Jack in the Box Inc (JACK) 2002 Q2 法說會逐字稿

Good day and welcome to the Jack in the Box, Incorporated second quarter 2002 Earnings Release Conference Call. Today's call is being recorded. A replay will be available for seven days on the Jack in the Box website, starting May the 8th for those who could not attend the live event. During the question and answer session, please use your handset when asking a question, do not ask over a speakerphone. At this time for opening remarks and introductions, I would like to turn the call over to Mr. John Hoffner, Chief Financial Officer with Jack in the Box, Incorporated. Please go ahead, Sir.

Thank you. Good morning and welcome to the Jack in the Box second quarter conference call. I'm John Hoffner, EVP and Chief Financial Officer. Joining me today are Chairman and CEO, Bob Nugent, President and COO, Ken Williams, and our Treasurer, Hal Sachs. During this session, the management team will review the company's second quarter results. Let me also mention that the details of the company's earnings guidance for the third quarter in fiscal 2002 can be found in the press release issued this morning prior to our conference call. Please be advised that this presentation contains forward-looking statements about sales, earnings and expenses, among other things. These statements reflect management's current expectations for the business and are based on current information. Actual results may differ materially from these estimates. The Safe Harbor statement in our earnings release outlines some of the risks and uncertainties and is considered a part of this conference call. Material risks affecting the company's business, as well as more comprehensive information relating to its operations, are detailed in company documents filed with the Securities and Exchange Commission. And now, Bob Nugent will open our conference call. Following today's presentation, we will take questions from the financial community. Bob.

Good morning, everybody and thanks for joining us. I would like to begin the session with a quick review of our key financial highlights for the second quarter. Jack in the Box net earnings in the second quarter grew 8.4 percent, to $18.2 million, compared with $16.8 million in the second quarter a year ago. At 45 cents, earnings per share beat analysts' consensus estimates by a penny and we're 3 cents higher than last year. As a reminder, earnings results include adjustments for the adoption of SAB 101, which occurred in the fourth quarter of fiscal 2001. On a full year basis, SAB 101 adjustments are not expected to have a material impact on operating results. Company] sales grew 7.4 percent during the quarter, to $418 million, and year-to-date, grew 8.4 percent compared with fiscal 2001. Second quarter same-store sales at company restaurants declined by 3 tenths of a percent from a year ago, but were 3 tenths of a percent higher than forecast and we're on top of a 4.1 percent increase last year. Year-to-date, our same-store sales increased 3 tenths percent, on top of a 4.2 percent increase in fiscal 2001. As mentioned in the press release, while we've experienced sales pressures in the last few months, I am pleased with our second quarter earnings results. Jack in the Box management is reviewing everything related to how we do business as a part of our profit improvement program. As a result, not only have we been able to help offset softer sales, we continue to invest in new initiatives that we believe will deliver improved returns for our shareholders. For example, we are implementing competitive advantages on the technology front. By the end of this fiscal year, we will have installed a new satellite system that enhances our information gathering capabilities and provides the ability for other benefits down the road. We're also rolling out our new POS system that is easier to use, allowing employees to enhance guest interaction and speed of service. The POS system also will help us to execute customer loyalty and debit-credit card programs that are emerging as a popular benefit for consumers and companies alike. We have more new things to tell you about the upcoming quarter in just a moment. But first, let me say that while we've experienced a somewhat challenging period recently, I am confident about where Jack in the Box is headed as a brand and as a business. And just completed our annual strategic planning meeting, senior management finalized not only the key initiatives for fiscal 2003, but also long-term strategies to capitalize on the changing dynamics of our industry. I left that meeting enthusiastic about our future and the significant growth potential that can be ours. With that, let me turn the call over to our President, Ken Williams. Ken.

Thank you, Bob. We have several initiatives underway in marketing and in operations, both short and long-term. During the second quarter, we introduced three new products, representative of our menu variety. A premium sandwich, Jack and Spicy Chicken Club, a new side, Spicy Cheddar Wedges, and a new flavor of our premium, real ice cream shakes, the Chocolate Banana Shake. Each of these new products contributed to sales system-wide during the quarter. In addition, we introduced a new antennae-topper promotion that featured Jack wearing either a San Francisco Giants or Oakland A's batting helmet. Offered with a premium Sourdough Jack Combo Meal, the promotion stimulated sales in the Bay area, helping offset some of the sales softness that we are experiencing there. We are expanding the program in seven of our major markets. With these additional Major League baseball teams; the Houston Astros, St. Louis Cardinals, Los Angeles Dodgers, Anaheim Angels, Seattle Mariners, Texas Rangers and the San Diego Padres. During the third quarter we also are introducing a new flavor specialty shake; our Ultimate Berry Shake. A high quality product made with real ice cream. We are balancing these offerings by also re-emphasizing our value menu, so that we continue to reach all segments of our customer base during this challenging economic period. Even more important is a major quality improvement initiative that will enhance our sandwich products.

We are encouraged about this initiative as we work to further improve positive consumer perceptions about the quality of our food. The initiative is slated to rollout system-wide during the fourth quarter. We are also increasing our investments in new product innovation that will reach beyond this fiscal year. Due to competitive reasons we are providing only headlines today. We plan to have new product introductions in fiscal '03 and will provide details as we progress. With respect to ongoing strength, our advertising is the longest running, active campaign in the fast-food business. Recent consumer research indicates that our advertising remains strong with high levels of recognition and great appeal to the heavy fast-food consumer. Operationally, there are several key projects underway to improve speed of service and update our facilities. Each is designed to enhance the guest experience and contribute to meaningful sales growth. So far, we have substantially improved speed of service since the introduction of the assemble-to-order program. Incidentally, ATO is the same program that led to significant sales improvements for us. Quality is a key point of our competitive differentiation. It is an essential part of meeting the evolving needs of our customer base and we are committed to continuous improvement in this important area. Now, let me turn over our discussion to John Hoffner, who will provide more detail about our financial results. John.

Thank you, Ken. And good morning. In the second quarter, Jack in the Box opened 20 new company restaurants, including two more units than forecast. Which were accelerated from our third quarter. Year-to-date, we have opened 55 new restaurants, versus 54 budgeted, and 58 last year. We ended the quarter with 1,817 restaurants in 16 States. This compares with 1,693 restaurants at the same time a year ago, an increase of 7.3 percent. As Bob mentioned, earnings grew 8.4 percent during the quarter, with a 7.4 percent increase in company restaurant sales, compared with a year ago. Total revenues during the quarter increased 8.3 percent, to $447.6 million, compared to last year's second quarter, and were up 8.9 percent year-to-date to 1.04 billion. Other revenues were 4.3 million, versus 1.5 million last year, primarily related to our stated objective of selectively increasing franchising in our business model as we grow. As forecast, we had six conversions during the quarter, compared to three a year ago. Out of a beginning of the year base of 1,431 company restaurants. Year-to-date, we have converted nine restaurants, versus four last year, which represents a majority of the $8.1 million in other revenues, versus 3.0 million last year. System-wide sales during the quarter increased 6.4 percent, to 512.8 million and 7.1 percent year-to-date, to 1.19 billion. The company's gross profit rate was 18.7 percent of revenues, the same as the prior year's second quarter. Year-to-date, our gross profit rate was 19.1 percent of revenues, compared with 19.6 percent last year. Our second quarter restaurant operating margin was 18.1 percent of sales, compared with 18.6 percent a year ago. Primarily as a result of higher occupancy costs of newer stores, whose sales have not yet matured, the impact of minimum wage increases in California, Washington and Hawaii, and higher utility costs. Our year-to-date restaurant operating margin was 18.2 percent, versus 19.1 percent last year. Primarily due to the factors just mentioned. SG and A rate, expense rate for the quarter was 11.1 percent of revenues, 1 tenth of a percent lower than forecast and slightly higher than last year's second quarter, primarily due to higher pension expense. Year-to-date, SG and A expense is 11.1 percent of revenues; the same as year ago. Earnings before interest and taxes during the quarter grew 6.2 percent, to 33.8 million, and year-to-date, were 83.1 million, versus 81.1 million last year. EBITDA was 50 million during the quarter, compared with 46.7 million a year ago. And year-to-date was 120.4 million, versus 115.1 million in 2001. Interest expense for the quarter was 5.2 million, versus 5.9 million in the second quarter of fiscal 2001, due to lower levels of debt. As previously reported, our estimated tax rate for fiscal 2002 will be 36.5 percent. Due to the favorable resolution of a long-standing tax matter. This compares to a rate in the second quarter last year, of 35.4 percent, which was related to the one time receipt of enterprise zone and franchise tax credits. Net income was 18.2 million in the second quarter, versus 16.8 million last year. Year-to-date, our net income was 44.9 million, versus 42.4 million in fiscal 2001. Second quarter diluted earnings per share, were 45 cents, versus 42 cents last year. Year-to-date, diluted earnings per share were $1.12, versus $1.07 in 2001. Capital expenditures in the second quarter were 24 million, versus 33.7 million last year, and year-to-date were 54 million, versus 72.5 million in 2001. Depreciation and amortization was 16.1 million in the second quarter, compared with 14.9 million in the last year, and year-to-date, was 37.3 million, versus 34 million in 2001. Now, let's move on to the balance sheet and cash flow. At the end of the second quarter, our current ratio was .5, versus .5 a year ago. Our debt-to-equity ratio at quarter end was .6, compared to .8 last year. The company's quarter end revolver balance was 39 million, compared with 71 million in the prior year. The company's revolving bank credit agreement expires March 31, 2003. This debt is now classified as current and has moved from long-term liabilities to current liabilities. The company is currently exploring refinancing alternatives and we are confident that we will be able to replace our current facility well in advance of this maturity date. Finally, the company's free cash flow year-to-date was 28.6 million, versus 1.9 million in fiscal 2001. Now, let me turn the call back over to Bob and we'll take your questions.

Okay Kelly, you want to open up the lines? And we'll be happy to take questions.

Good morning, Bob, John. A question on the other revenue. I know you said the six units sold were as forecast, and I guess that was the forecast in the March release, but the 4.3 million in other revenues was bigger than what you had forecast of 2.3 million in the February release. So, was there a change in the number of units forecast from the beginning of the quarter to the midpoint of the quarter? Has that number increased? Or was the sale proceed per store higher?

It was both, Mark. From the beginning of the quarter, I think we were estimating somewhere around five and then we increased it to six and then the proceeds from the sale on some of those units were, in fact, higher than anticipated. Our interim guidance in the quarter was probably estimating our other revenue line close to 4 million and I think we reported about 4.3 million. So, we were a little higher, and that is partially reflective of higher proceeds from the sale.

Okay. Thank you. And also a question on the strategic meeting, Bob, that you just had. I know that you've talked in earlier releases about -- and John, you referenced, the sale of stores reflecting this as well, the acceptance or decision that franchising will be a bigger part of the growth going forward. Can you maybe share with us any topic that you discussed with that in your strategic meeting? I mean, the current mix of franchise stores is a little less than 20 percent. Is there a targeted number that you guys have over the next three or five or seven years or so?

Mark, we're still in the process of developing a plan. There are a number of questions that we're asking that need to be answered. I think I've indicated here before that we would be prepared to come to the street with more definitive information regarding franchising in the summer. And, I think that I'm still asking that you be [patient]-- and we will be back to you late July, early August, with the details of our franchising strategy.

Okay. Thanks, Bob. I can certainly be patient. I look forward to hearing more from you on the topic. Thank you.

Yes, Sir.

Moving on to Joe Buckley with Bear Sterns.

Good morning. Just a couple of questions. Wondering if you'd talk a little bit about the Major League marketing initiatives and whether that's incremental advertising dollars or a shift in advertising dollars? And then, curious just on the Southeast. If you'd just give us an update on the number of units in your southeastern markets? And if you could, just aggregate it, maybe just the effect that it's having on your overall margins, that region?

Let me take the Southeast first, Joe. We don't -- I think I've said in the past, we don't comment specifically about the profitability by region. And I don't intend to change that policy today. I will tell you that we're making progress. We have 77 units that are opened and operating in the Southeast. We have another seven to open this year down there. We have not developed the schedule for next year yet, so I can't give you that. I can tell you, as I've told you in the past, that we'll open this year, totally, 30 new stores in the Southeast and that's about, therefore, 30 percent of the 100 new stores that we're opening for the company. Ken, you want to take the part on advertising?

Yeah, regarding the Major League baseball promotion, this has been an initiative that we've had in the works for quite a while, simply because of all the logistics that are necessary to put this kind of promotion together. In terms of the advertising levels, we're not anticipating a large increase in them, nor a decrease. This is part of the marketing program that we have going and we think it's going to be pretty successful.

Okay. One more question if I could. As you're selling restaurants to franchisees, are you keeping control of the real estate? Do these deals end-up involving rental income being paid to you by the franchisees?

Yes we are, Joe.

Okay, thank you.

You're welcomed.

And we will take our next question from Mark Kalinowsky with Salomon Smith Barney.

Hi. Two questions for you. First, I just wanted to see if there's any further details that you can give out regarding the product quality improvement program that's scheduled for the fourth quarter? The second thing I wanted to ask about is--I just want to see if my thinking is correct, you'll begin lapping easier year-over-year same-store sales comparisons in September, which seems to suggest that your own comp numbers should begin to improve at about that time this year. Is there any flaw in that thinking?

Let me take the last question first, Mark. No. Your thinking is not flawed. We have indicated that, in earlier guidance, that we expect for the balance of the year to be up about 1 percent, same-store sales. We are back-loading that estimate, believing that we're going to get more traction from the baseball promotion and even more traction from the quality initiative, which Ken will talk about in a moment, towards the end of -- beginning of the fourth quarter. And then as you indicated correctly, we start to rollover then, some easier comps. And so, I really expect that our sales momentum will start to build over the next 60 days and continue for some time thereafter. Ken, you want to talk about the quality initiative?

Regarding the quality initiative, this is another program that we have had in the works for quite a while. In fact, for really over a year. And what we've done is to make some very substantial improvements that have affected virtually all of our sandwiches. We will be rolling it during the fourth quarter. There'll be a small test prior to that. And we are also in the process of putting together advertising, which again, we believe is going to be pretty effective and we're, frankly, looking forward to it.

Thanks, Mark.

Thanks. Going once.

And we will take our next question from Jeff Omohundro from Wachovia Securities.

Hello. I wonder if you could provide us a little more detail on the new point of sale system rollout? And I'm wondering what impact that might have on speed of service? And also, if you have any thoughts now on what the royalty program credit-debit card initiative, what impact that might have on the speed of service?

Well, we're at the point with our new POS, where we have roughly 800 units installed at this point. We plan to install the balance of the system over either the next year and a half or so. It does have a built-in capability for debit and credit and loyalty programs. And we believe that it's going to offer-up all kinds of opportunities in that area. Regarding speed of service impairment, really none at all. In fact, it could even be a pick-up.

Okay. And I might have missed it, but could you update us a little bit on your outlook on beef pricing and beef sourcing?

Regarding the cost of beef, our second quarter costs were up somewhat over prior year. But that had eased from the first quarter. And the outlook is -- we think it's pretty good, although we, obviously, dealing with the commodity markets and the fair amount of volatility there. The one question we don't know about is the impact that McDonald's is going to have. There's some talk that they are going to be entering into the imported markets. We do believe however, that if there's any impact there on the import market, that there will be corresponding impact on the other side in the domestic market. So, we're not seeing the beef prices as a difficulty and possibly an opportunity.

Thank you.

Thank you, Jeff.

And we will take our next question from David [Bobay] with Paragon Capital Management.

Hi. I was wondering if you could breakout your traffic, versus the ticket for the quarter?

Well, the best I can say there is that the traffic was down a little bit and the average check was us a little bit. And the net was that we had a 3 tenths of a decline in our sales, same-store sales.

Okay. And do you see -- I know we have a strong concentration of stores in California where I think the minimum wage is a little bit higher maybe than other areas and I think there might be some other issues in California. Do you see a difference in the cost structure as you diversify out of California into new markets?

The cost structure in some ways can be somewhat higher in California, but frankly, we've done quite well with our sales here in California. So it's somewhat of a offset. Yes, there have been minimum wage increases. The average wage for the system however, has been up only slightly. And the field has really been working hard to keep that down and we're up only in low single digit area.

Okay, good. Thank you.

Moving on to David [Rose] with Jolson Merchant Partners.

: DAVID ROSE: Morning, Ken, John. Two quick questions. The first of which is the antennae balls. How many antennae balls did you sell in San Francisco area? And then secondly, on the conversions that you've been talking about in terms of the estimates, how are you coming up with the estimates of franchises sold? Are you looking at LOIs? Are you looking it at basing it on discussions with franchisees? How do we come up with that number?

Okay, regarding the antennae balls. The basic promotion was a free antennae ball when the consumer bought a sourdough Jack Combo. But, we did have them for sale and we sold a fair number. The actual number that we went through, I don't have. But, I can tell you that we were reasonably pleased with the response to it as well as the inventory. We neither had too much, nor did we have not enough. So, it came out just fine.

Dave, this is John. Regarding your question on conversion, essentially what we do is plan out our conversions over a period of time. Again, our talks with the franchisees determine which ones we think we can queue up and work on so we can develop a little bit of a flow here. And we do get some that are opportunistic in nature. Because as you know, we started in '01, to increase this part of our activity as a first step into growing franchising a little bit in our business. We have been able to cultivate some pretty good relationships and discussions with our franchisees. So, that said, what we are doing now is developing a pipeline of those conversions. And just so we keep this in perspective to the totality we're forecasting currently for the end of the year that we're going to do about 16 of these, versus 13 of these last year, which is approximately 1 percent of our, you know, our entire restaurant base. So, we are, at this point, we are not looking at a wholesale sets of conversions, ala Tricon. We see this as a steady measure, a process that we will undertake over time.

And from an accounting perspective, when I look at the balance sheet, at what point do these units flow under assets for held for sale?

They never do.

They never do?

0031:46 COMPANY REPRESENTATIVE: Assets held for sale ---.

Are only the sales leaseback? Okay.

Did you get that Dave?

Yeah.

Okay.

Great. Thank you very much. Congratulations on a nice quarter.

Thank you.

Good morning. I was hoping you could just discuss the components of the other income line more specifically please. For the current quarter and year-to-date?

Andrew, this is John. We don't really breakout the components of other revenue. What we can tell you is that the majority of it is made up of -- in terms of gains on sale of franchise restaurants. And, the other component is essentially fees that we receive for renewals and rewrites of franchising agreements. And I think there's a little bit of interest income in there as well.

I guess what I was hoping to do is separate the cash component of that line from the non-cash component?

Mostly cash.

Okay, thank you.

You're welcomed.

Thank you, just a couple of follow-ups. Ken, on the quality initiatives to be rolled-out in the fourth quarter, does it involve a change of ingredients? A change of, you know, breads or sandwich components, things of that sort?

Joe, at this point we are frankly, quite reluctant to go real far into it. If I could, let me just say that it's extensive.

Okay. Second question is just on operating in California, sort of two questions. One is, what are energy costs looking like year-over-year? And are we getting near a point where we may start to see some positive variance in the energy costs? And then secondly, just recently, both Brinker and Starbucks were forced by various regulatory authorities to make some payments related to labor issues in California. I know you've been a long-time California operator, but just curious if you have any exposure along those lines?

Sitting to my side here is Larry Shauf, our General Counsel. I'll let him answer the last question, Joe. And then we'll get back to the other question regarding California.

Yes, like most of our competition, we have a pending class action lawsuit, or alleged class action, on the issue of whether or not we properly paid overtime. In the past, however, there's been little appellate court guidance. Recently, there was a very favorable decision that has now been published and we think it's going to ease the situation considerably. We have that case in mediation and that's all I can say at this point.

Thank you, Larry. John, you want to take the other component of Joe's question?

You bet. Joe, this is John. Regarding utilities, essentially, what we're seeing is, that for the quarter, you know, utility rates are still higher than last year on a percent of sale basis. But, they are starting to ease a little bit, because we are just now beginning to rollover some of those higher costs from last year. We do, however, think that, you know, given where natural gas prices are today and so forth, and some work that the State is doing in renegotiating rates, and some of the things we've done with direct access, we're going to see a bit of moderation in that for the balance of the year. Beyond that, I'm not ready to make any predictions about, you know, specific improvements to the P and L, because I want to see it happen first. But, I will just say things are starting to normalize, versus last year and there is a potential for some improvement, I think.

Okay. And last one, John. Just give us an update on what your thoughts are on Capex for the full year.

Capex forecast for the full year, I think, right now is going to be somewhere around $138 and $139 million. I think we went into the year with an estimate of around $146 million. Some of that reduction is due to the profit improvement initiatives that we've been tackling in the company.

Okay, thank you.

Yes, Sir.

Okay, Kelly. No more questions?

And it appears there are no further questions.

Okay. Just let me say thank you for joining us. We appreciate your continued support and look forward to talking with you again at the end of third quarter. Bye.

That concludes today's conference. Thank you for your participation.