Q&A: Bob Evans’ CEO Steven Davis

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From the March 2014 issue of Columbus CEO

Steven Davis is invigorated by the pace and innovation that takes place in the food industry. Davis has spent his career developing restaurants and retail foods into nationally known brands. From Pizza Hut to Kraft to the stores and products he oversees as CEO of Bob Evans, Davis has helped build the brands that feed American families.

“The thing I like about the food industry, it’s a people business,” says Davis.

A family man who shares a love of philanthropic work with his wife, Lynnda, Davis has strong ties to Columbus nonprofits, including OSU’s James Cancer Hospital and the Columbus Partnership. Davis’ work on the Juvenile Diabetes Research Foundation was inspired by the youngest of his three daughters, who has Type 1 diabetes. On March 6, Prevent Blindness Ohio will recognize Davis with its 2014 People of Vision Award for his contributions as chairman of the organization.

“I just enjoy being around people,” says Davis. As CEO, he relishes touring the country on company roadshows and talking with Bob Evans’ investors.

The Bob Evans board, chaired by Davis, counts among its members Columbus food-industry legends, including Bill Ingram (chairman and CEO of White Castle System) and Cheryl Krueger (founder of Cheryl & Co.). Roughly a third of its members sat on the board when Davis was hired in 2006, he says.

“If you take the officers of this company along with our board of directors, we collectively own 1.1 million shares,” says Davis, asserting that the board’s interests are aligned with those of stockholders.

Bob Evans and its board have been named in two separate lawsuits filed by Sandell Asset Management Corp. and the Oklahoma Firefighters Pension and Retirement System. The suits allege the company violated shareholder rights governing the election of board members.

The bylaws were amended on Jan. 29 and Sandell announced it was dropping its suit. The legal actions follow a 2013 campaign led by the activist hedge-fund manager pressuring Bob Evans to sell and lease back its restaurants, spin off its food products division and return the proceeds to shareholders through a stock buyback.

Davis sat down with Columbus CEO magazine to discuss his philanthropy, his work and his confidence in the face of shareholder opposition. Following are excerpts from that interview.

You responded publicly to Sandell’s challenge, in part, by asserting your commitment to BEF Foods. What do brand retail products mean to your sustainability and growth?

Bob Evans started out as a packaged goods business and then opened the restaurant business. Remember, Bob made a better brand of sausage. He was selling sausage to people on the roadside, decided to open up a restaurant so people could sample the sausage. This is not the strategy that I started; this is the strategy that Bob started.

Over the years, we have taken products that we launched in the restaurants and then moved them into the grocery channel.

You can see the evolution of what we’ve done. The side dish business gets its inspiration from the restaurants. But we not only provide food service products for our restaurants, but…we can make sausage patties for other quick service chains.

There are five levels of synergy that happen between the restaurants and the food products business. First is the branding. Because the food products business is national, now that we’re expanding our geographic footprint in the restaurants, the brand has already been developed.

Number two is the innovation synergy. We wouldn’t have sausage gravy in the grocery channel if we didn’t have Bob Evans restaurants. Now, we’re taking the same sausage gravy and making it up for the restaurants. The restaurants used to make it from scratch.

The third part is, as we make products for ourselves, our food service team can go out and sell those to other people. The fourth part is our side dish business is very cyclical…. All the things we’re making now for the restaurant space keeps the plants busy all year long. So now, even though I have a big production spike, I don’t have what I call a ‘boom splat,’ this big surge and then drop.

The other thing that does is it gives us price certainty….The only reason prices will go up for our restaurants is if the costs go up. We’re not trying to margin up.

The other thing is supply chain safety. We’re always going to supply sausage gravy for the restaurants; we’re always going to make soups for them.

Have you seen the restaurant industry moving in the retail direction over the course your career?

Yes. You know who does a great job of that is Starbucks. Starbucks started out with coffee shops and now when you go into the grocery channel, you’ll find bags of coffee, you’ll find Starbucks kiosks. I think they’ve done the best job of what we’re trying to do. I think that serves as a great model for us. I would say that they are vertically integrated fairly well.        

You have a very strong board with a lot of well-known Columbus business leaders. How do you relate to your board members and get the most out of them?

It’s my board of advisors. I’d say about a third of the board, the group that hired me, is still around. Michael Gasser is a great executive….We’ve got some familiar faces like Cheryl Krueger with Cheryl and Company—‘the cookie lady’ we like to call her. But then we’ve got some new faces that were brought onto the board over the years. Eileen Mallesch used to be chief financial officer for Nationwide Insurance. We brought on Paul Williams, he used to be chief legal officer for Cardinal Health. We brought on Mary Kay Haben who is a retired president from the Mars company, the Wrigley company and Kraft foods.

Of course we’ve got Larry Corbin on our board. Larry Corbin opened our first restaurant with Bob Evans. He’s got the history of the company, and he’s been affiliated with the company for probably 50 years.

We’ve got Bill Ingram. He’s the chairman of White Castle, but he’s third-generation. He’s got restaurant experience, but also entrepreneurial. Rob Lucas is our longest standing board member. He goes all the way back to Dan Evans and some of the people who helped form and start the company. (Former Ohio State University president) Gordon Gee’s on our board as well. I think we’ve got a great mixture of new faces.

Our company was given the distinction by Forbes as one of the most admired companies in 2012. There’s an organization called 2020 Women on Boards. 2020 is a company that hopes to achieve the 20% female board representation by the year 2020. We have 30 percent, so we were listed as an excelling company.

We’ve got great diversity of experience, great diversity of thought, we’ve also got gender as well as ethnic diversity. We have a one score with ISS. One is the highest governance score you can get. One of the areas in which we got a green flag--which is a good thing--is board composition.

How did you deal with the recent shareholder opposition?

First of all, all shareholders have a voice in our company. One of my favorite things is when we do our annual meeting (and) somebody comes up to me and says ‘Steve, I still have the shares I bought when Bob Evans first went public,’ and they’re so proud and they’re still holding onto them. So whether you have one share or one million shares, you get my time and my mind space.

Number two, I spend a lot of time on the road with investors. When I first joined the company we only had one coverage analyst. We now have seven. We do what are called roadshows. We’ll go out with our analysts; we’ll talk to current investors as well as prospective investors.

Everybody has ideas.  All ideas are good ideas, but some are better than others.

A sale-leaseback is just a form of borrowing money. It’s the most expensive way to borrow money. Our job is to borrow money at low rates. We just increased our short-term borrowing to $750 million at a rate of Libor plus half a point, which is less than 2 percent. A sale and leaseback will cost you 7 to 8 percent, so it’s arithmetic. A sale-leaseback doesn’t make sense…and very few companies do sale-leasebacks, very few in the restaurant industry. They like holding on to their real estate. If you hold on to real estate you can borrow at lower rates.

If you looked at the history (of our food products business), we have grown this business to profitability. In fiscal year 2009, we made $16 million, and this year will make somewhere upwards of $28 to $30 million, and that’s even with the highest sow costs in our history. Clearly, the things we’re doing are growing shareholder value. You don’t sell a business when you’re growing it.

We sold Mimi’s Café because it wasn’t performing to our expectations. It needed a large capital infusion, and it was in a part of the country where we didn’t have a large geographic presence. So, for a lot of reasons we decided to sell Mimi’s Café. But the reason we sold it (was because) we didn’t see any more upside potential.

We see so much upside potential for our food products business. We’re only in 30,000 grocery stores; we can get to 40,000. In our core markets here in Ohio, we have 22 SKUs per (store); in our non-core markets like these in the West Coast we only have nine. So we can increase the number of stores and we can increase the number of items we have per store. Since we just bought Kettle Creations, we haven’t finished our vertical integration. There’s some profit upside there.

We believe that our plan with our food products business will provide great shareholder value, more so than selling the business. And if you sell the business you’re going to take a big tax hit, so you’re not going to get all the proceeds anyway.

In terms of buying back stock, if you take our current stock buyback--we announced a $225-million stock buyback program. Since 2007 we’ve reduced our outstanding share count from (36 million to 27 million). If you take our projected stock buyback, it’s going to reduce that number by a third.

So we’ve already bought back our stock. We’ve doubled our dividend. The real story I want everybody to hear is, by the end of fiscal year 2014, we’ll have returned over $800 million to our stockholders.

We’re a very stockholder friendly company. That’s not something that we say about ourselves, it’s what our analysts have said…Just because we see a different way of growing the business doesn’t mean that someone else doesn’t have ideas. We just think that the ideas we have for growing the business are the right ones.

You’re confident in your decisions—how would you advise other executives facing shareholder opposition?

If you have a story, stand behind it. When I look at our board and I look at the accolades we receive for our board, not only from Forbes magazine but also from ISS (Institutional Shareholder Services). That speaks for itself. So whenever there is a difference of opinion, I always like to go to the facts, because the facts are usually friendly and they tell the story.

We’ve bought back our stock, we doubled our dividend, we have great board leadership (and) we’ve had great board rotation. All the things that the outside services look for when they evaluate companies, we’ve done those things.

My advice to executives is, if you’ve got a great strategy, execute it. One of my former CEOs said, ‘Sometimes people don’t appreciate your strategy until it works.’ It’s a true statement. Sometimes you just have to stay convicted to the strategy because you know it’s going to work, but you’ve got to be sure it delivers results along the way.