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Bob Evans Farms, Inc. (NASDAQ:BOBE)

F1Q09 Earnings Call

August 13, 2008 10:00 am ET

Executives

David D. Poplar – Vice President of Investor Relations

Steve Davis - Chairman of the Board and Chief Executive Officer

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

Analysts

Jimmy Ewe [ph] – Arstuff [ph]

Brad Levington [ph] - Keybanc Capital Markets

Howard Penney – Research Edge

Amy Greene - Avondale Partners LLC

Greg Ruedy of Stephens Inc

Stephen Anderson - Mkm Partners Llc

Michael Wolman [ph] - Sedody & Company

Operator

Welcome everyone to the Bob Evans Farms first quarter earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host David Poplar, Vice President of Investor Relations.

David Poplar

This is Dave Poplar and I am here with Steve Davis, Chairman of the Board and Chief Executive Officer, as well as Don Radkoski our Chief Financial Officer. We will start with some prepared remarks and then we’ll 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. A number or risks and uncertainties could cause actual results to differ materially from these forward-looking statements.

Please refer to our recent filings with the Securities and Exchange Commission for a discussion of these risk factors. We caution investors not to place undue reliance on 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.

Steve Davis

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

Reported diluted earnings per share for the first quarter of fiscal 2009 were $0.45 compared to $0.38 in the first quarter of fiscal 2008. This represents an 18.4% increase despite a $1.7 million unfavorable variance that negatively impacts our comparison with last year. Don will provide more detail on this variance in his commentary.

Reported operating income was $23.5 million in the first quarter of fiscal 2009, a 9.3% increase compared to $21.5 million in the first quarter of fiscal 2008. In our restaurant segment Bob Evans has now delivered positive same store sales for eight consecutive quarters with same store sales up 2% in the quarter.

Our expanded pipeline of new products and more effective marketing has helped Bob Evans restaurants compete effectively in challenging macro economic conditions. At Mimi’s café our new management team is focusing on improving sales and profits at our core restaurants. Same store sales were down 6.5% for the quarter as economic conditions have adversely impacted consumer spending, particularly hard and most notably in California, Florida, Arizona, and Nevada, where the majority of Mimi’s comp store base resides.

We had another great quarter in our food products segment with a 12% overall sales increase and a 74.5% increase in operating income. We now have achieved 26 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

I am going to spend a few minutes walking through the income statement. Please note that 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 consolidated statement, net sales for the quarter were $440.3 million up 3.7% compared to $424.6 million in the first quarter of fiscal 2008. The increase reflects improved same store sales at Bob Evans restaurants, new restaurant openings at Mimi’s Cafés and strong sales in the products food segment. Cost of sales was $130.4 million or 29.6% of net sales in the first quarter of 2009, compared to $125.6 million or 29.6% of net sales in the first quarter of 2008.

A favorable mix shift in our restaurants segments along with efficiency’s from company wide purchasing initiatives and lower hog costs in the food products segment enabled us to hold cost of sales flat as a percentage of sales despite rising commodity costs; however we do expect cost of sales to increase as a percentage of sales in both segments for the full year.

Operating wages were $152.7 million or 34.7% of net sales in the first quarter of 2009 compared to $153.8 million, or 36.2% of net sales in the first quarter of 2008. This improvement is the results of effective restaurant segment labor management as well as leverage from improved same-store sales at Bob Evans restaurants and lower health care expenses. These benefits more than offset the negative leverage from same store sales declines at Mimi’s.

SG&A expenses for the quarter were $40.2 million or 9.1% of net sales compared to $35.8 million or 8.4% of net sales in the first quarter of fiscal 2008. The entire impact of the $1.7 million unfavorable variance that Steve mentioned earlier is in this line as we incurred a $675,000 expense related to a legal settlement this quarter. Also having a negative impact on SG&A comparison is the pre-tax net gain of nearly $1.1 million from the sale of real estate assets that were recorded in last years first quarter. We did not sell any real estate assets in the first quarter of this year and, as we have stated, we don’t expect material gains on asset sales this year given the current softness of the real estate market.

Our reported operating income for the first quarter of fiscal 2009 was $23.5 million, a 9.3% increase compared to $21.5 million a year ago. Net interest expense was $2.9 million in the first quarter of 2009, compared to $2.2 million in the first quarter of fiscal 2008. The increased interest expense is primarily the result of additional debt incurred to fund the company’s share repurchase program.

Please note that our interest expense guidance for the year of $15.5 to $16 million already contemplates this increase in our debt level. Also, as we indicated in the release, we completed a private placement of $70 million in senior unsecured fixed rate notes after the close of the first quarter. We used this additional liquidity to replace existing debt. Total debt at the end of the first quarter was $301 million compared to $298.5 million at the end of fiscal 2008.

Pre-tax income was $20.6 million, up 6.9% compared to $19.3 million a year ago. Consistent with our guidance the tax rate is up year-over-year at 33.1%. This compares with 31% a year ago. The increase is due to changes in state taxes. For the full year we continue to expect the tax rate to be between 34.5% and 35%.

Reported net income for the first quarter was $13.8 million compared to $13.3 million a year ago. Diluted, weighted, average shares outstanding were $34.9 million compared to $35.3 million in last years first quarter. This reduction reflects our share buy back effort during fiscal 2008.

As Steve mentioned, reported diluted EPS was $0.45 up 18.4% compared to $0.38 one year ago.

Now turning to our business segments, net sales in the restaurant segment were $368.1 million a 2.2% increase from a year ago. Same store sales at Bob Evans were up 2% for the first quarter with a 4.4% increase in May, a 0.9% increase in June, and a 1.1% increase in July. Average menu prices of Bob Evans were up 2.9% in the quarter.

Same store sales at Mimi’s café were down 6.5% for the first quarter. By month Mimi’s was down 5% in May, 6% in June and down 8.1% in July. Average menu prices at Mimi’s were up 2.7% in the quarter.

Food costs were a challenge for our restaurant segment during the quarter, but we were still able to hold the line steady as a percentage of net sales at 25.5% due mostly to a favorable mix shift and efficiency’s from our purchasing initiatives. Some of the mix shift is from the new Just

Enough menu at Mimi’s, which promotes higher margin items with lower food costs; however we do expect food costs to be up as a percentage of sale for the full year in light of a rising commodity costs that are putting pressure on margins across the entire restaurant industry.

Labor costs were 39.1% of sales, down 140 basis points from 40.5% a year ago. Both restaurant concepts made excellent progress in adjusting labor scheduling to eliminate hours, as we took approximately 560,000 total hours out of the comp store base, including about 365,000 hours of Bob Evans and around 195,000 hours at Mimi’s. This initiative helped offset the negative impact of federal and state minimum wage increases over the last two years. Healthcare costs were also down significantly.

Other operating expenses in our restaurant segment were 18.9% of sales up 80 basis points from 18.1 a year ago. This change is due primarily to a shift in advertising expenses Bob Evans restaurants which we expect to reverse over the course of the year. Also impacting other operating expenses was higher utility expense in the restaurant segment.

SG&A expense was 6.8% up approximately 70 basis points compared to the first quarter of fiscal 2008. This increase is due largely to the $1.7 million unfavorable variance that I mentioned earlier as well as an incremental $661,000 in performance based incentive compensation expense, compared to the first quarter of fiscal 2008.

Depreciation and amortization expense was up slightly as a percent of sales. The restaurant same with reported operating income was $17.6 million, down 3% compared to $18.1 million in the first quarter of fiscal 2008. This decline includes the impact of the $1.7 million unfavorable variance in SG&A mentioned earlier.

The food products segment had another great quarter with total net sales of approximately $72.1 million, up an impressive 12% from a year ago. Comparable pounds sold were up 13% on top of a 4% increase last year. Cost of sales were 50.6% of sales, down 190 basis points compared to 52.5% of sales in the prior year.

The improvement as a percentage of sales is due to lower average hog costs of $29.00 per hundred weight compared to $42.00 a year ago; however, just so they mention in our restaurant segment we do expect cost of sales to increase in our food products segment during the year as our full guidance for hog costs is approximately $35.00, so we anticipate higher average hog costs in the second, third, and fourth quarters.

Labor costs were 12.2% of sales, approximately equal to last year. SG&A expense was 20.8% down 50 basis points compared to the first quarter of fiscal 2008. This reduction is primarily due to leverage from increased sales.

In summary, the same as operating income of $6 million was up 74.5% and approximately 300 basis points as a percent of sales from a year ago, an excellent overall performance.

As we noted in the press release, we are reaffirming our guidance for the fiscal 2009 diluted reported earnings per share of $2 to $2.10. Capital spending was $22 million for the quarter. We continue to target capital expenditures for the year of about $100 million which is significantly below the $120 million we spent in 2008. This reduction in capital spending should give us more financial flexibility in deploying our cash flows.

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 have adversely impacted consumer spending particularly hard most notably in California, Florida, Arizona, and Nevada. These trends could affect our future development plans and our capital spending for Mimi’s.

Turning to the balance sheet, cash at the end of the quarter was about $6 million. Total debt was about $301 million, compared to stockholder’s equity of about $627 million.

Steve Davis

For the past two years we have focused on our internal approach to managing the company, which we refer to as our best brand builders. We developed these brand builders to unlock the national growth potential of our premium regional brands. As we do each quarter, I would like to quickly review our progress in each of the five brand builders. As a reminder, the five brand builders are: Win together as a team; consistently drive sales growth; improve margins with an eye on customer satisfaction; be the best at operations execution; and increase returns on invested capital.

Let’s start with winning together as a team, which means getting everyone at the company strategically aligned and focused on the same common goals. 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 out during fiscal 2007. The goal of this program was to achieve efficiency’s in productivity in all business units over the next five years. One of the immediate benefits we have realized from project Best Way is evident in our pricing strategy.

With the soft economic conditions, we have taken a cautious approach to pricing at both of our restaurant brands, instead of passing 100% of our commodities cost increases to the customer. Accordingly, our pricing was less than 3% at both Bob Evans and Mimi’s Café during the first quarter. Some of the cost reduction from project Best Way such as the purchasing initiatives that helped us hold our cost of sales line steady in the quarter have made this approach possible. For example, we are working on enhancements such as a new POS system at Bob Evans restaurants, which I will tell you more about in a minute. Also falling under Project Best Way umbrella is labor forecasting and scheduling as well as other cost savings and productivity initiatives.

Our second brand builder is to consistently drive sales growth. Our Bob Evans restaurant groups have taken this man through the heart with eight consecutive quarters of positive same store sales. Our first quarter same store sales at Bob Evans reflects a strong consumer response to our promotions including Big Farm salads, Bob-B-Q, baby back ribs, and oven roasted chicken as well as two new Knife and Fork Sandwiches.

At Mimi’s café we are focused on driving two primary strategies. The first is to revitalize sales. We are currently focused on driving top line improvement with our new right-sized, right-priced ‘Just Enough’ menu. We have rolled this program out for lunch in May and we launched our new dinner menu, featuring six new entrees ranging in price from $8.29 to $11.49 in August.

The second strategy of Mimi’s is to reengineer our cost structure to enable us to build brand awareness through advertising and promotion without negatively impacting margins. While Mimi’s has historically been a word of mouth advertise concept, we believe we are at a competitive disadvantage from a share of voice perspective; so we are planning to build the Mimi’s brand with more traditional forms of marketing, advertising and promotion. We have identified savings in five key areas that we expect will more than offset the incremental marketing expenses. These five areas are procurement, operations, menu reengineering, corporate G&A and pre-opening expenses. We will update you on our progress in these areas through out the year.

Along with Tim Pulido our President and Herbert Billinger our Executive Vice President of Operations, Productivity and Integration, we have added executive level talent in the functional areas of marketing, finance and operations recently at Mimi’s. We believe we now have the right people in place to drive these strategies I mentioned earlier successfully and I look forward to working closely with the new team going forward.]

In food products our sales momentum remains very strong as we continue to introduce new products and expand our relationships with major retailers. As Don mentioned, we achieved this quarters 13% in crease in comparable pounds sold on top of a 4% increase a year ago. During the first quarter we introduced three new products, new natural cased bratwurst and an Italian grilling sausage, as well as a 24 count sausage, egg and cheese burrito for wholesale club retailers.

Our third brand builder is to improve margins with an eye on customer satisfaction. As mentioned earlier, we eliminated a total of $2.6 million labor hours from our restaurant segment during fiscal 2008 and we took out an additional $560,000 during the first quarter of this year. We did this while maintaining our customer satisfaction scores and the number of customer complaints we are receiving at Bob Evans restaurants have declined. We also believe we have opportunities to further reduce labor while maintaining customer satisfaction.

In food products the team is doing a great job of improving hog yields and managing plant costs. Our margins also benefited from lower than expected hog costs in the quarter, but we expect our hog costs to gradually increase during the remaining three quarters to average out about $35.00 per hundred-weight for the full year.

Our fourth brand builder is to be the best at operations execution. Our roll out of a new point of sales system at Bob Evans restaurants continues to move forward. The system is now in a total of ten restaurants and we anticipate that the full roll out will be complete by the end of fiscal 2010. As we have mentioned before, this new system will help us simplify our order entry, it will help us achieve more precise labor scheduling, and help us better control our food costs. We also believe the new system will be a helpful tool to attract and retain employees, as it is much easier to learn than the manual process we are currently using at our Bob Evans restaurants today.

We have made significant progress in reducing turnover at Bob Evans restaurants from about 150% in fiscal 2006 to about 120% at the end of fiscal 2008 and for the quarter turnover continued to improve at Bob Evans restaurants at about less than 110%. We are trying to drive that number even lower.

Mimi’s café turnover remains one of the lowest in the industry at about 100%.

From an operations standpoint at Mimi’s café we have just launched a national guest feedback system through Mindshare Technologies. Although this system has been up and running for less than two weeks, we have already received more than 10,000 guest responses. This system is allowing us to get much better insight regarding our customer’s satisfaction because we are now receiving restaurant specific feedback instead of aggregated system wide data. We believe this insight will be invaluable to help us improve operations execution at the individual restaurant level. It will also provide us with a platform to conduct direct marketing with our guests.

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, we expect to build 12 new Mimi’s restaurants this year; however as Don mentioned, challenging economic conditions could adversely affect our future development plans.

In our food products division, we broke ground in June on a $16 million 50,000 square foot expansion of our Sulfur Springs, Texas facility, which will nearly double our square footage there. This plant serves as a sandwich production facility for both Owens and Bob Evans convenience food products such as breakfast sandwiches, fully cooked sausage, and breakfast taco’s. We anticipate that this investment will be beneficial to free up capacity to capture this high volume, volume source. We expect his expansion to be completed by May of 2009.

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 and while we did not repurchase any shares during the quarter, we expect to repurchase at least a million shares over the course of the year. We also have authorization to repurchase up to a total of $3 million shares for the 2009 fiscal year.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jimmy Ewe [ph] of Arstuff [ph].

Jimmy Ewe – Arstuff

I think there was mention of some management change at Mimi’s. Could you elaborate on what changes were made in the quarter?

Steve Davis

Yes over the past six months, as you are well aware, we brought in Tim Pulido and Herbert Billinger. We have also brought in a person to become our VP of Finance, Tom Lind [ph] who has a very extensive background in consulting and also in finance. We promoted Sherry Lee [ph] to our VP of accounting, she had been doing nice job for us out there. We just hired a woman by the name of Mimi Summerman [ph] who has great experience in restaurant marketing and casual dining, fast casual, as well as family dining in QSR and we recently promoted a gentleman out of the operations rank, Randall Hugh, to be our Vice President of Operations out in the East.

We felt like those changes are really going to help us out and as I said, move us forward in the five key areas that we had talked about earlier in addition to giving us some fresher thinking in terms of marketing for the Mimi’s café brand.

Additionally we have hired a consultant out of the restaurant space to work with our marketing team as well so we are feeling good about the new faces that we’ve put in place. They’ve got a fresh perspective and the things that we talked about earlier are now going to start to get some traction.

Jimmy Ewe – Arstuff

If I heard correctly you kind of implied, if I look at Mimi’s performance the last few quarters it’s just deteriorated consistently, but it seems to me a lot of that, from your comments, has to do with the geographical locations of those restaurants, but your response appears to be that we’re going to do more advertising. Am I reading that right, because it seems like advertising in areas that are already somewhat compromised may not help, but I guess you disagree with that?

Steve Davis

Well I would disagree because it is a share a stomach challenge now. If you look at casual dining historically, awareness is what drives the brand long-term. We’ve got these new products called the ‘Just Enough’ products that I mentioned to you earlier and we’ve got a great idea that nobody knows about. In the environment we’re in you can’t just be a word of mouth player. If you look at Friday’s, if you look at Applebee’s, you know everybody’s doing pretty much the same thing, which is the right sized, right portion strategy, but their advertising and out shouting us and so we’re getting great, great customer feedback on the items, it’s just that people outside of the restaurant don’t know about it.

If you look at the turn around at Bob Evans, we came up with product innovations, but we had some very laser beamed focused advertising against it and the success that we have with food products is the result of promotion.

So we want to follow that model in all three of our businesses and we’re not going to sit on our hands, we’re going to aggressively go after the customers that are out there and remember that this is not just a short-term investment, this is a long-term investment because we’re rebuilding the entire financial model so that we can have sustained advertising, not just for the next 90 days but for as long as we own the brand.

Jimmy Ewe – Arstuff

Well what kind of timeframe do you look for, for Mimi’s to eventually turn around?

Steve Davis

Well if I had a crystal ball I would answer that question for you, but in all seriousness, I don’t have to tell you about what’s going on in California, Florida, or any of those other places, you can do your own assessment. At some point in time that situations going to get better, so we just want to be in a better position both from a branding and from an operational perspective to take advantage of the consumer trends when they do improve. Simultaneously, the majority of our development is happening outside of those areas. Unfortunately a lot of our development historically was right in those areas and so we developed right into some troubled spots. All of our development going forward will be outside of those areas.

Jimmy Ewe – Arstuff

Future plan for share repurchases, should we expect more this year?

Donald Radkoski

We have $3 million share authorization this year and we’ve stated that for the fiscal year our plans call for about $1 million share repurchase sometime over the next three quarters.

Operator

Your next question comes from Brad Levington [ph] with Keybanc Capital Markets.

Brad Levington [ph] - Keybanc Capital Markets

I wanted to start off asking about food products cost of sales. Maybe we were looking at it wrong and seasonality might have factored into this some, but with the $29.00 per hundred weight sow costs, we thought you’d get a little more leverage on that line. Is that due partially to higher other cost packaging and other things in fuel?

Donald Radkoski

Yes it is true. I mean a lot of the other costs besides hog costs have increased in the food side, fuel being one of them and packaging and things of that nature, so that has some impact on it for sure.

Steve Davis

The other thing is, don’t forget that 100% of food product sales is not sausage, so recognize that there are other things in the commodities space that have increased and as I said, our strategy is not to pass everything on to the consumer. I think long-term that’s not a winning proposition.

We had some advantages with the hog costs and rather than taking prices just because some of the other commodities went up, we just let that balance itself out, because we’re in this for the long haul. You can look at Alpha space and you’ve got some people out there taking some pretty aggressive pricing, I just don’t think that’s going to be smart long-term.

Brad Levington [ph] - Keybanc Capital Markets

Can you quantify on that the difference in your sausage growth versus your side items, breakfast items and such?

Donald Radkoski

We have said that a lot of the growth, I mean sausage is growing, but the biggest growth areas are the side dish categories, potato categories and the side dish categories. We also said that roughly 60% of the sausage sales, or excuse me food product sales last year were related to sausage products, so the side dish category and potato categories and those categories are becoming a bigger share.

Brad Levington [ph] - Keybanc Capital Markets

Talking about the Mimi’s development, I realized that you can’t say exactly what would be expected beyond fiscal ’09, but are the 12 units planned for fiscal ’09 safe or is there any opportunity for some of those to be taken out if things don’t get better?

Donald Radkoski

We plan for it. As you know the pipeline takes time to get in, get the zoning and planning and things of that nature done so the 12 that we have are in under contract and many under construction.

Steve Davis

You should think of 18 to 24 months for a product for a development pipeline because by the time you find a sight and look at it and you’ll think it’s the right site and get it approved and then start the construction, you’re 18 to 24 months out, so you have to think about that. If you ever make any adjustments in development both up or down you need to think about an 18 to 24 month timeframe from any actions that already aren’t in the pipeline.

Brad Levington [ph] - Keybanc Capital Markets

On the restaurant labor line you mentioned lower health care costs gave some benefit. Do you have what the improvement was year-over-year on the health care costs?

Donald Radkoski

Yes, the improvement was $1.9 million and we are self-insured. We had less claims in the quarter compared to the quarter a year ago.

Brad Levington [ph] - Keybanc Capital Markets

Should we expect to see that in second or third quarter given higher costs back in ’07 or does that start to kind of level out?

Donald Radkoski

It’s really difficult to predict the health care costs. I mean the general, overall trend historically has been up, but this quarter we bucked that trend, so it’s just difficult to project quarter to quarter at times.

Brad Levington [ph] - Keybanc Capital Markets

One last question, the trend kind of changed this quarter for Mimi’s between same store sales and average weekly sales. Average weekly sales were worse versus usually better. Is that attributable to the Fourth of July falling on a Friday or is there some kind of change across the country that we’re not seeing in the same store sales number?

Steve Davis

You’re looking at seasonality because summer, unlike Bob Evans, Bob Evans peaks during the summer. You’ve got the family dining; you’ve got the back to school. Mimi’s will peak right after October and then go into the end of Christmas and then you get into January, you get into soft seasonality and then it picks up back in the Spring, so if you’re looking at absolute numbers you’ve got to take into account seasonality; so if you’re doing week-to-week or quarter to quarter comparisons you really do need to look at seasonality.

Operator

Your next question comes from Howard Penney of Research Edge.

Howard Penney – Research Edge

I have been more of a casual observer over the last couple of years and hitting in to the deep numbers and I guess you need to be complimented for the improvement in the turn around at Bob Evans and especially I want to say with the communications at the street, but the reality is traffic is the ultimate driver at Bob Evans and while you are, I guess, essentially flat or down slightly, is the non-traditional, (I’m going to use non-traditional at this point to describe QSR) competitors really having a big impact on the Bob Evans business and I’ve seen sort of comments about I-Hop and some of the other players in that segment wanting to take back breakfast and using to go and some of the other issues.

Can you sort of address the breakfast issue relative to maybe some of the other competitors than the non-traditional competitors?

Steve Davis

I think what you are seeing with some of the QSR competitors is they have gotten more aggressive in the breakfast front and I don’t have to tell you that convenience is a driver and to go is something that continues to grow.

The way we’re trying to capture it at Bob Evans is we really put a frontal assault against carry out about 18 months ago and we have seen some success in that regard.

In terms of the overall consumer, I don’t have to tell you about gas prices and all the other things that are pinching the consumers pocket and so we haven’t seen the same amount of traffic degradation on the weekends, but we are seeing a little bit more during the week day, so if people are consuming breakfast you might see some trade down to some of the QSRs, but you’re seeing that across all of retail.

If you look at any of the mid-scale retailers all the information I’ve been reading shows that their trends are negative, but if you look at Wal Mart, if you look at Costco, and you look at some of those people, their sales are up. If you’re in the middle things do get squeezed a little tighter, but that’s something that we expect over time as the economy gets better, maybe you’ll start to see that shift back, but credit the QSR guys, you know, they are doing some creative and innovative things and you’ll continue to see more breakfast innovation come out of Bob Evans.

Donald Radkoski

I think Steve also, as you look at our same store sales we’re over lapping really. In Q1 the toughest quarter of the year with Bob-B-Q promotion last summer which was very successful and really coming behind that was up 3.2 last year and then following up with 2% this year, so.

Operator

Your next question comes from Amy Greene with Avondale Partners LLC.

Amy Greene - Avondale Partners LLC

With Mimi’s, maybe I missed this, but did you mention when you were planning on launching some of the more traditional advertising?

Steve Davis

We usually don’t give forward information on any of our marketing and advertising plans for competitive reasons, but we do have four sources of testing that we want to do. The challenge to the team is get an advertising medium that we can own and you can probably, other than television, you will probably say while there is radio, there is print, there is local store marketing; we’ve got several of those tests in place, but we’re going to make the assumption that we’re going to reengineer the P&L so that we can sustain advertising. As I said earlier, word of mouth advertising in this space is not going to be as effective at driving improvements in same store sales as maybe actively getting out and promoting your brand, which is, quite frankly, something new for the Mimi’s team.

Amy Greene - Avondale Partners LLC

I am happy to see it coming. I just didn’t know if it was something that we could expect to see over the next quarter or so given the benefit that you were all able to drive when you kind of refocused the Bob Evans marketing. I think we’d all look forward to those kinds of improvements at Mimi’s.

Steve Davis

The difference was at Bob Evans we already were spending the money it just was not very well focused. The challenge at Mimi’s is, quite frankly, very little money was spent on external advertising, so now what we’re trying to do is we said hey a Bob Evans TV works we’ve just got to have a better message and we’ve got to put some innovation behind our advertising.

With Mimi’s it’s that we have to figure out the right vehicle, but then also what is the best way to promote the ‘Just Enough’ because, again, the consumer response and the mix we’re seeing on the product is great, but we’re just trading out customers and now the trick is to bring in new faces and try some of these new items.

Amy Greene - Avondale Partners LLC

Would it be a fair assessment that we probably could expect to see some continued softness at Mimi’s in the comps, particularly behind the success of ‘Just Enough’ given the lighter check average?

Steve Davis

Yes I think what you’re going to see with ‘Just Enough’ as you trade up mix is you’ll see margin improvement so that’s good for the long-term. But, like I said, until we start brining more faces and new faces into the restaurant it’s going to be a sub slog and then also, and I always tell this to the team, you can’t control the environment, what you can control is what’s in front of you. So we’re going to stay focused on what we impact and eventually the consumers or the environment is going to move in the right direction, but we’re not going to wait for that.

Amy Greene - Avondale Partners LLC

Looking at the marketing efficiency with Mimi’s, I mean you’ve got the majority of your efficiencies I would have to believe are in the most challenged markets. Are you looking to focus your advertising primarily there or are you willing to go spend it also on the East coast where you don’t quite have the penetration, but you have the newer units?

Steve Davis

We’re going to fish where the fish are, we’re going to go where the problem is so you can best believe we’ll be in 75% of the United States with a concentrated advertising effort.

Operator

Your next question comes from Greg Ruedy of Stephens Inc.

Greg Ruedy of Stephens Inc

Did you update your same store sales guidance for the two restaurant concepts?

Donald Radkoski

We have not. Basically the guidance, we reaffirmed the EPS guidance for the full year and really haven’t updated any of the components of that guidance.

Steve Davis

We will generally give you guidance on each line item. You know if anything is going to change materially through the year, but as far as the detail that goes underneath that, we generally won’t update that through the year.

Greg Ruedy of Stephens Inc

Discussing the labor hour reduction you’ve been using to lower the margins. The 500,000-hour run-rate in the first quarter is that what we should use going forward for the rest of this year, or what other opportunities do you have beyond that number?

Steve Davis

We really can’t project that number out because we are running into kind of budding in to some degree some of the labor savings we had in prior year during the second quarter. But, we do have a number of things in place with improved scheduling. We have some back of the house really reengineering that we’re looking at, those Bob Evans and Mimi’s that we think will help also, but I really can’t give you a run rate.

Greg Ruedy of Stephens Inc

Switching gears to the food product segment, the 13% increase in comparable pounds, how much of that do you attribute to a 40% year-over-year increase in promotions and then is there anything anecdotally you can share with us on trial versus repeat sales in that segment?

Steve Davis

Let’s talk about traveler repeat first. We have got several consecutive quarters of growth so, when we do get it, it usually sticks at, when we talked about regional brands with national potential, we grow our business both through new distribution as well as increasing our comparable products sold.

In terms of the increase in promotions, you see them when all costs go down. Our competitors get very aggressive. We’re usually not the cheapest guys on the block, but you just can’t sit there and not promote, so yes we saw a pop in some of our promotional expenses, but we don’t expect to see that through out the year and if hog costs start to increase everybody will cut back on promotions and so you’ll start to see more stability in that number.

Operator

Your next question comes from Stephen Anderson with Mkm Partners Llc.

Stephen Anderson - Mkm Partners Llc

Do you have any color at all on some of the Mimi’s café comps outside of the four states you mentioned?

Steve Davis

Yes generally the trends are down, but you do see a pretty significant difference between what we’ll call the sub prime belt and the non-sub prime belt. The other thing that we don’t spend a lot of time talking about, whenever you open up a restaurant you get that halo of the opening and then the next year. You’ve got the settling in of the numbers. So, I think we had our highest number of restaurants open last year, that’s factored into it. Again, pretty soon all of this is going to settle out, but more importantly we’re going to get, after making Mimi’s a promoted brand with innovation, just like we did with Bob Evans a couple years ago, we got a team in place to make that happen.

Stephen Anderson - Mkm Partners Llc

Talk about your new interest sub, new private licensing you mentioned in the report. What kind of difference in interest expense can we expect in the coming quarters?

Steve Davis

I’m sorry, you were coming in poorly, can you repeat that question?

Stephen Anderson - Mkm Partners Llc

Certainly, you had placed a private placement after the close of the quarter on the, for the senior unsecured notes. Can we expect any difference in interest in the coming quarters from that?

Donald Radkoski

We still maintain our guidance of $15.5 to $16 million net interest expense for the full year, so the current quarter; the next coming quarters would increase in relation to that.

Operator

Your next question comes from Michael Wolman [ph] with Sedody & Company.

Michael Wolman – Sedody & Company

At the food products side of things, can you guys give us any color her eon how that increase was driven from either new products or new distribution points?

Steve Davis

Typically we don’t break that out, but you’ll see a consistent trend probably over the next several quarters of us adding new distribution and then getting increased velocity and sales off of the items we get.

Just for perspective, our mashed potatoes have the highest volume per ACV of any mashed potato brand sold, so once we get in we continue to grow sales, so it’s a good blend. It’s really going to determine when we bring new people on versus when we’ve got a promotion going, but that’s always going to be the one-two punch, but we usually don’t split that out.

Michael Wolman – Sedody & Company

Okay, just on the other side, on the restaurants, what are your thoughts moving forward on pricing. I know that you guys have been pretty consistently taking pricing here, but moving forward is that going to be kind of the same picture?

Steve Davis

Yes my history both in packaged goods and also in the restaurant industry is you don’t know if you’ve not too far at pricing until you’ve gone too far and usually people will think pricing and then the next quarter you’re celebrating and then after a couple purchase cycles you’re feeling the pain of your decision.

One of the things that we will continue to do is to try to minimize the price increase we have to take. That’s why we put so much emphasis on productivity. What we do is we try to drive as much productivity as we can, then say all right what’s reasonable to take in terms of pricing based on the customer, based on the competition, but you’re going to see us on the lower range.

Full disclosure, a couple years ago the pricing on Mimi’s was very aggressive and again, unfortunately that was consistent in the casual dining space, but now you see the impact on the entire category. You’ll see us try to be as conservative as we can with pricing and you’ll continue to see us push very hard on productivity, because again, we’re in this for the long haul and if we can continue to create a gap between ourselves and another alternative, that’s just going to create great value for the customer and people are going to take a closer look at us.

Operator

Your last question comes from Brad Levington [ph] with Keybanc Capital Markets.

Brad Levington [ph] - Keybanc Capital Markets

Back in June when we were out in Ohio you talked about trying to roll out the back haul program for the Mimi’s prep kitchen deliveries as well to the East coast. Was there any progress on that in the first quarter?

Steve Davis

What we’ve done is we’ve got somebody taking a look at our whole distribution network. We basically have a prep kitchen out in California, as you are well aware. We’ve got people coming to California and then taking product out so we’ve got a consultant helping us, not only taking a look at our costs, but also saying what’s a smarter way to do this and as I mentioned at Mimi’s there were five areas that we were looking at to take cost out of the system. One of them is procurement and part of procurement is not only where you procure your items, but how you get them to the restaurant as part of the distribution procurement; so there is more to come in that area. It’s obviously not something you change overnight, but something that does have to change because I don’t have to tell you with high gas prices that that’s going to drive up your transportation costs and if your point of origin is California, that’s going to be an expensive way to do business.

Steve Davis

Thanks again everyone for joining us. If you have additional question please give us a call and if we don’t hear from you in the meantime, we look forward to sharing our second quarter results with you in November.

Have a great day.

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Source: Bob Evans Farms, Inc. F1Q09 (Qtr End 07/25/08) Earnings Call Transcript
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