BOBE

Bob Evans Farms, Inc. (BOBE)

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Bob Evans Farms (BOBE)

Q3 2013 Earnings Call

February 20, 2013 10:00 am ET

Executives

Scott C. Taggart - Vice President, Investor Relations

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

Steven A. Davis - Chairman and Chief Executive Officer

Analysts

Michael W. Gallo - CL King & Associates, Inc., Research Division

Will Slabaugh - Stephens Inc., Research Division

Michael Halen - Sidoti & Company, LLC

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Presentation

Operator

Good morning. My name is Jodi and I will be your conference operator today. At this time, I would like to welcome everyone to the Bob Evans Farms Third Quarter 2013 Earnings Release Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Scott Taggart, Vice President of Investor Relations. Please go ahead.

Scott C. Taggart

Thank you, and good morning from Columbus, Ohio. This is Scott Taggart, Vice President of Investor Relations. I'd like to welcome you to Bob Evans Farms Third Quarter Fiscal 2013 Conference Call. With me this morning are Steve Davis, our Chairman and Chief Executive Officer; Paul DeSantis, our Chief Financial Officer; Ed Mitchell, our Vice President and Corporate Controller. Our call today begins with a summary of our performance from Paul and then Steve will go into further detail regarding developments within each of our segments. After that, we will open the call for questions.

Please note, 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 of risks and uncertainties could cause our actual results to differ materially from these forward-looking statements. Our recent filings with the Securities and Exchange Commission include a discussion of these risk factors. We caution investors not to place undue reliance on forward-looking statements, which speak only as of the date of this conference call. We undertake no obligation to update these statements. Also, we will reference non-GAAP financial measures today. We have provided a reconciliation of the non-GAAP information to the most directly comparable GAAP financial measures in our earnings release posted on the Investor Relations section of our corporate website at www.bobevans.com and filed with the Securities and Exchange Commission on Form 8-K.

And now here's Paul DeSantis with a review of third quarter results and a look ahead at the remainder of fiscal 2013. Paul?

Paul F. DeSantis

Thanks, Scott. Good morning, everyone. This quarter is truly a demonstration of our first strategic pillar: Transform our core businesses to enable expansion. During the quarter, we took another big strategic step by completing the negotiations for the sale of Mimi's Café. We signed the deal on January 28 and, we're pleased to announce, closed on February 15.

Let me highlight a few other key items since our discussions last quarter. Same-store sales at Bob Evans Restaurants were 1.6% for the quarter, including a net unfavorable snow effect of approximately 0.5%. BEF Foods demonstrated volume growth of 13% and top line of 7.5%. Year-to-date, Foods has grown volume 12%, sales by 6% and non-GAAP profit by 40%. Non-GAAP EPS was $0.56 per diluted share.

We refreshed 40 Bob Evans Restaurants during the quarter, bringing the total to 249 restaurants refreshed to date. We continue to successfully integrate the Kettle Creations acquisition and then immediately challenged the plant to in-source a key product line due to a production disruption attributable to one of the company's suppliers.

We converted our 2 restaurant-operating companies to limited liability companies. Besides streamlining our organizational structure, this conversion is expected to have favorable cash tax benefits in the range of $53 million to $63 million, the bulk of which we expect to realize over this year and next year. This conversion is not expected to have any permanent tax rate benefit.

We paid off our remaining private placement notes, approximately $100 million worth, primarily using funds from our revolving credit line. The primary reason to pay out the private placement notes was the organizational and covenant flexibility we gained to facilitate the restructuring and other corporate initiatives. In addition, we expect to gain interest expense savings from the interest rate differential. I'll go into more detail by business unit in a few minutes.

As a result of our transformational and restructuring activity, there are a number of large items that are recorded in our financial statement. The goal of our GAAP to non-GAAP adjustment is to highlight the performance of our businesses by adjusting out the large items not associated with ongoing operation. In total for the quarter, we recorded $32.3 million pretax and $10.3 million after-tax of GAAP to non-GAAP adjustment. We also expect to have significant Mimi's sale-related GAAP expenses, which will be excluded from non-GAAP reporting during the fourth quarter. I encourage you to read the GAAP to non-GAAP disclosures in our press release for more specific details.

Normalizing for all these GAAP, transactional and restructuring adjustments, we reported non-GAAP EPS for the quarter of $0.56 per share, where we thought we were going to be when we announced the sale of Mimi's a few weeks ago. Last year, we reported earnings of $0.69 per diluted share. The key drivers of the variance are as follows: Mimi's reduced profitability cost us $0.07 per share as a result of the continued top line weakness. Last year, during the quarter, Mimi's earned $3.2 million. This year, only about $300,000. Same-store sales at Mimi's for the quarter were down 4%, with December down 6.3%, likely in reaction to our announcement of the pursuit of strategic alternatives for Mimi's.

BEF Foods shifted marketing spending to the third quarter from the first and second quarters to better match up spending with the key holiday demand period and avoid expensive election-related media. This timing shift cost $0.08 per share in the quarter. The spending is designed to drive awareness, as well as current volume. For the full year, we're expecting marketing spending to be up slightly to last year.

During the quarter, the Foods business experienced a $0.03 per share decline in profitability, as a result of higher costs arising from a production disruption attributable to a unilateral price increase taken by one of the company's suppliers.

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