Bob Evans Provides Strategic Initiatives Update and Reports Fiscal 2015 Third-Quarter Results

• Board of Directors announces the Company will not pursue a sale or spin-off of the BEF Foods business segment at this time
  
• JP Morgan retained during the third quarter to assist with continued evaluation of strategic alternatives for the Company's real estate
  
• Company's review of its G&A and operating cost structures yields a $35 million annual cost savings opportunity expected to be realized over three years
  
• Q3 2015 net sales total $357.2 million, an increase of $17.0 million, or 5.0 percent, compared to the prior year period. GAAP net income of $0.25 per diluted share compared to net income of $0.24 per diluted share in the prior year period. Non-GAAP net income⁽¹⁾ of $0.60 per diluted share compared to $0.31 per diluted share in the prior year period
  
• BEF Foods' Q3 2015 non-GAAP operating margin of 10.9 percent improved 870 basis points over the prior year period driven by sales gains, improved plant efficiencies, and lower sow and trim costs
  
• Bob Evans Restaurants' Q3 2015 same-store sales increased 3.8 percent
  
• Quarterly dividend of $0.31 per share payable on March 23, 2015, to stockholders of record at the close of business on March 9, 2015
  
• Company lowers fiscal 2015 GAAP diluted EPS guidance range to $0.70 to $0.90 per share and non-GAAP guidance range to $1.40 to $1.60 per share. Restaurant turnaround efforts are our #1 priority and are underway

NEW ALBANY, Ohio, March 3, 2015 (GLOBE NEWSWIRE) -- Bob Evans Farms, Inc. (Nasdaq:BOBE) today provided an update concerning a range of strategic initiatives the Company has been evaluating. The Company also reported its financial results for the fiscal 2015 third quarter ended Friday, January 23, 2015.

Strategic initiatives – interim update

Commenting on strategic initiatives the Board is addressing, Mary Kay Haben, Non-Executive Chair of the Board, said, "Last December, the Board of Directors concluded that the Company would benefit from new leadership and enhanced execution. In the wake of that leadership change, the Board and management are working together with a high sense of urgency to implement actions to enhance performance and create shareholder value. With these objectives in mind, the Finance Committee of the Board, with the assistance of independent advisors, was charged with conducting a comprehensive review of strategic alternatives. The Finance Committee unanimously reached several conclusions and advised the Board that:

1) Working with Lazard, it thoroughly reviewed the possibility of a separation of the BEF Foods business and concluded that a sale or spinoff of the segment, at this time, would not enhance shareholder value, and that continued focus on operations improvement would deliver greater benefits to our shareholders. Because the Company's tax basis in its BEF Foods business is low, a taxable sale would be accretive only if it occurred at an EBITDA multiple significantly in excess of recent valuations for which food businesses have traded. With input from its outside advisors, the Finance Committee also concluded the annual costs and lost synergies that would result from a tax-free spin-off would be significant. Additionally, the need to allocate the Company's debt between two smaller companies, and the one-time costs and significant management attention that would be required, make such a transaction not advisable at this time.

2) The Company has retained JP Morgan to work with the Finance Committee, in addition to Lazard, in reviewing the potential for real estate transactions or other changes to the Company's capital structure. Working with these advisors, the Finance Committee is continuing to evaluate various alternatives with respect to all, or a portion of, the Company's real estate assets, including a potential REIT spin-off, a sale-leaseback, and other real estate financing transactions; and

3) Working with Deloitte, the Company has reviewed its G&A and certain other cost structures and identified $35 million of potential annual cost savings, which it has already begun to implement and which it expects to realize over a three year time frame. The implementation costs to achieve these savings are expected to be approximately $4 million. Additionally, the Company is putting in place an enterprise-wide lean efficiency team to focus on other savings opportunities in addition to those identified to-date.

"The Board has thoroughly reviewed, and unanimously endorsed, the conclusions and recommendations of the Finance Committee."

CEO search update

Mary Kay Haben continued, "The Board is pleased with the progress of the CEO Search Committee as it identifies and vets CEO candidates. We will provide an update on the search process as soon as it is warranted."

Third-quarter fiscal 2015 results

On a GAAP basis, the Company reported net income of $5.9 million, or $0.25 per diluted share, compared with net income of $6.2 million, or $0.24 per diluted share, in the comparable period last year. On a non-GAAP basis⁽¹⁾, net income was $14.3 million, or $0.60 per diluted share, compared with net income of $8.2 million, or $0.31 per diluted share, in the comparable period last year.

Third-quarter fiscal 2015 commentary

Chief Financial Officer Mark Hood said, "Our third-quarter results reflect improved net sales in both our Bob Evans Restaurants and BEF Foods business segments. The improvement in sales combined with lower sow costs and improved plant efficiencies at BEF Foods led to solid profit growth at BEF Foods in the third quarter. While Bob Evans Restaurants' same-store sales increased 3.8 percent in the quarter, higher discounting, food, and labor costs resulted in a decline in the segment's operating income, demonstrating the challenges we face in turning around performance. We have developed, and are implementing, a restaurant turnaround strategy anchored in farm-fresh food, improvement of our breakfast offering, and completion of the Broasted^® Chicken platform rollout. We introduced a new restaurant menu late-February that, along with reduced discounting activity and an increased focus on breakfast, is expected to mitigate food cost pressures beginning in the fourth quarter."

President, BEF Foods, Mike Townsley, said, "We had a strong quarter at BEF Foods with overall volume up 5.5 percent. Our side dish business, which had been negatively impacted by a supplier dispute last year, grew 21.9 percent in the quarter. Our sausage volume declined 6.4 percent as sow costs remained relatively high early in the quarter and we maintained tight discipline over our trade spending. From a cost perspective, we continued to improve plant operations during the quarter as our plant network is now operating at higher efficiency levels than the prior year period. However, we have identified and continue to execute upon opportunities to further improve operations. With a newly optimized plant network, significantly lower input costs, and a sales force empowered to strategically employ trade spending to drive sales, we believe BEF Foods will quickly improve its margin structure and deliver a solid return on the significant recent investments in our business."

Third-quarter fiscal 2015 Bob Evans Restaurants segment summary

Bob Evans Restaurants' net sales were $250.4 million, an increase of $9.9 million, or 4.1 percent, compared to net sales of $240.5 million in the corresponding period last year. Same-store sales were 3.8 percent in the quarter, slightly below the national Knapp-Track™ family dining index increase of 3.9 percent.

During the third quarter of fiscal 2015, Bob Evans Restaurants opened two new restaurants located in Simpsonville, KY, and Seffner, FL.

Bob Evans Restaurants' GAAP operating loss was $2.0 million, compared to GAAP operating income of $6.6 million in the corresponding period last year. Bob Evans Restaurants' non-GAAP operating income was $6.1 million, compared to non-GAAP operating income of $8.7 million in the corresponding period last year. The primary drivers of the $2.5 million decrease were: a $3.9 million negative impact of higher food costs due to increased discounting, menu mix changes, increased off-premise sales mix, and higher commodity costs; a $2.0 million negative impact of increased labor and benefit costs driven primarily by healthcare costs and wage rates; $1.3 million of increased operating expense resulting from increased marketing and utility expenses; and $0.8 million of increased S,G&A costs as a result of a $1.2 million incremental discretionary 401k match, offset by $0.4 million of net S,G&A savings. These items were partially offset by $3.7 million of sales leverage and $1.8 million of reduced depreciation expense.

Third-quarter fiscal 2015 BEF Foods segment summary

BEF Foods' net sales were $106.8 million, an increase of $7.2 million, or 7.2 percent, compared to net sales of $99.6 million in the corresponding period last year. The increase resulted from $2.8 million of net sausage pricing and a 21.9 percent increase in side-dish volume, partially offset by lower sausage, food service, and frozen product volume. Overall, total pounds sold increased 5.5 percent compared to the prior year period. 

BEF Foods' GAAP operating income was $9.7 million, compared to GAAP operating income of $1.4 million in the corresponding period last year. BEF Foods' non-GAAP operating income was $11.6 million, compared to non-GAAP operating income of $2.2 million in the corresponding period last year. The primary drivers of the $9.4 million increase were: $4.3 million of cost of goods sold favorability resulting from improved production yields, decreased sow and trim costs ($1.2 million), and the favorable impact of sales mix resulting from the growth in our higher-margin refrigerated side dish product line; $1.6 million of labor cost favorability due primarily to reduced headcount as a result of last year's plant network consolidation and improved plant efficiencies; a $1.0 million decline in other operating expenses due primarily to plant startup costs impacting the prior year period; and approximately $2.5 million of sales leverage.

Net interest expense – The Company's non-GAAP net interest expense was $2.9 million in the third quarter of fiscal 2015, an increase of $1.6 million, compared to $1.3 million in the corresponding period last year. In addition to a higher borrowing rate, the year-over-year increase was due to borrowing related to funding of share repurchases and capital expenditures. The borrowing rate on the Company's outstanding debt was 2.42 percent at the end of the third quarter, compared to 1.29 percent at the end of the comparable prior year period.   

Taxes – The provision for income taxes is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items. The Company realized a tax benefit of 12.4 percent for the third quarter of fiscal 2015, as compared to a 7.7 percent provision for the prior year period. The decline in the tax rate was primarily driven by the domestic production activities deduction, benefits from a company-owned life insurance policy, Work Opportunity Tax Credits, and the resolution of uncertain tax position reserves. For non-GAAP items, the tax rate was 12.4 percent, reflecting the Company's annual estimated tax rate.

Balance sheet highlights – The Company's cash balance and revolver borrowings at the end of the third quarter of fiscal 2015 were $3.8 million and $444.4 million, respectively. The Company was in compliance with its debt covenants at the end of the third quarter of fiscal 2015. The Company's leverage ratio as defined in its credit agreement was 3.69 at the end of the quarter, down from 3.81 in the prior quarter.

Fiscal year 2015 commentary and outlook

Mark Hood Chief Financial Officer said, "We are lowering our fiscal year 2015 non-GAAP diluted EPS guidance range from $1.90 to $2.10 to $1.40 to $1.60 per share. Lowering guidance is necessary as a result of the underperformance of our restaurant business in the third quarter as well as the expectation that the initiatives being implemented beginning in the fourth quarter will take some time to be fully reflected in improved operating results. 

"We have reduced expected same-store sales in the fourth quarter to low-single digits, reflecting a lower than previously forecast weather benefit. While year-over-year increases in cost of goods sold will moderate beginning in the fourth quarter, overall flow-through from increased sales will limit operating margin recovery. BEF Foods' sales in the fourth quarter will be flat to down mid-single digits as a result of the loss of several BEF Foods' food service customers. However, we expect lower sow costs and improved plant efficiencies will help deliver improved operating results in the BEF Foods segment. Additionally, the year-over-year impact of income taxes in the fourth quarter represents a headwind as the decline in expected tax rate in fiscal year 2014 occurred in the fourth quarter as opposed to being spread across the third and fourth quarters in fiscal year 2015."

Hood concluded, "While we are disappointed that second-half fiscal 2015 results will not achieve prior expectations, the turnaround necessary to restore the guest experience and acceptable profit margins is being executed with urgency. The turnaround of Bob Evans Farms Inc. has begun, but considerable work remains to reposition our restaurant competitiveness and drive sustainable same-store sales growth required to return to acceptable levels of profitability and return on capital. We expect the momentum of BEF Foods' turnaround to continue as we drive growth in our refrigerated side dish business and focus on plant and G&A efficiencies. We are focused on reducing costs across the enterprise."

This outlook is subject to a number of factors beyond the Company's control, including the risk factors discussed in the Company's fiscal 2014 Annual Report on Form 10-K and its other subsequent filings with the Securities and Exchange Commission. 

Investor Conference Call

The Company will host a conference call to discuss its third-quarter fiscal 2015 results at 10 a.m. (ET) on Wednesday, March 4, 2015. The dial-in number is (855) 468-0551, access code 69664846. A replay will be available at (800) 585-8367, access code 69664846.  

A simultaneous webcast will be available at investors.bobevans.com/events.cfm. The archived webcast will also be available on the Web site.

⁽¹⁾Non-GAAP Financial Measures

The Company uses non-GAAP financial measures to monitor and evaluate the ongoing performance of the Company. The Company believes the additional measures are useful to investors for financial analysis. Excluding these items reflects operating results that are more indicative of the Company's ongoing operating performance and improve comparability to prior periods.   However, non-GAAP measures are not in accordance with, nor are they a substitute for, GAAP measures. Reconciliations to the applicable GAAP financial measures are included in the attached schedules. 

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

Certain statements in this news release that are not historical facts are forward-looking statements. Forward-looking statements involve various important assumptions, risks and uncertainties. Actual results may differ materially from those predicted by the forward-looking statements because of various factors and possible events. We discuss these factors and events, along with certain other risks, uncertainties and assumptions, under the heading "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 25, 2014, and in our other filings with the Securities and Exchange Commission. We note these factors for investors as contemplated by the Private Securities Litigation Reform Act of 1995. Predicting or identifying all such risk factors is impossible. Consequently, investors should not consider any such list to be a complete set of all potential risks and uncertainties. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect circumstances or events that occur after the date of the statement to reflect unanticipated events. All subsequent written and oral forward-looking statements attributable to us or any person acting on behalf of the Company are qualified by the cautionary statements in this section.

About Bob Evans Farms, Inc.

Bob Evans Farms, Inc. owns and operates full-service restaurants under the Bob Evans Restaurants brand name. At the end of the third fiscal quarter (January 23, 2015), Bob Evans Restaurants owned and operated 564 family restaurants in 19 states, primarily in the Midwest, mid-Atlantic and Southeast regions of the United States. Bob Evans Farms, Inc., through its BEF Foods segment, is also a leading producer and distributor of refrigerated side dishes, pork sausage and a variety of refrigerated and frozen convenience food items under the Bob Evans and Owens brand names. For more information about Bob Evans Farms, Inc., visit www.bobevans.com. 

Broasted is a registered trademark of The Broaster Company, LLC.

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