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Bob Evans Farms, Inc. (NASDAQ:BOBE)

UBS Global Consumer Conference

March 13, 2013 10:30 am ET

Executives

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

Scott C. Taggart - Vice President, Investor Relations

Steven A. Davis - Chairman and Chief Executive Officer

Analysts

David Palmer - UBS Investment Bank, Research Division

David Palmer - UBS Investment Bank, Research Division

Okay, so we're going to kick things off. Good morning. I'm David Palmer. As the food and the restaurant analyst, it's perhaps doubly appropriate that I introduce a company that's looking for growth in both segments of where we eat. We're honored to have Steve Davis, Chairman and CEO of Bob Evans Farms, with us here today; Paul DeSantis, CFO; Scott Taggart, IR.

Before joining Bob Evans, Steve worked at Yum! Brands, company that we've known and liked for quite some time, where he'd been President of Long John Silver's, an A&W All-American Food restaurants since 2002. And previous to that, he served a variety of operations management and other executive positions at Yum! Brands' Pizza Hut division, including Senior VP of the Concept Development when his team introduced the WingStreet concept. before joining Pizza Hut in '93, he was with Kraft General Foods for 9 years. His last position with Kraft was Director of Marketing for All American Gourmet. Earlier in his career, he spent some time in the Cheese division. He has an MBA from Chicago and a Bachelor of Science from University of Wisconsin in Milwaukee.

Thank you again to Scott, Paul and Steve for joining us here today. I'm going to pass it off to -- okay, Paul?

Paul F. DeSantis

Scott.

Scott C. Taggart

Okay. Before we -- good morning. Before we begin, I'd like to refer you to our Safe Harbor Statement on Slide 2.

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 further discussion of these risk factors. Also, I'd like to point out that our DAC [ph] is available on our corporate website at bobevans.com.

And with that, it's my pleasure to introduce Steve Davis, our Chairman and Chief Executive Officer.

Steven A. Davis

Thank you, Scott. How's everybody doing this morning? Good. Thanks for coming and spending some time with us. And I just always like to start with our investor fact sheet that's on our website. So it gives you a quick sense for who we are, our products, where we sell our products. And then on the other side of the investor fact sheet are our 5 key strategies, which we refer to as our BEST Brand Builders: Win Together as a Team, Consistently Drive Sales Growth, Improve Margins with an Eye on Guest Satisfaction, Be Great at Operations and Increase Returns on Invested Capital. That's what we're all about. So if you get a chance and you go to our website, that investor fact sheet is there. It's a quick 1-page summary for understanding what we're trying to do with the business.

I'd like to spend the majority of the time talking about where we're trying to take Bob Evans Farms Inc. post the separation of Mimi’s Café and what some of the growth opportunities are going to be.

Our vision has not changed: make our regional brands powerful national brands, but now it's focused on what I'll call the Bob Evans 2. It's Bob Evans Restaurants and it's Bob Evans Farms Food Inc.

I'll do a drill-down on both of those in terms of not only the composition of the business but also where we're trying to take it strategically.

I want to start out overall with our long-term guidance. Our shareholder value creation goal is to drive our adjusted long-term earnings per share growth 8% to 12%, and that's driven by 3 strategic pillars: One, transform our core businesses to enable expansion. And you'll see, over time, we've made some major transformations to the 2 businesses. One of the biggest transformations that's taking place right now is what we're calling our Farm-Fresh Refresh remodel program for Bob Evans Restaurants, and a series of transformations have happened with food products, and I'll show you the financial impact of those transformations. I think they're quite significant and gives you a sense for what we're trying to do with our Food Products business.

Selectively invest in high return on invested capital growth opportunities, both internal and external. So some of the acquisition work that you have seen us accomplish over the last 6 months was an example of external, inorganic opportunities that have been able to transform the food product business. But we always have a very, very laser focused on making sure that, when we make these acquisitions, that they're going to be accretive and we'll get a great return on them.

And then, finally, drive shareholder value with disciplined capital allocation. If we do the first 2 pillars, which is transform and drive sales growth, grow the enterprise, make the right selective investments, it's easier to deliver on that third pillar, which is making sure you're driving stakeholder value, but it's all about disciplined capital allocation.

When you look at our 8% to 12% growth, we say, "Well, how can you get there?" and then I always say, "The past is not a predictor of the future, but it's always the place to start." And as you can see, with the configuration of our 3 businesses in the past, we were able to drive adjusted EPS growth of 9% from fiscal year 2007 to fiscal year 2012.

This is a question -- when I first joined the company, I used to get this question a lot. I joined the company in 2006, and people would always say "Well, Steve, how can Bob Evans get back to historical margins prior to the Mimi’s acquisition?" Well, one of the challenges we faced is casual dining typically has a lower margin profile than family dining, and there are a variety of reasons for that, but just -- when you look at the numbers, and you can do your own fact checking, when you take a lower-margin business, put it with a high-margin business, you're going to lower the margins overall. And essentially, that's what happened.

What I'm showing you here is our last earnings release, which is year-to-date through Quarter 3 of fiscal year 2013. And Bob Evans' margins were at about 8%. Food Products' margins were almost 9%, but as you can see, the negative contribution by the Mimi’s business -- so you went from a 9.5% consolidated business to a 6% consolidated business.

Now I'm just going to share with you our Q4 guidance for fiscal year 2013. And as you can see now, the combination of just Bob Evans Farms Restaurant and Bob Evans Farm Food take you back to almost the 9% consolidated margins that we had prior to the Mimi's acquisition. Now a lot of people are asking, "Okay, so where does that go from there?" And so when we have our end-of-the-year earnings conference call, we will provide guidance for fiscal year '14 and also give you some insights on where we think the business can go in the next 3 to 5 years, but I just wanted to lay out this margin profile to show you how things have changed as a result of the divestiture.

What are some of those transformation that have caused this? One is the Farm-Fresh Refresh program, because you're probably asking yourself, "Why did some of the Bob Evans margins go down?" Well every time we do a Farm-Fresh Refresh, we close the restaurant for 5 to 7 days. So you lose sales days. Just for perspective, we'll have approximately -- I think the number is $3.2 million, and this is in our investor fact sheet. $3.2 million in lost sales as a result of closed store days and startup costs. We always have startup costs whenever we do a remodel. You've got training, you've got some other startup issues that get factored into it. That's about half. So going out into the future, eventually those expenses will go away when we finish our remodel programs. So that's why you're seeing a little bit of margin compression on Bob Evans Restaurant. The one thing I want to point out with Bob Evans Food Products is, in 2004, average sow costs probably range somewhere between $35 and $40. Sow costs now are $55 to $60, so you'd think that the Food Products margins would be much lower. What has happened over time is the side dish business, which is not reliant on sow cost, is now a bigger part of the business. And so 24% of our business is impacted mostly by sow costs on the sausage side, but our side dish business does not use sow cost in the formulation of the product. So therefore, you have a better margin composition, and that's why you're seeing an improvement in the BEF numbers from 8.2% to 8.8%. I've got a chart later on that'll go into a little bit more detail, many of the things we've done to improve the margins with the Food Products business. And as you can see, our expectation over time is to exceed those pre-Mimi’s Café acquisition numbers on Food Products in the fourth quarter, because our guidance is 9.5% to 10% on the Food Products business compared to 8.2% back in 2004.

We like to talk about a balanced approach to capital allocation, and the first part of the balance is making sure we invest in the core business, making sure that we're investing in things that are going to drive the business, whether it's Farm-Fresh Refreshes, I'll talk to you about our sales and growth layers. Essentially, we start with, "Where do we place our bets inside of the business?" And as you can see, just with the Farm-Fresh Refresh program, we're going to put $150 million into the business in terms of bringing the restaurants up-to-date but also providing sales growth layers.

Take a look at our dividend yield, which is among the top dividend players in the segment. And we've returned nearly $100 million to shareholders in 2012 in the form of dividends and share repurchases, and we're very strategic with our use of debt. We have the word "prudent," but I prefer to use the word "strategic." We don't borrow money because money is cheap; we borrow money because we put it to use, and we put it to use in strategic fashions. We generate enough cash flow to fund the Farm-Fresh Refresh, to expand our plants and to make other capital investments. So when we use debt, we use it very sparingly and we use it very strategically.

So essentially, we're well positioned to invest not only in profitable growth, but also reward our shareholders long-term with our dividend policy as well as our share repurchase strategy. Again, just looking back historically, I'm going to show you a pie chart from fiscal year 2008 to fiscal year 2012. Nearly $550 million of cash has been returned to shareholders in the form of share repurchases, which from that time frame was about half of the $550 million. $110 million was paid out in dividends, and we have lowered our debt by $163 million. We have since increased our debt for the Kettle Creations acquisition and some other strategic decisions that we've made, but again, still a low debt ratio relative to maybe the competitive set.

Our annual dividend rate since 2008 has increased 92%, and our strong balance sheet supports the growth strategies that you're going to hear me talk about with Bob Evans, the growth strategies that you'll hear me talk about with Bob Evans Foods, and I'm going to show you a page later on that talks to you about how we're going to continue to drive productivity.

We've had great success with supply chain, great success with labor management, great success with lowering food costs, and these are strategic initiatives. This is not just through cutting hours. This is not through food reengineering. This is going into our supply chain, this is going into our business and saying, "How do we do things better, efficiently and effectively?" But we understand that there's some headwinds that maybe some of you are concerned about. We'll talk about those macro headwinds, but we'll also talk to you about the things that we're doing to try to more than offset those headwinds. And at the end of the day, our investments will be required to exceed our cost of capital.

I want to come to a page here, because a lot of people asked -- they said, "Why do you have a Food Products business and why do you have a Restaurant business? It's kind of unique." And it is unique. But let me show you a macro chart. I always like to operate from these macro charts, see what they're telling us, and then say, "Okay, how do we best take advantage of what's happening from a macro perspective?" I want to show you a chart that shows percent dollars over time. I'm going to show you one line for restaurants, and I'll show you another one for what's happening in the grocery segment. This chart goes back to 1982, and this is the percent dollars spent over time. The blue line there is the Restaurant line. So as you can see, in the mid-2000s, that line started to peak, and as of late, that line has started to trend down. This is what's happening in the grocery channel. And you probably heard recently the major supermarket chains announce in February that, things weren't as bad as maybe some people played them out to be: "We're actually seeing some good sales, our consumers are resilient, they're coming into our stores and buying products." You may have heard some restaurant chains talk a little bit about some softness. You probably saw the Knapp-Track data, and you probably saw the Black Box information. I think what you're seeing is, you're seeing this chart played out that, in the restaurant segment, it's going to become more of a share battle because maybe, in the past, you could live off category growth. That means you have to be very sharp with your brand differentiation, with your marketing, you have to be sharp with your productivity initiatives, and you have to make the investments in your assets to keep them relevant and not only maintain your current user base but also attract the next generation of restaurant-goers, because that's the yin-yang that you have to strike.

On the Food Product side, what we like is consumers have to eat, so they're going to eat in a restaurant or they're going to buy food at a grocery store. That's what we like about Bob Evans. So if they start to cut back their restaurant consumption, they're going to shop at a grocery store, so we have that unique yin-yang that maybe some of our competitors don't. At the end of the day, one of these share points was worth $12 billion. So you're talking big numbers here. So we've got great -- and even if the line for the Restaurant goes down, it's still a large business, and it really does become a share gain.

So this is the split of our 2 businesses. Bob Evans Restaurants is about 76%. Food Products is about 24%. And again this now excludes Mimi’s Café, which was sold on 2/15 of this fiscal year.

I'm going to start out and go a little bit more deeply into Bob Evans Restaurants and some of the great things that are going on there. This is our family dining chain. 565 restaurants in 19 states. Our net sales are just shy of about $1 billion. Our average unit sales are about $1.27 million -- I'm sorry, $1.72 million. Our average guest check on a per user basis is $8.90. I want to show you this average carryout guest check, because it's almost $17, and I want to show you some trend charts as to why the off-premise business is important to us.

Basically, when people ask at Bob Evans, I tell them the business is about a 1/3, 1/3, 1/3. 33% is breakfast, 38 % is lunch, and about 29% is dinner. What are the vital few priorities? You heard me talk about our 5 Brand Builders. We always get the team down to, what are the must-dos? What are the things we have to do to be successful? Well, to win together as a team, we have to build bench. We have to build people capability. Every time we remodel a restaurant, sales go up; we have to hire more people. Every time we open up a new restaurant, we hire 60 to 80 new people, so we have to build that people capability as we get back into the development game.

Continue to drive profitable guest counts both in the dine-in channel and the off-premise channel. And off-premise, for us, is going to include bakery, carryout and catering.

Continue to improve our margins. I always tell the team, "Be smart enough to drive the top line but be smart enough to get it to the bottom line." And we're an operations-based company. We run restaurants. All of our restaurants are company-owned. We run plants. We have to be great at operations. And continue to drive the Farm-Fresh Refresh program so that we can improve our returns on invested capital, and one of our must-dos is get out of our 19-state footprint. You probably have heard a lot about our Farm-Fresh Refresh remodel program, and originally we started out with a 5-year commitment, but we've had such great success with this program, we accelerated to get it done in 4 years. So by the end of fiscal year '14, we'll have all 565 Bob Evans remodeled. You'll see a 20% average return on investment because we're seeing about a 5-point differential between a remodeled restaurant and one that is not remodeled, which makes sense. The restaurants that aren't remodeled don't have the expanded bakery, don't have the expanded carryout, have the older dining room, have the old restrooms. It's an older configuration of a Bob Evans. I'll show you how this transformation takes place.

This is what you may have seen in the past. That's the earlier version of a Bob Evans Restaurant. This is the new exterior that we do. And again, the average remodel cost is about $225,000, so it's both interior and exterior improvements. I always say to people, whose restaurant is this? There's no branding. We sell -- or at the time, we would sell an area of the waiting area called the Corner Cupboard. It was 650 SKUs. It drove about 2% of sales. In my mind, it didn't really build the brand and it just created a lot of complexity, and we are never certain how much money we made on all those 650 items. What have we done now? We've -- many people say, when they see the new Bob Evans Restaurant, they say, "You brought Bob Evans back into the restaurant because" -- sorry, let me go backwards. I didn't realize I was pushing that. Sorry about that. We tell the Bob Evans story. We clean out all the 650 SKUs that weren't driving sales, and our business peaks Friday through Sunday, and so we need a place for people to sit and be relaxed while they're waiting for their dining table.

We've also redesigned the counter. We've expanded and redesigned the dining room. We were long overdue for a dining room facelift with a new counter and with a new expanded dining room. But here's what's really starting to drive the sales. Yes, we are seeing a lift in the dining room. But our business, and I'll show you a carryout chart, how our carryout has gone from less than 7% of our mix to over 11% of our mix over a 6-year time frame, and the last 2 years, we've seen double-digit growth with our carryout business. And that's with a footprint in half of our restaurants that really isn't carryout-conducive. So we expand the carryout area, and we also introduced our bakery. Now we've always baked items in Bob Evans. We bake our own breads, we even bake pies. We've done all these wonderful things, but we never showcased them, and we never put them in a convenient grab-and-go format so if you want something and you're on the go, you can just grab it and, when you're checking out and paying, you just grab it with you. Very similar to what you see either in the supermarket or in a drugstore. You got the items in the front where you check out, and it's a grab-and-go kind of a configuration. We have the same thing going on with our bakery.

I want to talk a little bit about the carryout opportunity and I want to start out macro. This is a chart that shows the annual consumption of restaurant meals per capita, and what I want to point out is that only 40% of the time does somebody sit down in the dining room. Now I'm also including all dining. So this is fast casual, this is fine dining, this is quick service. If you look at it, the QSR segment drives 70% of their business off-premise. The full service business is only at 10%. So this tells me that we have huge opportunity, and we're starting to see that in Bob Evans. What I want to do is show you from 2006 to fiscal year 2012, we've gone from less than 6% -- 7% mix on carryout to nearly 12% as of the last fiscal quarter that we announced our earnings. But look at the growth rates that we've been experiencing. And in fiscal 2011 and fiscal 2012, we've had double-digit growth. What's been driving that? Our Family Meals TO GO, the introduction of our bakery, and recognize that bakeries are only in half of our restaurants. We just launched catering. We always did carryout, but if you were to call a restaurant and try to cater a meal and call 5 different restaurants, you'd get 5 different answers. We didn't have the menu. We didn't have the packaging. We put our teams at a disadvantage. Now we have a menu. It's available online, so we make it easy for you to carryout -- to cater your meals. We're seeing great success with breakfast catering and lunch catering, which makes sense. Those are the business occasions where people tend to cater. If we get to our bold goal of 25% of sales mix, that's about a $300 million sales layer for us.

What's driving the off-premise? Well if you looked at our most recent earnings release, our carryout year-to-date is growing 6% -- 6.6%, and our mix is at 11%. Our bakeries are growing at 20%. We're at a low mix because, again, only half of the 565 restaurants have a bakery, and there's more room to grow on that. And we just launched catering back in November, and we're already seeing sales growth. We're getting good -- great scores from consumer acceptance.

I want to now talk about the lion's share of what we do, which is almost 90% dine-in, and the key word is value. We've got value at all day parts, so at breakfast, we're putting together what we call bundles. We're giving people more food for their dollar. You can play value by playing the low-price game or you just give -- people define value as what you get for what you pay. And our strategy is to give people more for what they pay. And in the case of a Farmer's Choice Breakfast, that's not a new item, but what we did is we added All You Can Eat Hotcakes, which increased the value. That now represents $45 million of our annual sales.

At the lunchtime occasion. 2 years ago, we launched our $6 Farmhouse Deals, but if you add a $0.99 side -- we reduced our side dishes to $0.99, and if you add a drink, that gets you over your average guest check. So even though you're selling something at $6, you can still get back to your average guest check pretty easily.

And then at dinner, this has been a big winner for us. We launched this back in May of last year. it's our 3-course dinner. We started out with steak. We eventually evolved into other proteins. So we launched a chicken 3-course dinner. Turkey was one of our big sellers, obviously. That's one of our hero items. We sold a bunch of turkey dinners during the Thanksgiving holidays. And then seasonally, January is always the time of the year that people declare their diets and their new health regimen for the year. So we launched our under 450 calorie 3-course dinner. But we all know that, somewhere around Super Bowl, some of those resolutions may go out the window, so we followed up right after Super Bowl with our 3-course steak dinner, and we're getting good acceptance on that. And that's about a $600 million business.

Now a lot of people always ask, "How are you bringing in the next generation?" And what I always say to people is, "How do you communicate to them?" There's a very different communication strategy for baby boomers and the Greatest Generation versus Gen X and Gen Y, and Gen Y is always heavy into the digital space. This was actually very eye-opening for me when the team shared this with me: we've had 9.5 million visits to our bobevans.com website, which is a 52% increase. Our eCLUB, which basically, you give us your e-mail address and we send you coupons and offers, and the average consumer, if you executed these offers, can save up to $140 a year. All we need is your e-mail address. That's 850,000 subscribers, and that's up 10%. To me, the big opportunity, though, is to convert some of those visits from the Bob Evans website -- because I said to the team, "You could double the size of your eCLUB just by getting a 10% conversion on your website."

Online ordering. We launched online ordering about 3.5, 4 years ago, and we've had 336,000 orders as of -- just for the calendar year 2012.

We have mobile sites. We've got our mobile site and a mobile app, which we launched. The mobile site is up 34% and the mobile app is up 200%. And you'll find us on YouTube with 323,000 visits. We're on Facebook. We're on Foursquare. We have Twitter followers. One of the things we just launched on Yammer is our internal sales blog. We wanted to have an opportunity for our employees to share when they have sales successes. For example, during the Daytona race, one of our restaurants got a catering order for $7,500. Well I want to know -- I want everybody in the system to know, a, they did it, how they did it, and if they want to contact each other, all they got to do is just go back and forth. I just saw some numbers. I think we've got about 65% of our managers signed up. I asked the team, why isn't it 100%? Because we're all trying to drive sales, but this is an easy way, if you're trying to figure out how to drive sales in our system, there's some great business-building ideas on there. Periodically, I'll comment on some of the fun stuff that's going on. But at the end we're all about the guest experience. And so what I want to show you is, over the last 4 years, the blue bar shows overall guest satisfaction, the red line shows the improvement in speed of service. So as you can see -- and we usually will wind up in the top tier of guest satisfaction in the Nation's Restaurant News' guest satisfaction survey. This is a different source called Mindshare. Not only does Mindshare measure our performance, they measure our competition. So we always know how we're doing versus best-in-class. But as you can see, almost a 6-point improvement in guest satisfaction and almost a 10-point improvement in speed of service. People want to know what our restaurant strategy is for opening new restaurants, and it's real simple. We have core markets. We still have restaurant opportunities in Pennsylvania, in Michigan, Indiana, Illinois, places where we currently have restaurants. This is an example of a restaurant we opened up in Petoskey, Michigan. It was an unfilled trade area. And then we're going to new markets in contiguous states. This is Fort Smith, Arkansas. This was our 19th state that we had penetrated, and we have 2 restaurants in the great state of Arkansas.

I want to shift gears now and talk a little bit about our Food Products business. We have 4 key lines of business. It represents about $315 million, 24% of the total enterprise. Our side dishes are about 40% of the business. The food service is 28%. Our sausage business, if I'd shown you this chart probably about 5 years ago, almost half of the business was sausage, so you see the transformation that's happened with the side dish business.

In terms of the vital few priorities, we're going to continue to in-source, which means that we provide products for Bob Evans Restaurants with our Food Products group, which also opens up food service opportunities with other retail -- or excuse me, with other food service businesses.

I'm going to show you a chart that shows our new authorizations and our new product introductions that are happening in multiple places across the United States. We'll continue to drive margin improvement to LEAN manufacturing efficiencies. I'll show you a profit chart that shows how that came to life. We'll continue to optimize our plant and distribution network and integrate Kettle Creations, and we'll drive best-in-class return on invested capital.

This is the growth story for Food Products, because in 2005, this was the number of grocery stores carrying at least one Bob Evans product and was 12,000. 2013 it's grown to nearly 30,000, almost a threefold increase, and our goal by 2015 is to be in 40,000 supermarket locations across the United States. Our greatest penetration happens -- if I can get this pointer working -- most of our greatest penetration is right here, which lines up with our Bob Evans footprint. But as you can see, you can find our food products in all 50 states, parts of Canada and also Mexico. If I had shown you this chart maybe 5 or 6 years ago, you would have pretty much found all of our concentration was tied up in this area.

You've heard about our acquisition of Kettle Creations, which strategically takes us to almost being 90% vertically integrated. The growth part of our business was primarily achieved through a co-packing relationship. We now have the opportunity to improve our margins because we'll be making a lot of those products ourselves. So the acquisition of Kettle Creations has given us proprietary manufacturing capability. It's giving us opportunities to drive our food service business during the off-peak production, because most of the mashed potato and side dish sales happened between October and December. So there's a lot of slack period in between that time, so we have food service business that we can fill in and do during there. It also reduces the reliance on sausage, because none of these products are meat-based. And this acquisition also is helping us accelerate our product innovation.

Let me show you a chart of what's happening with food products. I hinted at this earlier, but I wanted to show you the transformation of our food products margin. We've done a fair number of restructuring initiatives since 2009 to offset the impact of sow cost because, in fiscal year '12 alone, it was a $17 million cost impact. And if we hadn't launched a series of initiatives, we estimated we would have gone from $15.6 million in profit to about $3.2 million. But through the launch of our LEAN manufacturing program, transitioning from a direct store delivery operation to a warehouse-based, the growth of our side dish business and an optimized plant network took our profitability from $15.6 million to $20.5 million. And we're guiding this year, fiscal year to be over $30 million. So you can see the impact of those strategic initiatives.

But now we've talked about the Bob Evans Restaurants and what's going to drive sales growth and profitability. We've talked about food products and how we're going to drive sales and profitability in those segments. I want to talk a little bit about how our corporate infrastructure is going to continue to improve the margin profile of our company.

We've got the 8% to 12% goals, but we know there's some headwinds out there, and you've heard them all. Healthcare costs are going to go up. We're launching an ERP implementation. When you do the growth in some of these investments, you have depreciation expense. There's talk about minimum wage increases. And we do have some stranded cost left over as a result of the transition services agreement with Mimi’s Café. As we help with that divestiture, we've got to provide some services as they transition.

What are going to be some of our offsets? Well, over the last 5 to 6 years, supply chain alone has had $100 million impact in terms of offsetting some of those headwinds. Our labor management initiatives in the past have driven margin improvements, and we've got some other programs that we're going to be launching with labor management. Continuing to the optimization of the back of the house, having food products make those products so the restaurants don't have to make them, which will save labor, reduce complexity and improve product quality.

We recently restructured our debt to improve our -- and reduce our interest expense, and we launched a plant consolidation with our ready-to-eat business, and we announced that May of last year, which over the next 2 years, will have a significant impact on our profitability. And not only is LEAN manufacturing taking place inside of Food Products, it's now starting to launch itself company-wide.

Here are some other things that we're doing, because a lot of people say, "Why are you doing an ERP?" Well one, it's going to help you better understand your cost structure and help you understand where you're getting efficiencies and where there are opportunities to offset inefficiencies. Things like menu optimization, things like trade spending and optimizing that, and then just SKU rationalization. We have several hundred SKUs in the Food Products business. Understanding the volume contribution of those items, similar to a way we can with the Restaurant business, is going to be critical.

We have a new restaurant prototype that we're launching. It's going to be a lower cost footprint, but it's also going to have an optimized back of the house. And then in the future, you're going to hear us talk about Farm-Fresh Refresh 2.0. We're going to go back to all of our refresh restaurants and say, "What do we have to do to drive the carryout business? What do we have to do to drive the bakery? What do we have to do to improve our beverage offerings?" And then also do some work on the back of the house. It won't be as expensive as our current remodel, because we're not going to be re-skinning the front of the restaurant, we're not going to be redoing all the bathrooms and the tile work. All the effort's going to be focused on 2 things: driving sales and optimizing the back of the house. And then strategically, similar to Kettle Creations, there may be some bolt-on acquisitions that we may consider along the way, and that's why we're keeping our powder dry.

You probably have seen our fiscal year outlook. I want to save the time for questions, but just a quick summary on what's going on. Bob Evans Restaurant, we're forecasting to deliver positive sales, deliver another 74 Farm-Fresh Refreshes. You saw the margin profile in the early chart. Food Products, you'll continue to see great growth from them driven by new product innovation, average sow cost $55 to $60, operating margins 9.5% to 10%. I'm not going to go into a lot of detail on this. You can read. But one of the things we do want to point out is we'll have about $0.03 as a result of the transition services agreement with Mimi’s Café.

So that's our shareholder value creation goal. 8% to 12% anchored by 3 strategic pillars: transforming our core business to enable expansion, selectively investing in high return on invested growth opportunities, both internal and external, and drive shareholder value with disciplined capital allocation.

And with that, I'll open it up for questions.

Question-and-Answer Session

Steven A. Davis

Yes, sir?

Unknown Analyst

The acquisition of [indiscernible], is it possible with [indiscernible] Food Products area, with Food Products, where would -- what would you...

Steven A. Davis

Well, it's going to be mostly on the Food Products. You never say never on the Restaurant side, but we think there's a lot more fertile space in the Food Products business. What was nice about Kettle Creations is it helped us go from about 55% to 60% vertical integration to about 90%, so that's going to help our cost structure. So anything along that lines would be of interest. And anything that would be complementary to our business that we're growing in the meat case, which is our side dish business. Sausage is a tough place to be. The category is shrinking. The ready-to-eat section is growing, but it's not offsetting the decline in raw sausage. So that will be a tougher one. I mean, it would have to be an incredible opportunity, and then what I would do is, I'd also look and say, "How can it optimize our plant network?" It wouldn't just be about getting facings on the shelf. What would it do to the overall operations? So that's kind of our screen. And I said this in one of my last presentations: we're very disciplined about acquisitions. Just because we say we're going to do it. I read an article that said, don't shop when you're hungry, okay? So we're going to be very strategic. If we don't see the accretion -- basically, I always have a walkaway price. So if we see something we're interested in and we set a top parameter, and if it goes beyond that, we'll walk. Yes, sir?

Unknown Analyst

That [indiscernible] ...

Steven A. Davis

Yes, what's interesting is we have a very good presence in Florida. But then Alabama, Mississippi, Louisiana type, those are wide-open spaces for us. What I also like about those spaces, very good demographics consistent with the products that we sell, favorable real estate, stable workforce. There's just a lot of things to like about it. Now we're going to be very strategic and surgical. I think maybe in the past when we expanded, we do what I call pin-dotting. You go to one state, then you go to another state. We want to do more what we did in Arkansas, which is, "Okay. We opened up 2 restaurants there. How many we should we build in Arkansas?" And then fill out the other states, so it's going to be a combination. So yes, of those our places in our radar screen. Yes, sir?

Unknown Analyst

Can you talk a little bit about [indiscernible] ?

Steven A. Davis

Yes. I'll turn it over to Paul, because he can talk about the returns that we're seeing with our Farm-Fresh Refresh program and what we expect to see going forward.

Paul F. DeSantis

Sure, so I'll talk about both. So generally, we look for 12% return if we're making an investment after-tax, cash-on-cash kind of return. If we look at the Farm-Fresh Refreshes, we look at them to basically by restaurant and then by tranche of restaurant. And what we're seeing are the restaurants that have been refreshed for quite some time are plus-20%, so -- cash-on-cash return. So we're seeing a nice return on that investment. So not only are we positioning the restaurant for future growth, but we're getting a decent return on it as well. That's part of the reason we wanted to accelerate the program and have everything done by the end of next year. I think that will help with the synergies of driving the carryout and driving the bakery.

Steven A. Davis

Yes, sir?

Unknown Analyst

[indiscernible] How does turning plans to it shut the restaurant down for 5 days? What's the [indiscernible] ?

Steven A. Davis

Well, now that we have -- and we do this with contiguous geography, and there's a reason for that. Number one is the point you just made. When we first launched farm-Fresh Refreshes, we started in the Dayton market. We went north and south of Dayton for a reason. The restaurant that get closed, the employees will go into the remodeled restaurants and train. We first launched Dayton, they didn't have anyplace to go and experience a new concept. We have gone north of Toledo into Detroit, then we went south to Cincinnati, then we went east to Columbus, and now we're going north and northeast into Cleveland. Sometimes, these markets are run by the same Vice President. So we're getting economies of scale of the learning, and then we don't jump states. So my guess is Florida will probably be done last, because it's the furthest away from where we're doing all the work. The other advantage of doing contiguous geography is the contractors. Let's just say that we went all the way to Pittsburgh from Dayton. You just lost all your economies of scales with your contactors. You got to set up a whole new base. So it's almost like we've got this traveling group that goes and does remodels for us. And originally, we used to be closed 7 to 10 days. And we challenged ourselves, and they said, "Well, if you use the same contractor, you can probably -- he'll know what to do, or she'll know what to do when they go into each of these restaurants." So training, the turnover of the restaurants, and then the other thing we do is we ask on the managers to re-interview for their jobs so they understand what they're signing up for because. It is not the same Bob Evans they were running before. But we go through a retraining, a selection -- more of a mindset selection. "Are you ready for this transformation?" And that's part of it. That's gone well for us. That's part of the reason we the sales growth, we see margin improvement, we also are getting -- the remodel cost probably started out probably like a $250 million, $240 million. It's come down about $225 million. I think that's going to settle in on average, and that's what we've been seeing, even with the last round of CapExes that we signed.

Unknown Analyst

Does that increase [indiscernible]?

Steven A. Davis

I'd say it varies. I think what's happening now -- and I get a chance to talk some of the new managers coming in. They come in for a week of training, and so the last day, sometimes I get a chance to talk to them. They're excited about this transformation. I've had several people say, "I've been waiting for you to do this for years." So there's a great excitement. And then when people see the sales lift, and we're communicating it publicly we're getting this sales lift, I mean, who doesn't want to sign up for that? So there's a lot of internal excitement that's happening as a result of this. Yes?

Unknown Analyst

How much does your comp based on bonus based on -- how much do they benefit from it?

Steven A. Davis

Yes. We have a balanced scorecard for all of our restaurant General Managers. So it's guest satisfaction, it's sales, it's profit, and it's operations metrics. And it -- that Mindshare chart that you saw, that's tied into their compensation. That's part of the reason why you've seen that driven the way it was. We tied it to their compensation. They always say, if you want to move a metric, tie it to compensation and you'll see some great movement. In terms of the Refresh restaurants, we actually have a pro forma. Because recognize, they're going to start out with closed sales days, and then they're going to have operating costs, startup costs. So we build that in, so the actually have a pro forma that's modeled off of our experience of restaurants that we've already opened. And then eventually, they'll go into a steady-state scorecard. So we actually can model what's going to happen. We can model what's going to happen when the days closed, we can model what should happen with the margins. In some respects, it's a bit of a hockey stick because what happens is sales go up, the expenses go down, and then you have a better margin profile than what you started with. But that seems to have been consistent with all of our remodels.

Unknown Analyst

Base versus comp bonus?

Steven A. Davis

We're about 80/20: 80% base, 20% bonus. Yes, sir?

Unknown Analyst

The markets have a little base, as the restaurants [indiscernible]. It's been a while for support.

Steven A. Davis

Yes.

Unknown Analyst

Figure that saying something that is presenting sort of thinking [indiscernible] quite a bit in common. But [indiscernible]. How temporary can some of these factors...

Steven A. Davis

Yes. I think, until unemployment changes dramatically, I think, then you'll start to see some stability. You've heard people talk about the choppiness. So I think that will continue, but I think those who understand how to play value and how to sustain it and then also make money doing it. Because just lowering your prices, that just goes right to the bottom line. So we've been very surgical and strategic about our value. And we just said to the team, "I don't see value going away from something that we have to do." And that's one of the advantages that you have in family dining is the lower average ticket, and I think that plays in nicely, and as of late, I think family dining has actually outperformed casual dining according to Knapp-Track and Black Box and other sources. Yes, sir?

Unknown Analyst

Is there any [indiscernible] sow cost going up [indiscernible] just break down into [indiscernible] mix...

Steven A. Davis

,,

Continue to change the mix and continue to hit the optimization of the things that we talked about. Same thing with the economy. It's hard to have a crystal ball. I mean, 5 years ago, when I first joined the company, you could set your watch to $35, $40, $55, $60. I even said to the team, "Act like it's $65. What would you do if it's $65 all the time? What are the trade-offs that you're going to have to make, what are the things you're going to have to do?" And that's what our strategic plan is based on. Just assume that you'll never see $35 to $40 sow costs, and then if they ever come down, it's favorability. But if you plan on a low number and you guess wrong, then that's when the fun starts.

Our clock has counted down, so thank you very much for your time and thank you for your interest in Bob Evans Farms Inc.

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