 19 states. It's a full-service family restaurant featuring a wide variety of menu items. We serve all 3 dayparts. We're just shy of $1 billion in sales, our average unit sales are about 1.7. Our average guest check per person is $8.97, but one thing I want to point is the average carry out guest check, which is nearly twice that and I'll talk a little bit later about the importance of the Carry Out business.

What makes family dining unique is you do have all 3 dayparts to grow, to innovate and, I think, that makes us unique. 33% of the Bob Evans business is breakfast, 29% is dinner, 38% is lunch. Actually, that 38% lunch surprises a lot of people, they think that the largest segment is breakfast, it's actually the lunch business.

We have 5 brand builders, which drive our key strategies. And the first one is win together as a team, but it's all about building people capability. We're going to be opening more new restaurants. Every time we remodel restaurants, with grow sales and need more people. So we want to make sure that we have the people capability to drive our profitable expansion.

Our second brand builder, consistently drive sales, is all about driving sales layers, both on premise, in the dining room, and off premise. And I'll show you an off premise chart that might surprise you a little bit in terms of where people consume restaurant food. And you'll hear me talk a lot about the bakery, catering and carry out. Once you drive the top line, you got to get into the bottom line, but we say improved margins with an eye on guest satisfaction and I'll show you our guest satisfaction scores over the last 4 years have improved every year.

Elevate the guest experience. We're a restaurant company. We run plants, we have sales organizations, we're an operations-based company. So we have to be great at operations.

And finally, our fifth brand builder is improved returns on invested capital -- actually, increase returns on invested capital. And you'll hear how we've accelerated our Farm-Fresh Refresh remodel program and how we're expanding beyond our 19-state footprint. We've had great success with the Farm-Fresh Refresh program and, originally, when I showed this chart this was over a 5-year time frame, but we accelerated that because we're seeing a 20% return on our investment and the same-store sales of our remodeled restaurants, on average, outperform our non-remodeled restaurants by about 5 points. So by the end of the fiscal year, next year, all 565 Bob Evans will have had the Farm-Fresh Refresh.

I want to show you the difference, because this is what a typical Bob Evans might look like. This is the exterior refresh of a Bob Evans. This is what you might walk into in the old Bob Evans. I always tell people, whose brand is that right there? There's no branding. There is a story about the founder of the company. It's a more inviting and warm entry. And as you notice, we got rid of all the clutter. We improved the counter, which is one of our legacy seating areas. We've totally revamped our dining rooms. But the thing that's really driving the sales, in addition to the lift that we're seeing in the dining room, is the new carry out area as well as the bakeries. Now Bob Evans has always been in the Bakery business. We make pies. We make breads, biscuits, banana bread. But we never showcased it. So what we're now doing is bringing it out to the front. Were also offering it in a grab-and-go format.

This is why we get excited about carry out. Again, taking a giant step back, looking big picture. This is the annual consumption of restaurant meals per capita. And as you can see, less than 40% of dine-in occasions are in the dining room. When you look at the QSR segment, the Quick Service, 70% of their business is off premise. When you look at full-service, it's only 10%. But we've already eclipsed that, and I want to show you a chart of a progression of how, by focusing on the Carry Out business since 2006, where our mix was less than 7%.

Now, I want to show you the growth that's happened year after year. Two years in a row, 2011 and 2012, we posted double-digit growth in carry out. Why? Because we've launched programs like Family Meals To Go. Our Bakery business and right now, today, only half of our restaurants have the full bakeries, because we're only halfway through our Farm-Fresh Refresh remodels. Catering, we just launched our catering program and we're having great success with that. We see this potentially, if we get our bold goal at 25% mix and we're already at 11%, this could be a $300 million layer for us.

So what's driving it? Well year-to-date, the Carry Out business, which is 11% of mix is up 6 points 6%. Our bakeries are now contributing 1.3% mix, but again that's only in half of the restaurants. That's growing at 20%. And catering, although on a low base, we're seeing some great success. And really, all catering is just larger carry out orders.

A lot of people have talked about the economy and how are we playing value. It's real simple. We're giving you more value for your dollar. For example, in the breakfast space, our Farmer's Choice Breakfast, which is the legacy item we have, we have an All You Can Eat Hotcakes, now that's a $45 million contributor. Two years ago, we launched 10 meals under $6, and that's now $35 million of revenue. And just last year of May, we launched our 3-course dinner, and it's a real 3-course dinner, no sharing, no trade-offs, no nothing. The big winner on this has been choice, value and variety. And right now that's $60 million of our revenue.

People have asked us, how are you engaging the next generation? Because Bob Evans' skews heavy towards baby boomers and the greatest generation, but we know Gen X families are right behind and Gen Y is right behind them as well. Well one of the things that we've been very pleased with, when you look at bobevans.com, we've had 9.5 million visits to our website, and that's increased 50%, big conversion opportunity for us. Our email database, which we do very few pre-standing inserts and direct mail anymore, because we built an email database of 850,000 subscribers. But what I said to the team is if you get a 10% conversion off your website, you can double the size of your email database. Our online ordering, which we launched about 3.5, 4 years ago had 336,000 orders. Our mobile site is up 34%. Our mobile apps are up 200% and you can find us on YouTube, of which social media is now becoming a larger component. You can find us on Facebook, Foursquare and Twitter. But one of the things we just launched through Yammer is an internal sales blog. So now when people have great sales building ideas, they post them online and share them within the Bob Evans community. So when somebody has a great carry out or a great catering program for a week, and this is a true story, somebody had a $7,500 order, all the facts and the stories are now on that website. So people can figure out how to go out and do catering.

We're here to elevate the guest experience. And I want to show you the proof that over the last 4 years, we have driven and we usually are in the top tier of guest satisfaction according to the Nation Restaurant News survey, and this is our mine share data, so this looks at us and the competition. But as you can see, we've grown almost 6 points of guest satisfaction and significantly improved our speed of service.

Our new restaurant opening strategy will be as follows, we'll be going to core markets. So in our 19 states, we actually still have open spots. This is a restaurant that we open up in Petoskey, Michigan. In new markets, we penetrated our 19th state, which is Arkansas. So we have a restaurant in Fort Smith as well as Rogers, Arkansas.

I'd like to take a couple of minutes now and talk about that Food Products business, which is our -- 24% of our net sales, $315 million. There's 4 key lines of business that split out as follows: 40% of our Food Products business is the Side Dish business, 28% is Food Service 25% is Sausage, 4% is Frozen. If I had shown you this chart 5 years ago, Sausage would have been, by far, the largest contributor in terms of sales. So you can see the growth of both the Side Dish and the Food Service business.

What are our 5 brand builders key priorities there? We're going to continue to expand our in-source relationship and we mean in sourcing, our Food Products business actually makes products for our restaurants. So in many respects, we're vertically integrated within our Restaurant business through our Food Products business but also gives us some food service opportunities outside of the Bob Evans franchise. You'll see us grow this through new authorizations as well as new product innovations. I'll show you a chart later to show the importance of our LEAN manufacturing initiative and how that's been accretive. We'll continue to optimize our plant and distribution network. And in terms of returns, this is where some of the best return on invested capital has been within Bob Evans.

I want to show you a progression of the number of supermarkets that Bob Evans sells its Food Products. In 2005, we're in 12,000 locations. This year, we're in 30,000. So we've almost tripled it. With our goal of being in 40,000 locations by the end of fiscal year 2015. If I were to do kind of a red, yellow and green, it's no surprise that most of our strength is where we have Bob Evans Restaurants. But I'm here to tell you, we sell Bob Evans Food Products in all 50 states, also Canada and Mexico. And I talked about our Kettle Creations acquisition, which now takes us to 90% vertical integration because what this does is it gives us proprietary manufacturing capability, it gives us an opportunity to drive Food Service business during off-peak production, and it reduces the reliance on the Sausage business because I'll show you a chart how sow cost has been offset by the fact that we've made some of these strategic changes within our Food Products business. And also because now we own the manufacturing, we can innovate a lot faster versus having a co-packer relationship.

I want to show you chart to show how these restructuring initiatives have changed the margin profile of our Food Products business. So in fiscal year '09, our end of the year operating income was about $15.6 million. Well in 2012 alone, the increase in sow cost hit our profitability by $17 million. If we hadn't done anything. Obviously, we would have dropped to about $3.2 million in profit. But we launched our lean manufacturing program, we transitioned from a direct store delivery model to a warehouse model, we expanded our Side Dish business, and we optimized our plant network and our profits rose to $20.5 million and our guidance this year is to go through $30 million to $32 million. So you can see how we've offset the reliance or the relationship that we used to see as sow prices would go up instantly, our profitability would go down. But as you can see, the contribution of the Side Dish business plus the productivity has nearly doubled the profit contribution since fiscal year '09.

So we talked about the Bob Evans Restaurants and our sales layers, our Farm-Fresh Refresh and our new development. We've talked about Food Products and how we're going inorganically and organically to capitalize on the great returns from this business. I want to talk a little bit about how we're going to attack some of the cost headwinds that we're going to be facing in the next couple of years. So as you're well aware, there are some headwinds out there. You know that there's healthcare costs that are probably going to go up. We've got an ERP implementation that we're going to be launching. When you invest in Farm-Fresh Refreshes, you're going to see a depreciation hit. We know that minimum wage increases are probably going to be in our future. And as we talked about in our last conference call, we do have some stranded cost left over from the Mimi's acquisition -- or I'm sorry, the Mimi's divestiture.

So what are going to be some of our offsets? Well, we've had tremendous success by integrating our supply chain. You'll hear us talk more about an enhanced labor-management program using -- most of our labor-management has been through internal initiatives. We're now working with a consultant to help us better manage our labor and improve our overall systems. You'll see us continue the back of the house optimization; you saw that restructured our debt; we announced food products plant consolidation, but there's more optimization work to do there; and the LEAN manufacturing is just not for the operations of that the Food Products business, there's some LEAN manufacturing techniques and processes that we can apply to the Restaurant business.

Here are some of the things that we're looking at. Why are we doing ERP? ERP is going to help us better understand the profit contribution of our marketing initiatives, the profit contribution by SKU and also trade spending, which is a large portion of the marketing spending for any CPG business. ERP will help us better understand that.

All these things we're working on. Later on you're going to hear us talk about a new restaurant prototype. You'll hear us talk about Farm-Fresh Refresh 2.0 because the challenge I gave the team is okay. They're going to go through this wave of Farm-Fresh Refreshes, what's next? So our next Farm-Fresh Refresh initiative will not only be on sales driver, it will also be on the back of the house optimization. And then when the opportunities are right or makes strategic sense, we're open acquisitions.

I'm not going to spend a lot of time on the fourth quarter outlook, that is available on our website. But needless to say, we are projecting still positive same-store sales on Bob Evans Restaurants, strong sales growth coming from our Food Products business and our guidance, I want to point out, does include, short-term, the impact of the Mimi's stranded cost. Because we are going to be providing a transition services arrangement with the people we sold the company to and our CFO can talk about that a little bit later.

So this is our value creation story: Transform our core businesses to enable expansion, selectively invest in high return on invested capital growth opportunities and drive shareholder value with disciplined capital allocation.

So I believe now it's time for Q&A.

Question-and-Answer Session

Joseph T. Buckley - BofA Merrill Lynch, Research Division

I'll and launch the Q&A. And again, we encourage audience participation, please wait until the microphone reaches you before you ask your question. First, I was going through my introductions, I didn't mention Paul DeSantis, the CFO of Bob Evans. So I figured I should mention as Steve was passing the buck on some of those tough questions to Paul, it's probably important we all know who he is. Steve, I'd like to start with a very big picture, non-Bob Evans-specific question. You've had experience across multiple segments of this industry, back in the Yum! Brands days, obviously, with QSR and then with Mimi’s Café in casual dining and Bob Evans' family dining, can you talk a little bit about the state of the segments and it seems, I think, I mentioned in my introduction that the family restaurant segment has picked up a little bit as of late. So a lot of interesting things going on in your company, some of the other companies as well. Please talk about what you think is going on there.

Steven A. Davis

It's no secret that the consumer is under a bit of stress. And one of the things that I think we can say is that family dining has really stepped up in innovation. Carry out, as an example. Remodel programs is another example, being tighter on value. And then when you think about it, we compete with both. I mean, you don't have customers saying, well, I'm going to go to a family dining restaurant, I'm going to go to casual dining restaurant, they pick based on the food choice, and then they're going to look at value. And so if you have a strong brand identity, where you got clear brand positioning and if you innovate, I think you got a pretty good shot. And as I've said, the one thing we've really been focused on is driving sales layers. Carry out is a sales layer. These bakeries are a sales layer. We treat value as a sales layer. And so we don't think anytime soon value is not going to come off the table, it's something that's going to be a key driver. But I think with the lower guest check, I think family dining is a little better positioned, given the stresses that are happening, I think -- and Malcom can probably give you some insight on this. But I think what happened in February was you had a combination of a tax increase, you had gas prices spike up and then you had uncertainty. So I think people pulled back a little bit but, I think, they pulled back less and -- and I don't know this for a fact, but I'm going to guess, they pulled it back a little bit less in the family segment than they did the casual segment. Malcom is nodding his head. So I think were well-positioned with our price point. But again, it's all about innovation, it's about brand differentiation and it's about staying relevant and then figuring out how do you maintain your core customer? And that was something very critical with our remodel. If all we did was bring in new guests but our loyalists, who's coming in 3 to 5 weeks, didn't like our remodel, that would've been a failure. The beauty of this is our loyalists liked it and our new guests like it. So we did get a win-win out of that. Thank you.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

I had the benefit of visiting one of your Farm Fresh Refresh remodels back in June, had breakfast there, which I do think is a [indiscernible] Bob Evans, you're lunch business is a little bit bigger. And I appreciate all the multiple messages. It was a great experience and it was a beautiful looking restaurant. But talk about the multiple messages being delivered around the Bakery and the Take Out and you mentioned your core customer, how have they responded to it?

Steven A. Davis

The core customer likes the improvement in the dining room. So that was long overdue, that needed to happen. The other thing we did and we announced this 2 years ago, we used to have something called a Corner Cupboard, which was about 650 SKUs that drove 2% of sales, wasn't probably the greatest return on investment, but it wasn't given a good brand statement and when you saw the pictures I showed earlier, where it's like, there was nothing in that lobby that talked about the founder. And not all brands have a founder. We've got a powerful story that we weren't telling. It's one of the comments we've gotten back from our loyalists is you brought Bob back. So I thought he never left, we just didn't honor him the way we should have. And then the Bakery is something that people see on the way in. But on the way when they're cashing out, it's a great impulse item. And most of these items we sell on the bakery are the grab-and-go, already pre-boxed and ready to go. And then the carry out, we were under spaced on carry out, I mean, for 11% of the business, there was no 11% of the space. We had a restaurant in West Virginia where they had actually, we closed off a part of their dining room because they were doing 20% carry out. So when you see stories like that, it's like, wow, we're capping an opportunity based on that chart where 60% of restaurant consumption is off-premise versus in the dining room. So that's been one of the changes.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

We have a question here.

Unknown Analyst

Just sort of given the successful integration of Kettle Creations, are you looking more towards vertical integrations on the Packaged Food side or more horizontal ones, what are you looking at there?

Steven A. Davis

Well we looked at both. And I will go public with this. I read an article once, and it said, don't go shopping when you're hungry for acquisition, that's when you make for mistakes. And so we have been doing business with Kettle Creations since 2009. Great customer. Great business partner. They were helping us with a lot of the innovation, so it just made sense. And one of the things that sometimes gets overlooked is the cultural integration. I mean, it's an Ohio-based company in Lima, Ohio. So there's a great story. Bob Evans roots are in Ohio. This is Lima, Ohio which is an economically challenged area. So Bob Evans aligning with a successful growth company was a great Ohio story. And I'll tell you what, I've never seen a more seamless integration, culturally. We still got some work to do in terms of bringing the manufacturing and the like in. But culturally, when we threw them a challenge and, right away, they just jumped right into it, told me that this was going to be a good success story for us. If I were to do something more horizontal, it would have to be complementary. It wouldn't make sense to get another Roll Sausage business because Roll Sausage is starting to compress, but if I can get into something that would complement the Side Dish business. And then the other thing I want to look at is what is going to happen to the margins. I think the story we told with Mimi's was the case of don't bring in a business that's going to take your margins the opposite direction. You want something that's going to be accretive to your margin. I know this is simple stuff, but that's the screen I go through when we look at acquisitions. Yes, sir?

Unknown Analyst

A couple of questions around opportunities for asset monetization or optimization. So on the real estate side, could you talk a bit about how you think about that asset, whether there are opportunities to monetize it and, if so, kind of what's the cost basis would be, is that an issue? And I have a follow up but I'll just...

Steven A. Davis

I'll start out strategically about our asset strategy and then I'll let Paul talk about some of the implications if we ever did that. When you start out with the sale leaseback back, you say, okay, what's the reason for doing it? You're going to put a liability on your income statement. The advantage of owning a real estate, and we've done this for years, when I first joined the company 6 years ago, we closed over 60 Bob Evans Restaurants. Now that would have been tougher to do if those had all been leased, I guarantee you. So we closed the restaurants, sold most of that real estate, and now when we're doing this Farm-Fresh Refreshes, I had an experience in the prior life, came behind a sale leaseback, couldn't even remodel the restaurant. There are all these contingencies and restrictions of things you could and couldn't do. We decided ourselves, we want to do this in 5 years. Then we decided, we want to do it in 4 years. Well we got aligned, we're getting it done. So it gives a tremendous flexibility. Number two, if you look at the borrowing cost, we can borrow money for a lot less. I mean, we just did a recent borrowing and we're at LIBOR plus, what? Half-point. If I did a sale leaseback, and I've seen rates on those they are not even close. So if I wanted to borrow money, that wouldn't be the first place I'd go. Paul, you want to talk a little bit about the cost basis and some of the other implications, financially, of doing a sale leaseback?

Paul F. DeSantis

Sure, yes. I mean, when we look at it, so we look at it in terms of a financing technique, just like any other financing technique, and we've ranked from low to high, if you will, kind of in terms of cost and flexibility. And so where we are right now is probably the lowest cost, highest flexible way to finance our business. And then we've just gone through said, well, as we've stepped all the way through, how do all of these opportunities to finance look? And if you get to a sale and leaseback of the assets, the way that, that looks to us is it's an ever escalating cash payment out right because the payments go up over time. So we'd be trading where we stand now with cash flexibility. For noncash flexibility, we'll never have the asset again, so it's gone so you can only do it once and never again. We lose the flexibility that Steve talked about. And so as we've ranked all of these things, that ranks near sort of the bottom of our list of things that we would do. We also look at this in context of our capital allocation strategy. And our capital allocation strategy, and Steve articulated this earlier, we're investing in the core business, we're paying a dividend, we're buying shares back and we're keeping some powder dry for acquisitions. We're really beyond de-levering at the moment. And so, we can fund all of that right now with our current capital structure and it leaves us in a position where we're in the sort of 1.5x to 2x levered range, so that we have some leverage on the books, but we also have the ability when the next Kettle Creations comes up to go right out and buy it. And so depending on what those are and how those flow, we'll take a look at our capital funding strategy, of which sale and leaseback is a component. Just to go back in and to the other side of the question, we lease about 86 restaurants right now, we own the rest. Our properties are not here in Manhattan, they're kind of Manhattan, Kansas properties, we've owned them for a long time. You can imagine there's a relatively low ownership basis in those restaurants. And so, all of that factors in as we think about the attractiveness of our different financing options. Does that answer your question?

Unknown Analyst

Thank you both for the detailed response and just a final question, on the subject of franchisees, could you talk about, again, maybe a strategic and financial perspective there, is there any opportunity to exploit that lever to a greater extent?

Steven A. Davis

Yes. And part of it is, you've got to have the margins for a franchisee to make money. Because, obviously, you'll charge a franchise fee. And then the other thing you want to do in franchising is you want to set that up as a core competency. Right now, our core competency is in running restaurants and I'm a firm believer, it's hard to do both, because it's almost like you're neither fish nor fowl. And we've been very successful being able to do the things we need to do, especially in this transformative stage. Now, is it out of the question? No. Is that what we're going to be doing anytime soon? I don't have a reason to do it right now because we're having a good success being company owned. Thank you. Yes, sir?

Unknown Analyst

I have one here, a couple of questions related to the ERP. One, could you talk about who the vendor is? Secondly, how much is it going to cost you and then what the timing is on the rollout?

Steven A. Davis

Well here's one of our ERP steering captains, so I'll turn it over to Paul.

Paul F. DeSantis

I don't recall whether we've publicly announced to our vendors for the software. So I'm not going to publicly announce it. We've gone through an extensive RFP process to find sort of a state of the art software provider that can provide us software that'll support both our Foods business and our Restaurant business, because we have little complexity associated with that. In terms of the system integrator, we are working through that process right now and negotiating as we speak and so I'm not at liberty to discuss that. The costs will be in the -- we haven't really announced the cost side, but I think we've said that we're going to spend $10 million of capital this year in terms of that and then there'll be some capital spending associated with that next year as well. And we'll give more guidance on that as we lock down exactly where we stand.

Steven A. Davis

We've been readying for 2 years and some of us, many of us have experience with that and other companies. A couple of things, one is take your time, two is know what your endgame is. And we're going to start with our Food Products business. We've got very good data on the restaurant side of the space. But if I ask the same question on the Restaurant folks, I can get that answer in less than an hour. If I ask my Food Products folks, it might be 30 days before I get the answer. So that's where the biggest benefit is going to be. And then the other thing is we're not doing Big Bang, we're not taking the whole organization at once. So we're starting up with Food Products and then doing some of the back of the house. The restaurants will probably go last, and that's the biggest part. So don't learn on the biggest part, learn on the smallest part.

Unknown Analyst

When you guys talk about in Food Products, the 30,000, I guess, the 15,000 doors growing 30,000 doors. Now, I think in the '15 going up 50 000 --

Steven A. Davis

40,000.

Unknown Analyst

40,000, excuse me. The revenue growth that you have in that segment, it doesn't totally correspond with the door growth. Can you talk about what the algorithm is of door growth and revenue growth for food products and why the delineation? Theoretically, they're comping okay in their existing doors.

Steven A. Davis

Well, there's a couple of things going on: One is the actual increase and distribution of multiple items per door. So that's one thing that's taking place. And the other thing is the Side Dish business has just been wonderful. You saw in the last quarter's numbers, we were talking about some of the growth we've seen in that business. And you'll just continue to see us add more points of distribution, but you'll also see filling out -- I've got a top 20 initiative going.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Thank you very much for coming. We're out of time.

Steven A. Davis

Thank you.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Thank you so much for coming.

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