Bob Evans Farms Inc. F3Q08 (Qtr End 01/25/08) Earnings Call Transcript

Bob Evans Farms Inc. (BOBE)

F3Q08 Earnings Call

February 13, 2008 10:00 am ET

Executives

Steve Davis – Chairman and CEO

David Poplar – VP Investor Relations

Donald Radkoski – CFO

Analysts

Conrad Lyon – FTN Midwest Securities Corp.

Stephen Anderson – MKM Partners LLC

Jimmy Yu – Aristos Capital Management

Amy Greene – Avondale Partners LLC

Brad Ludington – Keybanc Capital Mkts

Patrick Stowe – Priority Capital

Philip Schaefer - Katana

Operator

I would like to welcome everyone to the Bob Evans Farms Third Quarter Earnings Conference Call.

(Operator Instructions)

It is now my pleasure to turn the call over to your host, Dave Poplar, Vice President of Investor relations. Sir you may begin your conference.

David Poplar

This is David Poplar and I am here with Steve Davis, Chairman of the Board and Chief Executive Officer, as well as Donald Radkoski, our Chief Financial Officer. We have some prepared remark and then we will open up the call for questions. Let me first remind you that our comments today contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include projections regarding anticipated future results, including estimates for growth. A number of risks and uncertainties could cause actual results to differ materially from these forward-looking statements. Please refer to our recent earnings releases and filings with the Securities and Exchange Commission for discussion of these risk factors.

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

Before I turn the call over to Steve, I would like to address a change we will be making in our financial disclosure beginning with the First Quarter of Fiscal 2009. After speaking with many of you, we have decided to discontinue our current practice of issuing a monthly sales release for the third period of each quarter. Instead, we will incorporate the same-store sales information for the third month, as well as quarterly and year to date same-store sales results into our quarterly earnings release.

Please note that you will continue to receive the same information as you have in the past but it will now be available later for the third month of each quarter. Again, this change will go into effect in the First Quarter of Fiscal 2009 so we will have one more quarter under our old procedure. With that, I will now turn the call over to Steve.

Steve Davis

Thank you for joining us as we discuss our third quarter financial results. I am going to start with a few highlights and then Don will provide us with the financial details on the quarter. After that I’ll have an update on the progress of our best brand builders and then we will be happy to take your questions.

Reported diluted earnings per share for the quarter were $0.61 compared to $0.51 a year ago. This represents a 19.6% increase. As noted in our earnings release, a number of special items impacted in our reported results and Don will review those in greater details in just a few minutes.

In our restaurant segment, Bob Evans Restaurant has now delivered positive same-store sales for six consecutive quarters; the same-store sale is up 1.5% in the quarter. We are encouraged by the operating results and sales at Bob Evans Restaurant that have resulted from our expanded pipeline of new products, more effective marketing, and an increase focus on customer service in our restaurants despite challenging macroeconomic conditions.

At Mimi’s Café, our new management team is now in place and focusing on improving sales and profits in our core restaurants, as well as opening new restaurants effectively. Same-store sales were down 2% for the quarter. We believe this trend reflects conditions and reasons of the country such as California, Florida, Arizona, and Nevada were economic factors have resulted in decreased consumer spending. These regions account for approximately 75% of total Mimi’s Café sales.

Finally, we have another great quarter in our food product segment with a 12.7% overall sales increase, and a 56.4% increase in operating income. We now have achieved 24 consecutive quarters of positive comparable pounds sold. Don will explain these issues in more detail now as he reviews the quarter’s financial highlights.

Donald Radkoski

Please note that we will focus on reported results for the quarter, and we will not be providing pro-forma results. However, we have provided you with a pre-tax impact of key items that affect year-over-year comparisons to help you understand our operating performance relative to the prior year.

Starting from the top line on the consolidating income statement, net sales for the quarter were $449.7 million, up 7.1% compared to $419.9 million in the Third Quarter of fiscal 2007. This increase reflects some improved same-store sales at Bob Evans Restaurants, new restaurant openings at Mimi’s Café, and strong sales in the food product segment.

One item that provided a significant benefit to our net sales line in the quarter was pre-taxing, $6.6 million for gift certificate and gift card breakage at Bob Evans Restaurants. This is for gift certificates and gift cards that consumers have failed to redeem. We have never recorded a breakage at Bob Evans Restaurants before, so this represents a catch-up entry for all his historical gift certificate and gift card breakage through the end of the third quarter.

This is the first quarter where we believe we have enough historical data to reasonably determine the breakage amount. Going forward, we will record breakage on an ongoing basis so we do not expect any subsequent benefits to be material. Please keep in mind that this benefit from breakage of Bob Evans will favorably affect many of the results that I discussed today, especially of those that are expressed as a percentage of sales for the restaurant segment.

Cost of sales was $134.9 million or 30% of net sales in the Third Quarter of 2008, compared to $124 million or 29.5% of net sales in the Third Quarter of 2007. This increase is the result of higher cost for commodities in the restaurant segment including proteins, dairy, grains, and oils. This increase is more than offset, decreased raw material costs in the food product segment.

Operating wages were $150.5 million or 33.5% of net sales in the Third Quarter of 2008, compared to $148.5 million or 35.4% of net sales in the Third Quarter of 2007.

This improvement is a percentage of net sales, is the result of effective labor management, as well as leverage from improved same-store sales at Bob Evans Restaurants and sales increases in the food products division. These operational improvements more than offset the impact of state, minimum wage increases, as well as same-store sales declines at Mimi’s Café.

SG&A expenses for the quarter were $41.1 million or 9.1% of net sales, compared to $33.4 million or 8% of net sales in the Third Quarter of fiscal 2007. The Third Quarter 2008 results include a pre-tax charge of $3.7 million related to nine underperforming Bob Evans Restaurants that we closed in February. While we have not typically recorded significant charges when closing restaurants, several of these units were in lease locations which resulted in an impairment charge.

Also, impacting the SG&A line was $100,000.00 pre-tax gain on the sale of restaurant assets which provided a slight benefit to the Third Quarter Fiscal 2008, but was significantly lower than the $900,000 gain on the sale of restaurant assets that were recorded in the Third Quarter of fiscal 2007.

In addition, SG&A include a $700,000.00 in expense related to the settlement of a dispute with a third party. Our reported operating income for the Third Quarter of fiscal 2008 was $32.7 million, an 11.2% increase compared to $29.4 million a year ago. Net interest expense for the quarter was approximately $3 million compared to $2.1 million in the Third Quarter of 2007. The increased interest expense is primarily the result of additional debt incurred to fund the company share repurchase program.

Pre-tax income was $29.7 million, compared with $27.3 million a year ago. The tax rate was 32.7%, compared to 31.5%. Reported net income for the third quarter was $20 million, compared to $18.7 million a year ago. Deluded weighted average shares outstanding were $32.6 million, compared to $36.7 million in last year’s third quarter.

During this third quarter, we repurchased $2.3 million shares for a total of $4.4 million shares repurchased for the year. This releases with an authorization at the buyback $600,000.00 additional shares over the balance over the balance of fiscal 2008. As Steve mentioned, reported deluded EPS came in at $0.61 compared to $0.51 a year ago.

Now, turning to the business segments, net sales in the restaurant segment were $367.6 million, a 5.9% increase from a year ago. Same-store sales at Bob Evans were up 1.5% for the third quarter, with a 2.1% increase in November, a 1.1% increase in December, and a 1.2% increase in January. Average menu prices at Bob Evans were up 2.8% for the quarter.

At Mimi’s, same-store sales were down 2% for the third quarter. By a month, Mimi’s was down 1.9% in November, down 1.8% in December, and down 2.4% in January. Average menu prices at Mimi’s were up 2.6% in the quarter. Sales in our California, Florida, Arizona, and Nevada markets were softer than expected.

We are seeing better comes in our remaining markets that these accounts were only about 25% of our sales. Food cost were challenged during this third quarter, as restaurant food cost were 25.4% of sales, up 60 basis points from 0.8% in last year’s third quarter.

Labor cost was 38.6%, down significantly from 40.4% a year ago. Both restaurant concepts made excellent progress in adjusting labor scheduling to eliminate hours for the third quarter. This initiative helped offset the negative impact of state minimum wage increases over the last two years.

Other operating cost in our restaurant segment were 18.3% of sales, up slightly from 18% one year ago, to the higher pre-opening expenses, deferred grant, and insurance.

SG&A expense was 6.9%, up approximately 150 basis points compared to the Third Quarter of Fiscal 2007. This increase is due to the $3.7 million charge related to the nine underperforming Bob Evans Restaurants that we closed, as well as expenses related to the third party dispute that I mentioned earlier, and the lower amount of gains on the sale of restaurant assets due to a soft overall real estate market. Depreciation and amortization expense was approximately flat as a percentage of sales.

The restaurant segments reported operating income was $22.3 million, compared to $22.8 million in the Third Quarter of Fiscal 2007. In addition to the breakage benefit, the major variances were the $3.7 million charge noted earlier for nine underperforming Bob Evans Restaurants, lower same-store sales at Mimi’s Café and higher commodity cost which increase restaurant segments cost of sales by 60 basis points as a percentage in net sales, the gain of $100,000.00 from the sale of real estate asset which is less than $900,000.00 in pre-tax gains from the sale of real estate assets recorded in the third quarter last year, expenses of $700,000.00 are related to the settlement dispute with the third party, and a year-over-year increase of $1.4 million in pre-tax expense per pre-opening cost due to a greater number of restaurants opening in the third quarter.

During this third quarter, we opened eight Mimi’s Cafes and one Bob Evans Restaurant, compared to three Mimi’s Cafes and three Bob Evans Restaurants in the Third Quarter of Fiscal 2007.

The food product segment had another great quarter with total net sales of $82.1 million, an impressive 12.7% increase from a year ago. Comparable pounds sold were up 8%. Cost of sales was 50.6% of sales, compared to 52.1% of sales in the prior year. The improvement is the percentage of sales as due to lower average hog cost of $31.00 per hundredweight, compared to $39.00 a year ago.

Labor cost were 10.7% of sales, down almost 60 basis points from 11.3 % a year ago, due primarily to the leverage from increased sales.

SG&A expense was 19%, down nearly 100 basis points compared to the Third Quarter of fiscal 2007. This reduction is primarily due to leverage from increased sales. Advertising expenses were comparable to the Third Quarter of 2007, which is lower than our most recent forecast.

So, in summary, the segment’s operating income for the quarter of $10.4 million was up 56.4% and approximately 360 basis points as the percentage of sales from a year ago, an excellent overall performance.

As we note in our press release, we are reaffirming our guidance for fiscal 2008 diluted reported earnings per share of $1.77 to $1.84. This outlook includes lower than expected gains on real estate sales of approximately $2.5 million, compared to our initial forecast of $4 million to $5 million, really due to a continuing soft real estate market. Also included in our estimates are lower than expected sales trends at Mimi’s Cafés, and higher commodity costs in the restaurants segment.

Despite positive sales of Bob Evans, we have had a tougher winner season so far than we did in 2007. Capital spending was $30 million for the quarter and $92 million for the year to date. We are now targeting capital expenses for the year of about $110 million, but significantly blow our high of $140 million at fiscal years 2004 and 2005.

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

Turning to the balance sheet, cash at the end of the quarter was about $6 million. Our total debt was about $294 million, compared to stockholders equity of $616 million. Now, with that, I will turn it back over to Steve.

Steve Davis

For the past year and a half, we have been focused on our overall internal approach to managing the company which we have been referring to as our best brand builders. We developed the brand builders to unlock the national growth potential of our premium regional brands. I like to quickly review our progress in each of the five brand builders and as a reminder, brand builders win together as a team, consistently drives sales growth, improve margins with an eye on customer satisfaction, be the best at operations execution, and increase returns on investment capital.

Winning together as a team means getting everyone at the company’s strategically alignment focus on the same common goals, and we have implemented company-wide productivity initiatives including procurement and purchasing consolidation.

One significant project that helps us win together as a team is what we call Project Best Way, which we rolled up during fiscal 2007. The goal of this program is to achieve efficiencies and productivity in all business units over the next five years. We have already realized improvement under Project Best Way such as the purchasing initiative we mentioned at our recent disclosure. Specifically, we have had success with corrugated, cheese, bacon, menus and cartons; just to name a few, by leveraging the collective buying power of our entire organization. We are achieving material cost reductions. We are also working on additional enhancements such as a new POS system at Bob Evans Restaurants, which I will tell you more about in a minute. Also, following under the Project Best Way umbrella is labor forecasting in scheduling at both of our restaurant concepts, as well as other cost savings and productivity initiative. You will hear more about these programs beginning in fiscal 2009.

The second brand builder is to consistently drive sales growth. We are pleased that Bob Evans Restaurants has now achieved five consecutive quarters of positive same-store sales. We saw an excellent response to our new product innovations in the quarter including deep-dish dinners and the latest edition to our family of Stacked and Stuffed Hotcake, Blueberry Cream. We also rolled out our new signature coffee program featuring a blend of Columbian and Brazilian beans which has a richer aroma and taste.

At Mimi’s Café, we are focused on four key areas. The fist is the revitalized sales with new menu items. Second, implementing a more formal product development process with a new product pipeline calendar to assure more effective and systematic product rollup process, similar to what we put in place at Bob Evans 18 months ago.

Third, we are focused on improving food and labor cost and finally, we are focusing development in high profit regions by determining our priority markets and filling in the concentrated clusters. In food product or sales, momentum remains very strong as we continue to grow both to our new product introductions and by forming new relationships with major retailers. We also continue to gain distribution as our existing retailers grow their store bases. So far, in fiscal 2008, we have added 781 new points of distribution and we now have at least a limited retail presence in 49 states.

We believe our food product is staying as well on its way to becoming a powerful national brand.

The third brand builder is to improve margins with an eye on customer satisfaction. As Don mentioned, we quote the total of nine underperforming Bob Evans Restaurants last week. While closing a restaurant is always difficult, this decision will help improve our margins in the long run. Driving positive same-store sales and improving profitability of a primary focus for the entire Mimi’s team.

Mimi’s has made progress on managing labor cost during the third quarter but we still believe we have opportunities to further reduce labor hours and pre-opening expenses. And, as we already have mentioned, we have done an excellent job of reducing labor hours in all of our Bob Evans Restaurants.

In food products, the team is doing a great job of improving hog yields and managing plant cost. Our margins also benefited from lower than expected hog cost, but keep in mind that year to date hog cost are only $2.00 lower per hundred weight versus 2007. Also, third quarter advertising expenses were comparable with prior year but lower than our most recent forecast.

Under our fourth brand builder, which is to be the best at operations execution, are current pilot of a new point-of-sale system that Bob Evans continues to move forward, and we are installing two more new restaurants this week. This will give us a total of four test restaurants, and we now anticipate a full rollup beginning in the First Quarter of fiscal 2009. And as we have mentioned, this new system will help to simplify our order entry and achieve more precise labor scheduling, as well as help control food cost. We also believe that new point-of-sale system will be a helpful tool to attract and retain employees, as it is considerably easier to learn in the manual process we use today.

We have already made significant progress in reducing Bob Evans Restaurant turnover from over 150% in 2006 to about 125% this latest period. We believe this new system can help us drive that number even lower. Mimi’s turnover remains one of the lowest in the industry at about 100%. From an operation standpoint at Mimi’s Café, we are expanding our curb-side and carry out in our full-bar expansion. We now have 18 curb-side friendly locations and we have converted or opened 43 restaurants with full-service bars. We are now evaluating the incremental fails from two retrofit bars to determine whether further expansion makes sense.

Our fifth and final brand builder is to increase returns on invested capital. While we are not building significant numbers of new Bob Evans Restaurants, our current unit expansion pace at Mimi’s is approximately 15% annually, with 17 new Mimi’s Restaurants in our plans for this year.

However, as Don mentioned, we are monitoring sales and profit trends in certain parts of the country where macroeconomic conditions have adversely impacted consumer spending. These trends could affect their future development plans for Mimi’s. In food products, the increased capacity of our new 65,000 square foot expansion of our Springfield distribution center contributed to our solid sales in the quarter as we are now much more efficient at peak production time such as the winter holiday season.

We are currently paying a quarterly cash dividend of $0.14 a share, and we continue to reassess our dividend policy with our board regularly. Finally, as Don noted, we repurchased 2.3 million shares during the quarter for a total of 4.4 million shares repurchased for the year. This leads us with the authorization to buyback about 600,000 additional shares over the balance of fiscal 2008.

For the 2008 fiscal year to date, we have returned a total of $152 million to shareholders in the form of share repurchases and cash dividends. With that, we would like open up the call and take any questions you may have.

Question and Answer Session

Operator

(Operator Instructions)

Our first question is coming from Conrad Lyon of FTN Midwest, please go ahead.

Conrad Lyon – FTN Midwest Securities Corp.

Can you give us any idea of what fiscal ’09 growth may look like, it is just to help modeling here?

Steve Davis

The fiscal ’09 growth rate at Mimi’s, we have not announced yet the total number, 17 stores for this year. Fiscal ’09 will probably come down to few stores from that because we have a number of stores in the pipeline, maybe three or four stores actually from that, but that would probably be about where it be, 13 is probably pretty solid, something of that nature.

Conrad Lyon – FTN Midwest Securities Corp.

What recently has been your cash cost to develop at Mimi’s?

Steve Davis

Well, we have around $2.7 million or $2.8 million, that would be basically building an equipment and then a lease which a capitalized lease would probably be another $1.1 million or something of that nature.

Conrad Lyon – FTN Midwest Securities Corp.

Let me shift over to the gift card breakage for a minute here. First thing is the materiality level, is that based on net income or earnings per share? I just wanted to get an idea of something like a penny per share. As it pertains going forward, I just want to make sure on a go-forward basis on what we could expect in terms of perhaps breakage from that material I am assuming it is probably less than a penny per share.

Steve Davis

Yes, maybe a little more than. I think for the full year, it is probably something maybe $700,000 to $800,000 worth of breakage and that would be for full fiscal year because that would be more than a penny.

Conrad Lyon – FTN Midwest Securities Corp.

You mentioned that I was adjusting, assuming that it was a non-cash adjustment?

Steve Davis

That is true, it is a non-cash adjustment.

Conrad Lyon – FTN Midwest Securities Corp.

Let me jump over to the food products, were you able to quantify how much your gain and comparable product sold came from new distribution outlets versus existing outlet. It is actually a balance, we are seeing improved sales in our non-hog related products, mostly are side dishes and non-trays. That is where most of our new authorizations are coming from but in terms of actually splitting it out, I will let Dave and Don meet with you separately and we will see what we can do to provide you some information in that regard.

Operator

Our next question is coming from Stephen Anderson of MKM Partners LLC.

Stephen Anderson – MKM Partners LLC

I just want to go back to the gift card breakage, can we go look at what the breakage was in the most recent quarter, and can I be quantified?

Steve Davis

We have not quantified whether it be in the most recent quarter. The breakage that we took was really up through the end of this quarter so included some third quarter breakage. Like is said, the bulk of it is gift certificates that we had for a while now that we have been looking and tracking the breakage to see, the liability to see how many would be redeem so the bulk of it is that, the only clear, like I said, we did say $700,000.00 to $800,000.00 would be an annualized breakage amount so if you look at it per quarter, that you could be a couple of $100,000.00 per quarter or something of that nature.

Stephen Anderson – MKM Partners LLC

Okay, you spoke about some of labor cost at the POS system that is going out. Have you talked about also any other POS and how about the scheduling tools?

Steve Davis

We have made some pretty significant progress at both Mimi’s and Bob Evans with labor and we do have some scheduling tools currently that were working with the new POS that is going to provide us really enhanced forecasting, better, tighter, labor scheduling we think. So, really, it is going forward, we think we can continue to work on productivity in the labor area.

Operator

Our next question is coming from Jimmy Yu of Aristos Capital Management.

Jimmy Yu – Aristos Capital Management

Could you provide sales and earnings excluding the positive contribution for gift cards?

Steve Davis

We really are not providing performing information that the gift card was $6.6 million a set that was recorded against sales or added into sales.

Jimmy Yu – Aristos Capital Management

It is our understanding that certain states consider unused gift cards abandoned property and may take blame on that property. To what extent will that effects future recorded earning?

Steve Davis

Yes, mostly, I guess some states have that but in Ohio, definitely, that is an exempt and that is where the corporation as far as the operating company is located so we should not have an issue with that.

Jimmy Yu – Aristos Capital Management

Lastly, you have been fairly aggressive buying common shares despite weak operating results. What gives you the confident that the US is currently not facing for long downturn; such return to shareholders will not be favorable.

Steve Davis

We have been aggressive buying shares back. I am not sure we would say we have a weak operating environment or at least, at Bob Evans, we have seen some pretty good numbers as we look out and really buying shares back is looking out in the future and our five-year plans are to continue the growth sales and profit and continue to have productivity and drop more dollars to the bottom line. We feel it is a good investment, good use of capital.

Operator

Our next question is coming from Amy Greene of Avondale Partners LLC.

Amy Greene – Avondale Partners LLC

Have we quantified, or at least tell us how much the POS rollup could impact CAPEX as we go into next year.

Steve Davis

We have about $4 million to $5 million buildings next year.

Amy Greene – Avondale Partners LLC

Is that already in what you are expecting?

Steve Davis

In next year’s numbers? Right.

Amy Greene – Avondale Partners LLC

Looking at Mimi’s, if you are expecting the results continue to stay soft for a little while, do you see fixed rooms for material margin improvement that you all could get despite the soft sales environment?

David Poplar

As I mentioned in the script earlier, one of the things that we do believe is that there is an opportunity both in Bob Evans Restaurants and also with Mimi’s services and labor management, and if you notice two of e the people that we brought in have extensive QSR experience outside of casual dining, both QSR and casual, as well as fast casual dinning. So, it is their observation and our observation that there is opportunity there. Now, we can not quantify what that is but we just do believe that there is further opportunity and we are going to mind that. We will keep you posted.

Amy Greene – Avondale Partners LLC

Looking at some of the changes that you put in to some of the Mimi’s like the full bars or curb-side, are you ready to tell us what kind of sales upside you have seen even in a limited number of doors that you have gotten in.

David Poplar

I think with any new initiative, you got to give a time and I think we put our first bar just a little over a year ago and we put it into one restaurant. There is a two-part process to this conversion. One, you have to go back and convert your ****34:34. Two, I think you need to not only put the bar in, but then you will also have to market it and we are relatively new to this whole phenomena. So, before I would declare any kind of projections, I would say “stay tuned, we will keep you posted. We will analyze it and we will give you further information as we continue to expand the test.

Amy Greene – Avondale Partners LLC

Lastly, I think you have mentioned trying to take some of pre-opening cost out of the Mimi’s system. Are you making progress there or is that something that you and the new team were going to be addressing as you look at the other nine opening?

David Poplar

We have made some progress, we have identified some areas that we want to go after and we are going to be putting those in place in our future opening. So, we will keep you posted.

Amy Greene – Avondale Partners LLC

Congratulations for this morning guys.

David Poplar

Thanks.

Operator

(Operator Instructions)

Our next question is coming from Brad Ludington of Keybanc Capital Mkts.

Brad Ludington – Keybanc Capital Mkts

I just had a couple of questions on modeling and I know you do not have these things set yet but looking into fiscal ’09, is there some kind of range that makes sense to model in for gains on assets sales. I know it is a weak market and is hard to tell what will be sold but if there sort of a minimum number you think you will hit.

Steve Davis

You are right. It has been very difficult, as you probably know, it really changed during this past summer with the real estate market falling. As we mentioned, we were 45 million and we have a tough time doing it, selling properties that we have. We are focused on it but are just a tough environment. So, I would model definitely low from a modeling standpoint. I just think it is just that of environment. It is going to be difficult selling properties.

Brad Ludington – Keybanc Capital Mkts

What about share repurchases in fiscal ’09? Is that the plan to keep on doing maybe a similar level of repurchases?

Steve Davis

We still have $600,000.00 shares left in this fiscal year and that will end our authorization. So, our board will be looking at this incoming year trying to really get a flavor for what we are going to be doing as far as additional authorization. I really can not give you a whole lot of guidance there.

Brad Ludington – Keybanc Capital Mkts

One thing I should know while we are talking about share buy back. You mentioned share buy back interest expense and because of the share buy back program for the fiscal year 2008, it will probably be around $11.7 million, because of that, the interest expense, because of the buy back, will be up in just a couple of other points that the shares actually will be probably at $33.4 million average weighted shares at the end of the year there.

David Poplar

$33.4 million?

Brad Ludington – Keybanc Capital Mkts

Yes, and its rate is probably going to be right around 33%.

Steve Davis

So, that was the last question?

Brad Ludington – Keybanc Capital Mkts

Yes.

Operator

Thank you. Our next question is coming from Patrick Stowe of Priority Capital.

Patrick Stowe – Priority Capital

I just want to make sure I am clear on the reiterated guidance. Does that include all the breakage and charges, you said you were not given performance. I just wanted to make sure.

Steve Davis

That is correct.

Patrick Stowe – Priority Capital

So, that would imply a Q4 earnings number somewhere a couple of pennies lower than last year’s number?

Steve Davis

Yes. As you look at it, we originally plan for more gains really in the fourth quarter. That is probably the biggest piece of it on real estate properties.

Patrick Stowe – Priority Capital

How many properties that those gain that you talked about apply to? Are those the stores you just closed?

Steve Davis

Really, it is a basket of stores; we closed 18 stores last fiscal year and 24 on the prior year. Some of those stores which are also some current ones. So, it is not really related to the stores that you just closed.

Patrick Stowe – Priority Capital

So, just some of the older ones still cycling off?

Steve Davis

Yes.

Patrick Stowe – Priority Capital

On the food products business, do you guys lock in to your hog cost at all going forward?

Steve Davis

We do not. We use the Sals to make sausage and there is really not a truth for future market that we feel comfortable with so we buy, in the stock market and through auctions. So there is a small piece of it that is locked in on the contract for this less than five percent.

Patrick Stowe – Priority Capital

Do you have any updated views on where the pricing in that market is headed?

Philip Schafer – Katona

Certainly, we have enjoyed some lower costs. It had just been difficult, the corn prices and that whole complex up. That side is as you look out, it seems as if, as we look and give guidance next year, we will be thinking about where that is going to be, but it is probably going to be more than normal or higher. Definitely higher, we think, than next year.

Patrick Stowe – Priority Capital

I probably have this written down, can you roughly what percentage of the cost in the food business that hogs represent.

Philip Schafer – Katona

Our cost of sales is roughly 50%-51%. Now, that does include a significant piece of purchase product also. But it is roughly 50 or so percentage, I guess.

Patrick Stowe – Priority Capital

What is the percentage of hogs?

Philip Schafer – Katona

Of the sales in the food product side, I guess around 70% of the sales are related to sausage high products.

Patrick Stowe – Priority Capital

Operator

Our next question is coming from Philip Schaefer of Katana

Philip Schaefer - Katana

On the asset sales, the $4 million, the $45 million earlier estimate, and $2.5 million, that is the game that you would book on the sales, is that right?

Steve Davis

That is right.

Philip Schaefer - Katana

Could you tell us your cash proceeds estimate?

Steve Davis

Yes, if you could give us just a second. Do you have another question?

Philip Schaefer - Katana

I missed the first few minutes of your formal comments. Did you comment on how recent business is at recent customer accounts or any customer surveys that you have done or anything that could give us some color as to how business is currently.

Are you talking about the sales performance?

Philip Schaefer - Katana

Yes, but just in terms of the last few weeks? The last few weeks they do not disclose it.

Steve Davis

We have about 10 million, I guess year to date in proceeds. On the sales properties, it is about $10 million.

Philip Schaefer - Katana

And the in the $10 million proceeds would result in the $2.5 million in gains.

Steve Davis

That would be the $10 million that is year to date that $2.5 million would be for the full year.

Philip Schaefer - Katana

And so how much more dividends for the final quarter?

Steve Davis

Final quarter I guess you can have another, probably half a million or something of that nature.

We will give an update of our sales on March 4^th.

Philip Schaefer - Katana

Okay, I mean I was just looking to customer surveys or focus groups or just anything like that that could give us some sense into what you are hearing.

David Poplar

Like Steve said, we hear but we do not generally disclose that.

Operator

At this time, there appear to be no further questions. I would now like to turn the floor over to Steve Davis for any further or closing remarks.

Steve Davis

Thanks again everyone for joining us today, if you have additional questions, feel free to give us a call, if we don’t hear from me in the meantime. We look forward to sharing our year-end results in Fiscal 2009 outlook.

Have a great day.

Operator

Thank you, this concludes today’s Bob Evans Farms Teleconference.

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