Bob Evans Farms F4Q08 Analyst Day (Qtr End 4/25/08) Earnings Call Transcript

Bob Evans Farms, Inc. (BOBE)

F4Q08 Earnings Call and Analyst Day

June 4, 2008 1:00 pm ET

Executives

Donald J. Radkoski - Chief Financial Officer, Secretary, Treasurer

David D. Poplar - Investor Relations

Mike Townsley - Vice President, Food Products Division

Steven A. Davis - Chairman of the Board, Chief Executive Officer

Analysts

Will Hamilton - SMH Capital

Presentation on F4Q08 and Fiscal Year 2008 Results

Donald J. Radkoski

First of all, good afternoon, everyone. I would like to just start off firstly, welcome to all those who have traveled and came to join us. It is a pleasure to have you here and anxious about our first analyst day, as Dave mentioned.

I would like to just really just briefly go through really the highlights of the fourth quarter and for the fiscal year and give some really high level -- as Dave said, we’re not going to go into as much detail as we might on a quarterly call but we will hit some of the highlights and then I will spend a little bit of time talking about some of the key drivers.

First just from an overall standpoint, as you stand back and you think about the 2008 trends, you can -- Bob Evans Restaurants I think the overriding theme and food products really somewhat outperformed our expectations. You know, Mimi’s certainly faced difficult comparisons and key regions that we’re in at Mimi’s, you know, the sub-prime areas and we’ll talk more about that later.

And then, overriding as you think about, and I heard Steve say it two or three times, the concept of productivity and how do we work in the middle of the P&L in terms of delivering results in a really difficult cost environment, so that’s kind of our themes.

I am happy to report to you today as you look at our fourth quarter results, we came in at $0.52 on a reported basis and you can see that above the $0.42, or a $0.10 increase, 23.8% increase in earnings per share for the fourth quarter.

Included in those results were about $700,000 in gains on the sale of assets in the fourth quarter, and that compares with $200,000 in the fourth quarter a year ago.

Kind of jumping to the full year now versus when you look at our diluted earnings per share, you see that the total of $1.95, we are -- an increase of $0.29 -- are up 17.5%, so a nice improvement over fiscal 2007.

And I thought we would just point out to you that included in those numbers would be $5.1 million of pretax impact compared to 4.4 last year of what we consider special items. That would include the breakage of $6.6 million that we had in the third quarter, which was a plus to sales. We also had ready-to-serve closings in the third quarter, about $3.7 million, a third-party dispute, about $700,000. And then gains on sale, you can see we are at $2.9 million compared to 4.4. And just a quick comment there -- it is becoming much more difficult in today’s environment with the real estate market really to garner the [gains] and you have seen they’ve slowed down considerably from ’07 to ’08 and in our ’09 guidance that I will talk about later, we really haven’t factored any real estate gains or any -- they might be minimal but any real significant gains into those numbers.

This is the good news chart and Steve really touched on it with Bob Evans same-store sales, you can see up 1.8%. Our menu for the year would be about 2.5%. Our current menu is at 2.4%, so really this is just a credit certainly to our team in terms of delivering on the pipeline in the restaurants. It’s just good ready-to-serve operations that just helped drive these numbers, but up 1.8% for the full fiscal year.

As you look at Mimi’s Cafes, you can see for the full year down 2.4 and really the trend getting tougher, and we’ll talk some about that a little later, but the trend getting tougher, down 5.3% in the fourth quarter.

On a food product side, and this is probably one of the best charts -- again, Steve mentioned 25 quarters. It is pretty amazing that we’ve been able to stack up that many quarter upon quarter of increase driven pounds sold, and that has really helped drive the profitability in the food products group.

If you stand back and you look at the really kind of the trends that we are seeing on the restaurant side, there is no question we are in a difficult consumer environment. I don’t think anybody could argue that one. The commodities environment, I don’t think it’s much tougher than it seems like it’s been the last year in terms of the cost side of the equation. There’s not a whole lot of -- if any items that we consider going down. We are paying higher price for labor in our restaurants. Just to give you an idea, Bob Evans average was 4.2% higher at Bob Evans and 5.9% higher at Mimi’s. That’s just inflationary increases that we are having in labor rates, so the labor is much more expensive.

But when you look at the productivity initiatives, and that is where it’s kind of a tail of two cities. We have a tough cost environment but we’ve been able to offset it with productivity initiatives that really have made the difference.

I will kind of walk through just first the quarter and at a high level, you can see net sales, this is restaurant, this would be Bob Evans and Mimi’s, would be up 3.5% in terms of net sales. Our operating income increased 10.3% and again, you can see from the fact sheet that you’ve probably taken a look at that cost of sales, and I’ll highlight that here in a second, went the other direction with a tough comparison but we made up that difference in labor and our operating margins of 5.1 compared to 4.8.

And just highlighting for the fourth quarter, this slide, the cost of sales up 50 basis points, so a tough -- you know, that’s a significant increase. However, you can see on the operating wage line, 140 basis point improvement and again, that’s in spite of higher labor rates, so a really good job and I know Randy is going to talk and Roger talk more about that, how we got that done with better scheduling and hours reduction. In Mimi’s Café, we’ve also had some hours reduction that’s helped offset some of the extremely high labor rates that we are paying.

For the full year, sales were up 4.3% and that’s a reflection of the increase and we added 17 Mimi’s Cafes for the full year. It’s also a reflection of the same-store sales increases we had at Bob Evans Farms. And you can see a slight improvement for the year in our operating income at 78.7, operating margins at 5.4 compared to 5.7.

When you look at the two big costs, again cost of sales and wages, and this is for the full year, we had a 70 basis point change, a negative impact on cost of sales and in almost all categories. I mentioned that earlier in the quarter but all the proteins, anything associated with oil, the grains, anything associated with wheat, dairy for much of the year, as well as eggs and most just about every -- most items that we do touch.

Looking at the operating wages, you can see we are down 120 basis points which helped offset some of that increase, or all of that increase.

Turning quickly to the food product side, just -- again, just giving you some trends -- great top line growth, continued top line growth dairy pounds sold. We had a lower hog cost environment this year and I have a slide here that will illustrate that but a lower hog cost environment. And then the other item would be increased productivity in a number of products -- the two products I just went through with increased productivity that helped offset and helped drive profit.

For the quarter, our sales were up 8.4% on the food product side; our operating income was up 7.9%, so you can see 11.4% operating margin, about the same as a year ago. I think when you look at it on the full year is when you really see the big impact there on the food product side -- a nice [inaudible] 8.7% increase in sales. You know, I mentioned the pounds sold earlier but a significant improvement in profitability on the food product side, up 43.7%. Operating margins near 10%, 9.8% compared to 7.4 and again, that was done with productivity in a number of areas. We had some help on our -- and I should have mentioned this on the restaurant side, our procurement side of the business with Richard Hall and his team were able to drive some nice savings of about $2 million on the food side and I believe about $3.5 million on the restaurant side, which helped offset some of the -- just the increasing costs.

As we reviewed the hog costs sheet, we are at $35 average for the full year and you can see [inaudible] we are at 38, just slightly or somewhat below a year ago. And we really did see the benefit, as you can see, just in the second half of the year. If you’ll remember on calls earlier on, we were talking about maybe this year the hog cost would average in the mid or upper 30s to 40s, low 40s, and really beginning in the third quarter, that came down and we averaged 31 in the third quarter, 27 in the second quarter, and the trends right now are in the 30s range right now, or maybe in the mid-30s I should say right now, so really a good cost environment from the -- about one of the only good cost environments that we have on the hog cycle.

Just a few comments on our balance sheet -- you can see we had cash and equivalents at the end of our year at $7.7 million. Our total debt balance, $298.5 million. That [inaudible] typically [inaudible] about Bob Evans, that’s up from the 206.3 that we had at the end of last year and really that was mostly two purchase treasury shares. We bought for the full year 5 million shares of Bob Evans stock back and most of the increase here in the debt was used to buy our shares back.

You can see our effective tax rate for the quarter is 32.8 and for the full year is 32.6%.

We spent $154.6 million in buying our shares back. Our average price was just under $31 per share.

Just a couple of other comments -- the capital expenditures for the full year came in at $121 million, compared to $84 million, and 121 is more than we had forecasted. We had said 110 or so. Really at the end of the year, there was a lot of construction in progress, mainly in the Mimi’s group that was really -- that helped drive that number up some and so some of that, as we look at our guidance for the full year we’ll be pulling back our ’09 guidance on CapEx to about $100 million.

Our depreciation for ’08 is $77.1 million and our -- and that compares with $74.2 million in ’07. And finally, I guess with that, I will -- I can ask if anybody has any questions on the quarter or on the year, I would be happy to try to answer them. Brent.

Question-and-Answer Session

David D. Poplar

Yeah, we’ve got a mic coming over.

Unidentified Analyst

I essentially wanted to ask on the operating wage line, you mentioned that you had some benefit from lower healthcare costs. Can you quantify what kind of benefit that was and what that represented?

Donald J. Radkoski

We had in the fourth quarter about $1.8 million in benefit, reduced revenue fourth quarter this year compared to fourth quarter last year in healthcare, and about $3.3 million for the full year. So we had some -- you know, we are self-insured and certainly we had some good experiences there, especially in the fourth quarter.

Unidentified Analyst

And is that related to just higher costs last year, more claims, or is it --

Donald J. Radkoski

We had a very difficult last year. I mean, many of the claims, if you’ll remember there was a quarter or two last year where we had significant increases in healthcare costs, second quarter in particular and really for the full year. So I think it’s mostly a function of somewhat of last year and I think this year’s claims may be slightly lower. We’ve done maybe a little better job but we are self-insured so the claims are the claims.

Unidentified Analyst

Okay, and then just quickly on other operating, what caused the significant deleverage there? Were there fuel surcharges or --

Donald J. Radkoski

Well, we had taxes. There were some -- you know, a couple -- a few different items in there that made it. There wasn’t anything that could -- that I could point to or that would jump out at it right now.

Unidentified Analyst

Okay. Thank you.

Donald J. Radkoski

Any other questions? If not, I’m going to turn it over to Roger Williams to really get into the business side of things.

Presentation on 2009 Outlook

Donald J. Radkoski

One point on FY08 I want to mention is just I had mentioned our current price increase on [inaudible] restaurants is 2.4%. It is actually 2.8%, so I just want to clarify that. That was in the release that went out for -- or our price increase, our current one is -- ’09 yeah, for May. That’s where we’re at currently.

And then I guess just FY08 is behind us, so I’ll take a few minutes and talk about the outlook and kind of where see things heading. First of all, looking at earnings per share, we are targeting earnings per share of $2 to $2.10 a share, diluted share. You see that compares with $1.95 and I think as a reminder that we are in the $1.95, that includes about $5.1 million in net pretax gains, if you’ll remember, from the slide that we have, which was a gift certificate breakage, as well as the other items that made up $5.1 million.

On net sales, we are targeting net sales growth consolidated 3.5% to 4.5% increase. At Bob Evans Restaurants, we are targeting a 1.5% to 2% increase in same-store sales, so continuing the trends that we’ve seen. At Mimi’s, we are estimating a slightly negative to flat trend, and just to explain a little bit, you know where Mimi’s numbers have been lately. Certainly that trend will be negative as we go throughout the summer. We hope it’s positive but certainly we are -- as we get into the second half of the year is where we really hope to see the positive numbers come out. That’s when the programs will be in place and with some of the initiatives and also we will be overlapping the comparisons we have in the second half of this year.

On the food product side, we can see -- we are estimating continued sales growth of 5% to 7% increase, and really that’s from expanded retail distribution as well as strong growth, continued growth in comparable pounds sold.

Looking at development, we are targeting one new Bob Evans Restaurant, staying very conservative, as Roger mentioned. We are going to be rebuilding five Bob Evans Restaurants in this fiscal year and at Mimi’s, as Tim mentioned, we are [going to open] 13 new Mimi’s restaurants during the fiscal year.

From the cost standpoint, really on the restaurant segment, there’s higher commodity costs. You know, we don’t really put out a target for that but it appears as if the cycle we are in is not going to end anytime soon, so we are saying we are up against the higher commodity costs. On the food side, however, we are seeing or estimating on $35 per [inaudible], which would be pretty close to where it ran this past year, so it’s still a pretty good, a fairly good price on the average cost per hundred weight for fiscal 2009.

As we look at operating wages, continued minimum wage pressures, however offset by proactive labor efficiencies at both Bob Evans Restaurants an at Mimi’s, and that’s where we are really going to be hopefully winning this year as we work towards reducing hours and keeping guest satisfaction.

Depreciation and amortization for FY09, we’ve estimated at $81 million. That compares with $77.1 million in FY08.

And then, moving on to restaurant -- or first the restaurant operating margins, we are estimating that restaurant margins will be slightly higher than the 5.4% that we achieved in 2008, and that the food products would be around the same, flat, close to the same really strong 9.8% margins that we saw this fiscal year.

And a reminder, the 5.4% does include the $5.1 million in net gains that we have in this current year on the restaurant side.

Net interest expense we are estimating at $15.5 million to $16 million, compared to $11 million prior year.

We see our effective tax rate, we are projecting an increase to 34.5% to 35%, and that would compare to 32.6% in the current year.

Shares outstanding, we are estimating 30.5 million to 31 million, compared to 33 and CapEx, as I mentioned earlier, $100 million compared to this year’s $121 million.

So with that, that ends our guidance and I would like to open it up to the floor, as well as the conference for Q&A.

David D. Poplar

We’ll take questions from people here in person in just a minute but Rose, first if you could see if anybody who has called in on the phone lines has any questions, if you could assemble that queue.

Question-and-Answer Session

Operator

(Operator Instructions) Sir, there are no questions in queue at this time. Oh, I apologize, you do have one now from Will Hamilton of SMH Capital.

Will Hamilton - SMH Capital

I had a question first for Mike on the food product side -- I was wondering, what gives you confidence that sow prices will stay around $35 per hundred weight, given that we saw a pretty significant herd liquidation in the first part of this year?

Mike Townsley

Well, I think what you are going to see and I think most analysts have forecasted, we are going to see sow prices for the balance of this year hold in this range. Now, will that include some liquidation in that? Absolutely. So the year we are talking about right now, I think we are fine with our estimates with the reduction in herd size. As we get into FY10 and FY11, we will see sow costs I think appreciate just simply because the herd size is going to be smaller.

Will Hamilton - SMH Capital

Don, I also had just a couple of questions in regard to the guidance. First, the interest expense line, you are obviously forecasting that to be higher. Do you guys anticipate taking on more debt this year or is that just factoring in higher rates?

Donald J. Radkoski

Well, we are factoring in that we will take a piece of our short-term debt and we will take it into a longer term piece, which will have a higher interest rate. And as well on the short-term debt, that we’ll still have some that will be at somewhat higher rates.

Will Hamilton - SMH Capital

So in terms of debt increases, you don’t plan on taking anymore debt out of your credit facility?

Donald J. Radkoski

We don’t really plan on for the full year not really increasing our overall debt levels very much this year at all. But as I mentioned, we will take a piece, probably 150 to -- well, it will be $100 million total of the short-term debt that we have now and we will price it for a longer term under a private placement, so that will have a higher rate than the short-term rates that we are enjoying, frankly, right now.

Will Hamilton - SMH Capital

Okay, and then lastly just have a question for maybe any of the presidents of the restaurants groups, Mimi’s and Bob Evans -- have you guys seen any benefits recently from the rebate checks? Obviously Bob Evans had a very good May sales and that’s partly when the checks went out, but I don’t know if anecdotally you’ve seen any evidence of that benefiting the results.

Unidentified Participant

I’ll take that one. I think that’s hard to quantify. I mean, all the reports that we have been reading said that a lot of those rebate checks are going to be going to existing debt obligations, so it would be hard to predict that, that had a significant impact. We just don’t have that kind of precise data.

Will Hamilton - SMH Capital

Thank you.

David D. Poplar

Operator, any other questions?

Operator

(Operator Instructions) Sir, there are no other questions in queue at this time.

David D. Poplar

Okay, we’ll go ahead and take any questions from anybody who is here. I think Brad had his hand up first.

Unidentified Analyst

I have just two quick questions, one on the repurchase assumptions. The guidance has 100 million shares built in, I believe -- yeah, okay, 100 million but you still have a $300 million authorization in place. Is that 100 million expected to be kind of evenly balanced throughout the year, first off? And would you say there is any chance that that would be adjusted throughout the year?

Donald J. Radkoski

The authorization is $3 million and we have $1 million baked into our plan, and really that will be mostly probably back-half loaded. It will be in the second, you know, second, third, [fourth quarters].

Unidentified Analyst

Okay. And then, back on the debt issue, I know you don’t know exactly where that’s going to be -- do you have an effective interest rate that you are kind of expecting for the debt this year or --

Donald J. Radkoski

Well, we are just beginning -- in fact, we are in our negotiating and working on that right now. You know, the longer term margins are going to be closer to the 6, 6.5 range versus we’re [enjoying] debt at the -- you know, in the 3, 3.5 range. So there’s -- you know, it depends on how it ends up but there will be some differential. But we feel it’s important here at some point to lock in some of that short-term debt [in with some longer term debt].

Unidentified Analyst

Okay. Thank you.

David D. Poplar

Stephen.

Unidentified Analyst

Just to follow-up on food costs, can you explain if there are any programs to [inaudible] food cost hedging?

Donald J. Radkoski

On many of our items, our proteins, most of -- you know, a number of the other key items that we deal with, we have some type of price that we buy for with one of our partners, one of our vendors. We will lock in prices for a certain period. Certain items we have locked in through the end of the calendar year, certain ones through the end of the fiscal year. And it really depends on [a program-by-program] basis. Things like ribs, for instance, we are locked in for ribs for the barbeque promotion, so we have that figured out. Things like chicken and some of those items would be locked in in different times, maybe through the end of the calendar year.

Unidentified Analyst

I’ve been noticing also things like shell eggs [have dropped] drastically -- are you covered for programs like that or --

Donald J. Radkoski

Shell eggs -- I don’t know. Richard, are we covered on shell? It’s a formulated price that changes monthly, so that -- we’re not covered per se on that, but we are covered on the -- we are covered on a number of our other items.

I think it’s important in today’s environment to -- you know, we have some good business partners. We work with vendors that we are able to do that and it helps [inaudible] in today’s environment.

David D. Poplar

Any other questions? Greg.

Unidentified Analyst

When you look at the growth at Mimi’s, 13 units planned for this fiscal year, I’m assuming that those are all locked in. When we start looking at fiscal year ’10, do you have anything that you have to move forward on? Because I know you have plenty of initiatives in place to drive that same-store sales number, but given that is there a possibility that you adjust your development at Mimi’s going forward?

Steven A. Davis

As with all our investments, we look at returns and again, if we see the returns being where they need to be, we’ll continue. If the returns aren’t there, we’ll look at it. You know, it’s something that we review on a quarterly basis. So we’ve got our guidance for this year and yeah, there’s always a pipeline. You can never just say we’re going to stop completely when you work out your pipeline but our desire to go forward with development is going to be based on how will we do with our returns, and that’s Bob Evans and Mimi’s and [inaudible].

David D. Poplar

Other questions? Okay. Rose, do you want to check and see if there are any other questions on the phone lines?

Operator

(Operator Instructions) And it appears there are no questions from the telephone audience.

David D. Poplar

Okay. Thanks. This concludes our analyst day then. Thanks to those of you who participated via webcast or via conference call, and I’ll be around for a while still today if you have any other additional questions to follow-up. Those of you who are here in person, we’ll be here for a few more minutes if you have follow-up questions.

Steven A. Davis

Dave, I’d like to say thanks to all the people who helped make this investor day I think a huge success. First of all, thank you to all of our guests for coming in. We know you have a lot of commitments. I heard some of you got the report last night and issued research this morning, so that means you probably got about three hours of sleep and still got here. We really appreciate your effort and thank you for taking the time to cover Bob Evans. We really do appreciate your work.

I want to say thank you to the chefs who prepared the food and all the ladies who put together the books and putting up with Don and Dave and I and all our last minute changes and all that good kind of stuff, so I just want to say thank you to the ladies in the back of the room.

And also I want to say thank you to the team. You know, it’s like the Wizard of Oz -- you pull back the curtain and you see the people really doing the work and that’s what you get here, and I hope you got a sense for the team, their commitment, their love for the business and I think you see probably a [inaudible] than you probably have seen in a long time at Bob Evans and I feel pretty good about that, in that we have come so far in a short period of time, but there’s a lot of work to do. We think we’ve laid out the opportunities. We try to be as fully transparent as we possibly can, and I want to say thank you to all of our investors and our suppliers and partners who are on the phone as well. Without you, we wouldn’t be where we are today. And most, a special thanks, if we have any customers on the line, thank you for being great customers and we look forward to seeing all of you in Bob Evans.

So Dave, is there anything else?

David D. Poplar

That’s it.

Steven A. Davis

Okay, so I guess that pretty much concludes our investor day and we are here to take any other questions from people in the room if there are some.

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