Jack in the Box Inc (JACK) 2002 Q3 法說會逐字稿

Please stand by. Good day and welcome to the Jack in the Box Incorporated Third Quarter 2002 Earnings Release Conference Call. As a reminder today's call is being recorded. A replay will be available for seven days on the Jack in the Box website starting July 31st for those who could not attend the live event. During the question and answer period please use your handset when asking your 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 third quarter conference call, I am John Hoffner, EVP & Chief Financial Officer. Joining me today are Chairman and CEO Robert Nugent, President and COO, Kenneth William and Linda Lang, EVP of Marketing and Operations. During this session the management team will review the company's third quarter results. Let me also mention that the details of the company's earning guidance for the fourth quarter fiscal 2002 can be found in the press release issued this morning prior to the 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 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 outlined 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. The details and company documents filed with Securities and Exchange Commission. Now, Robert Nugent will open our conference call and following today's presentation we will take questions from the financial community, Bob.

Good morning everybody thank you for joining us. I will begin my remarks with a brief review of our third quarter. Earnings of Jack in the Box increased just over 15 percent during the quarter, which ended July the 7th. Earnings reached 24.2 million or 60 cents per share compared with 21 million or 53 cents per share in last year's third quarter. Year-to-date, net earnings have increased to 8.9 percent to just over $69 million or $1.72 per share compared with last year's 63.4 million or $1.60 per share. Let me remind you that our 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 our operating results.

Company's restaurant sales increased 5.2 percent, $428 million in the third quarter compared with last year. Despite positive earnings growth in a tough environment we were disappointed in the same-store sales, which decreased 1.5 percent compared with a 4.3 percent increase last year. Same-store sales were slightly lower than forecast due to continued economic softness and a few key webster markets along with substantial competitive activity. We are intent on improving these results. Jack in the Box is investing additional risk [indiscernible] and product marketing, marketing research and R&D. We are increasing our focus both on new products as well as improving the quality of those that we offer today -- up in the fourth quarter to help address these changes and drive our sales. I can also tell you that our management team is excited about the new strategic plan that we are currently developing. As you know we intend to issue a press release, hold a special conference call once the board of directors approved our plan and budgets at its mid September meeting.

I also want to brief you on our new reporting plans. Effective in the fourth quarter Jack in the Box will begin reporting a same-store sales quarterly instead of monthly. The company plans to be among the first to adopt regulations being proposed by the FCC and the New York Stock Exchange that call for additional depth, quality and certification of all public disclosures. These regulations While being [indiscernible] by the company and beneficial in general require additional administrative time and resources to repair and communicate the expected levels of information. In addition the company intends to meet the accelerated deadline for quarterly filings being proposed by the FCC. As a result Jack in the Box now believes that all of its operating results are best communicated in the context that its quarterly earnings releases, financial guidance and related conference calls. To help with this transition Jack in the Box will provide a mid quarter up date of its performance for the fourth quarter only on September the 10th this year. Before turning our call over to Kenneth Williams, let me say for those you do not know it. Ken has been a part of the Jack in the Box Team for 36 years. For many of them he has also been my business partner and friend. A decade ago we took a company that many had given up on and revived it putting Jack in the Box on the path that is on today. So it is not just a courtesy when I say that we will miss Ken's leadership and dedication. Of course like many companies we have had a succession plan in place to ensure that we have the senior management strength that we need. You will recall that we recently named Linda Lang as Executive Vice President of Marketing and Operations. For those of you who had not [indiscernible] Linda is a 14-year veteran of Jack in the Box, she has held a variety of marketing, finance, and operations positions here most recently, she was senior vice president of marketing. Linda holds an MBA degree from San Diego State University, and a BS degree in finance from UC Berkeley. We have a strong senior executive team in place with great balance. We are working closely together to ensure that this transition is a smooth one. I know that by January Ken will be fishing off the coast to southern California. Ken I hope you are will be thinking of us.

Thanks for the kind word. Although I am certainly looking forward to this next stage of my life, there is no question that I am going to miss Jack in the Box a lot. Today though we have quite a bit of news for the fourth quarter, we expand on Bob's earlier comments. First, we are augmenting product marketing and R&D to fill the innovation pipeline. We are focusing both on the near term and the longer term. Some of our future innovation may push the edge of what has been traditionally developed at fast food hamburger restaurants. For sometime now we have been working on a significant product quality project that has taken the talents of the majority of the organizations from identifying what consumer's want in quality, finding the right ingredients, determining the best sandwich dough, redesigning the packaging in which these products are delivered, and developing creative new advertising to sell them. We have tested our efforts and trained our restaurant employs. Now we are ready to roll that out in August. A major product quality initiative called our best burgers ever. We are supporting this new initiative with special advertisings. In this campaign Jack our CEO traveled across the country, tests the quality of these products, conducting consumer research with real people, not actors. The real people include Ronald McDonald, and the [Bopper family] among others to help ensure that his products are superior. Advertising for the campaign begins in most of our markets the week of august 5th. We are also introducing a new product in response to the growing popularity of Mexican Food, we are introducing [tuchidos] we offered [Grocomoli] in sour cream to accompany them, just likely find in a higher-end restaurant. Going forward, we intend to continue this two-part quality strategy of introducing unique new products that you don't see at every fast food restaurants, but also continuing to improve our existing products. Finally, beginning this quarter we are offering our customers greater flexibility in selecting combo meals. For the first time, Jack in the Box will offer combo meals in three sizes instead of two, and if your order includes a medium or large-sized drink it will come in a branded car friendly cup. Giving out I guess more options than ever before, we are encouraging the purchase of combo meals which helps deliver additional value to them and helps increase our sales. To recap our Best Burgers Ever is our major product quality initiative rolling out this quarter and supported with new advertising. Our new tuchidos are a high-quality product that capitalizes on the growing popularity of Mexican foods, and we are offering our customers additional value with three sizes of combo meals instead of two. Its going to be a busy quarter, and I believe a satisfying one. Now let me turn the call over to John who will provide you with more detail on our financial results.

Thank you Ken and good morning everyone. In the third quarter Jack in the Box opened 23 new company restaurants, one more than forecast which was an acceleration from our fourth quarter. We ended the quarter with a total of 1840 restaurants, this compares to a 1721 restaurants at the same time a year ago. Year over year we have increased our total restaurant count by 6.9 percent. As Bob mentioned, earnings grew 15 percent during the quarter with a 5.2 percent increase in company restaurant sales versus the third quarter of 2001. Year-to-date, company restaurant sales had increased 7.4 percent to 1.4 billion compared with last year. Total revenues during the quarter increased 6.1 percent of 461 million compared to last year's third quarter and were up 8 percent Year-to-date to 1.5 billion. Other revenues were 4.7 million versus 2.3 million last year. Primarily related to our stated objective of selectively increasing the use of franchising in our business model as we grow. As forecast we had 5 conversions during the quarter compared with 2 last year. Year-to-date we had converted 14 restaurants versus 6 in 2001. This represents 1 percent of our beginning of year base of 1431 restaurants. These conversions make up a majority of the 12.9 million in another revenues Year-to-date versus 5.3 million last year. As Bob mentioned, it seems our sales in the third quarter decreased 1.5 percent, this is a 4.3 percent increase last year and Year-to-date decreased three-tenth of a percent compared with a 4.2 percent increase -- fiscal 2001. Our system like sales during the quarter grew 4.8 percent to 525 million, an increase 6.4 percent Year-to-date to 1.7 billion -- with 19.4 percent of sales compared with 19.1 percent a year ago. A margin improvement was primarily resolved of lower food packaging utility supplies and maintenance cost partially offset by higher occupancy cost on new stores, whose sales have not yet matured and higher insurance cost. Our Year-to-date restaurant operating margin was 18.6 percent versus 19.1 percent last year primarily due to higher occupancy, utility, and insurance cost, which will all set in part by improved packaging and maintenance cost. Our [FGNA] expense rate for the quarter was 11.1 percent of revenues comparable to last year's third quarter and slightly higher than forecast due to reduced [indiscernible] and software sales and to higher pension, insurance, and legal cost. Year-to-date FGNA expense rate was 11.1 percent of revenues the same as a year ago. Our earnings before interest and taxes during the quarter were 11.9 percent to 41 million and Year-to-date were 124.2 million versus 117.8 million last year. EBITDA was 57.3 million during the quarter compared with 51.6 million a year ago and Year-to-date was 177.7 million versus 166.7 million in 2001. Interest expense for the quarter was 5.1 million versus 5.7 million in the third quarter of fiscal 2001 due to low average levels of debt and to low [indiscernible] rates. As previously reported, our annual income tax rate for fiscal 2002 is estimated at 34.5 percent due to the favorable resolution of longstanding tax matter. Effective tax rate applied to the third quarter to achieve this annual rate was 32.7 percent, this compares to last year third quarter rate of 32.2 percent, which was related to the one time [receipt] of enterprise zone and franchise tax credits. Our net earnings were 24.2 million in the third quarter versus 21 million last year. Year-to-date our earnings were 69.1 million versus 63.4 million in fiscal 2001. Third quarter earnings per diluted share was 60 cents versus 53 cents last year. Year-to-date earnings per diluted share were $1.72 versus $1.60 in 2001. Capital expenditure was 37.2 million versus 40.9 million in last year's third quarter, and year-to-date were 91.2 million versus 113.4 million in 2001. Depreciation and amortization was 16.3 million compared with 14.9 million last year, and year-to-date was 53.5 million versus 48.9 million in 2001. Now let's move on to the balance sheet and cash flow. At the end of the third quarter our current ratio was 0.5 to 1 the same as last year. Our debt equity ratio at quarter end was 0.5 to 1 compared to 0.8 to 1 last year. The company's quarter end revolver balance was 35 million compared with 68 million in the prior year. As reminder, the company's revolving bank credit agreement expires March 31st, 2003. This debt is now classified as current and has moved from long-term [list] to current liabilities on the balance sheet. The company is currently exploring refinancing alternatives, and we are confident that we will be able to replace our current facility well in advance with its maturity date. Finally, the company's free cash flow year-to-date was 31.9 million versus negative 1.1 million in fiscal 2001. Now let me turn the call back over to Bob and we will take your questions.

Thank you John. Ready for questions operator.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please press star 1 on your telephone keypad. Again star 1 to ask a question, and again we remind you if you are in a speakerphone please use your handset when you are asking a question, and we will go first to [Andrew Bare] of Bank of America.

Hi guys. Quick question on the other revenue line and their conversations, I just want to -- I guess I would give you this suggestion and then see if what I am assuming is right. I mean you talked about last year the increase in that accounting for the gains and operating income. Assuming that your booking gains on those sales of company [indiscernible] to franchise these. I mean that number on a per share basis is pretty considerable, I mean [indiscernible] there are, I would encourage the guys to break that out a little bit more transparently going forward. My assuming is that is the kind of what you guys employed in the [indiscernible] or press release.

I think that that is correct and we want to point out in the press release here today.

Eventually, on a dollar-to-dollar basis the gains and [EBIT] year-to-date were in fact mathematically all accounted forward by the increase on gains in sales, so I think we would disclose that and I think the notion of indicating the impact on EPS of that, I think is a good one, and I think that is something we could consider going forward. But the plan I want to make is that it is still our conversions for the company are still at very low levels of our own restaurant base and you know this is consistent with what we have talked about in terms of increase in franchising a little bit as we go forward. The provisions that we have done to date and once we have in the pipeline are definitely value added to the company's earnings, and we think we will continue to be so, for a long time to come I suppose to you know just in the short run, and I think that not only as, you know the number of gains, conversions relatively modest but and the impact on gains with respect to EBIT is large proportionally, but we should also point out. I think that with the company's profit improvement program this year where we offset [indiscernible] sales and increases in cost pressures that we felt from minimal wage increases and utility cost. We don't break that out either, but it is, you know, it is pretty considerable so while it is mathematically true that the gains accounted for the growth and EBIT if you want to just look at, at that way there is also lot of additional savings that the company has generated to its profit improvement program as well they help deliver the company's earnings.

Can you give us a quick up date on where you guys stand in terms of beef] pricing for the next couple of quarters?

I think generally what we would say is we are seeing a moderation in our price of beef currently and what we think will be going forward.

Thank you.

And we will take our next question from Jeff [Amahandro] with Wachovia Securities.

[Jeff Amahandro]: Thanks. I want if you could elaborate little more on the [our best burgers] as a program. Where are you in terms of your thoughts regarding potential traffic gains, have you done a test with it and also related to that do you see any impact on speed of service and how speed of service been tracking?

Well, the best [indiscernible] ever has been tested. It has been tested in our Las Vegas market. The program is aimed at improving upgrading of virtually all aspects of the [indiscernible] from the bread to the sauces to the meat to the [bake] and to every thing. I told the speed of service we look at that very, very closely in terms of best burger ever. There really has not been any impact on a broader basis regarding speed of service. We do continue to make improvement and those improvements are coming from basically two areas, first a higher level of collective activity within the restaurant and then we are also getting improvements based on our new kitchens in the new restaurants and finally the retrofits, which we have done on existing kitchens, which have actually been in test for about a year and a half are showing also some substantial improvements. [indiscernible] we believe that the speed of service picture continues to look like there are more opportunities having said that with all the progress that we have made, the opportunities that we are looking at will probably come a little bit slower than the progress we have made over the past year or a year and a half.

And are you still on track to compete the technology [indiscernible] by the end of the fiscal year and what benefits are you seeing from that program and also you mentioned the kitchen retrofits, do you anticipate any pickup in activity there? And that's all I have.

With the technology [indiscernible] we are going on they are all on track. They are in fact working, and the main benefit is that we have much, much better communications with all of our company restaurants as well as a good portion of the franchise restaurants.

Much explained came with the technology improvement [indiscernible].

Well the key aspect of the technology is that we do have now satellite communications with each of our restaurants. Prior to that we were relying upon phone lines for that communication and as you might be aware there is a number of difficulty with the phone line communication. Satellite opens up a whole new world frankly in terms of communication, in terms of training, in terms of downloading information directly to the restaurant and making it immediately available. There is another aspect to your question that I --

On the retrofits on the kitchens.

Yeah. Where we stand on the retrofits is that we are clearly seeing the improvement and moreover we are very pleased with those improvements.

The retrofits do require some amount of capital and we are in the process of determining which aspects of the retrofits are giving us the biggest bang for the buck if you will? Because we have just we just assumed spend a 20 percent of the capital if we can get 80 percent of the results.

Thank you very much.

And we will take our next question from [indiscernible] at Lehman Brothers.

Good morning to you

Good morning.

You talked about an intensified competitive environment can you add some more color to that?

Sure. Let me take you back quite a way just to see how the advantage of the historical prospective here. If you go back to say 1980 Jack in the Box was about a $600,000 PSA chain and we were in a situation with declining sales. We adopted that point a marketing strategy whose core was to compete on the basis of our menu. The tactic we used was new products. For the subsequent 15 years Jack in the Box was known for its ability to introduce high quality unique new products on its menu and that served us very well for that period of time. And in 1996 we adopted what we call a core-product strategy where we focused on a few of the core products on our menu and then spent a lot of energy against quality initiatives and productivity improvements. That strategy served us very well form 1996 to the beginning of this year. And what we have now recognized is that we need to make an adjustment, we need to get back into the game of new products in a more innovative way than what we have here before and that's what I mentioned in my remarks when I said that we are investing at additional resources in product marketing, marketing research, and R&D. That answers your question?

That has answered a part of the question, but I am wondering if the level of discounting that you saw from the competition or new products from the competition that escalated versus preceding quarters or your expectations?

I will take that question. Actually for the past nine months we have felt we believe the impact of Burger King and the number of new products that they have rolled out as well as the continued level of discounting and other competitor -- that has done quite well with their new products since [Wendys] and their salads we believe are working quite well for them.

I see, okay, and is this -- I was wondering you may have mentioned it, but I was wondering if you could give us the CapEx for the quarter and the guidance for the year.

Yes, we can. CapEx for the quarter was 37.2 million versus 40.9 million last year and for year-to-date its going to be approximately - [indiscernible] that in my remarks with a four year [indiscernible]. I think it is in our release is it not?

Yes, [indiscernible]to 81.2 million.

Yeah.

Okay [indiscernible].

[indiscernible] but for the full year the CapEx is going to be about a 168 million versus 166.5 million last year.

Now what is your run rate rent expense?

What is the question?

What is your rent expense?

We won't disclose our rent expense.

Right was it about a $140 million something, $143 million dollars last year, I am wondering it inched up since then?

I would say generally it has.

Well okay.

That would be a function of adding new stores.

Right [indiscernible].

We are going to add a 100 new stores this year.

Perfect, thank you.

You're welcome.

We will take our next question from [Joe Buckley] at Bear-Stearns. Mr. Buckley.

Thanks, thank you, can you hear me okay?

Yes we can hear you Joe, how are you?

I am fine thank you. A couple of questions. You know a fair amount of questions about McDonalds testing beef imported from Australia has any impact on Jack in the Box from the [indiscernible] standpoint in terms of the amount of beef that you can import? Secondly, I had a question on the new Burger Program and also new combo sizes. Just what impact for that the changes in the menu may have unchecked either from pricing or just from a [indiscernible] standpoint.

Let me take that Joe. We expect little to know the impact from McDonalds moving over to Australian imported beef. With regards to the best burgers ever the impact on average check, there should be some positive impact on average check. When you add to that the fact that we will be rolling out or our in the process of rolling out a new program with our combo meals, the three different sizes of combo meals, that also will have an impact, so we expect the fourth quarter to end up with a higher average check then we have in the beginning of the quarter.

Okay, thank you.

You're welcome.

From [Corner Capital Management, Lloyd Corner].

Good morning, Bob, Ken, John, Linda, how are you.

[Unidentified]: Good Morning Lloyd.

I just want to start by congratulating you and thanking you, one for developing the SVC in the New York stock exchange regulations that are proposed, and two for going to quarterly comps. I have been doing this long enough to remember when nobody reported monthly comps and think it is better way to go and it is a trend I am seeing among the higher quality companies, I am not surprised you are doing it. My question just involves the -- I notice that under CapEx you are planning to buy a bid more land for new unit than you are in the past versus leasing. I am just wondering why?

Lloyd this is John. We have done some analysis on that lately and the simple answer to it is that we have the capacity to do it from cash flow point of view and it is simply more advantageous to the company to own its real estate and finance it rather than it is to continue to pay a higher rate on a sale lease-back basis. That is the simple answer to the question. You know we avoid rent step-ups along the way and we are doing that on a very, very selective basis where we think that we can improve our returns. It gives us a little bit more control over our destinies in the long run as well when we own those properties.

Great, thank you very much.

Thank you.

From [Glenn Hell Capital, Finn Krevlin].

Good morning, one question. I don't you don't like to talk specifically about markets, but can you just sort of qualitatively discuss you know any changes in the South East and you know sort of what is your any specific plans you have there in terms of improving profitability?

Well, you're right. We don't like to discuss profitability or sales by market. I will say this and I thank it is basically a repeat of what I have said in the past and that is that we continue to develop in those markets by that I mean Nashville, Charlotte, Greenville, [Spartenberg], and [Baton Rouge]. Those markets are not contributing to earnings today, however, the plan that we have says that as we continue to build out the markets and reach critical mass that we expect within about two years that they will be contributing to earnings. I am very pleased with the new stock performances here and the performance of the stores that we opened in the past, they continue to improve. Operationally, we are doing a terrific job and the consumer research that we get back indicates that the consumers are noticing that.

The other question I had was the burger test in Vegas that you referenced. Can you talk about the results in anyway you want to talk about them?

Well I would discuss that in general sense. But we believe very strong in this program. We believe and tested well and we frankly looking forward to the results in the system.

Did you employ the same marketing in Vegas that you plan to do in the rest of the country now in your other markets now?

Yes basically.

Okay. So it is effectively the same thing just rolled out to some more markets?

In any kind of test the reason that you are testing is to see how they go. You make a few changes here and there to make it better.

Right thank you.

You are welcome.

As a reminder, to ask a question please press dial 1 on your telephone keypad. And next we will go to [Jonathan Wheat] of McDonalds Investments.

Yeah, hi. Any question on this [indiscernible] result ever promotion either chance to go in into Jack in the Box. And first of all wondering how you have been get that average checkup from what I remember it was still the same price point for the same burger. And then second of all to me just as a consumer I didn't tell too much of difference between the burger what I guess that my Jack in the Box experience wasn't much different that have been in the past. Wonder if you are going to an - any thoughts as to may be brand new kind of hamburger that uses the new quality initiative? That's it.

Well in term of the average check the expectation there is that there will be a shift from the what we refer to as the bottom tier to the higher priced sandwiches. In terms of your personal experience I am not trying to account for that except to say that we had done as we do all of our efforts a large amount of consumer work. And frankly the claims that we are making on TV have to be backed up by that consumer work. And we in fact did get very significant results back from that consumer research.

Okay any thoughts on doing something perhaps like close [indiscernible] on those line? Or would you stay with the same sandwich lineup and that's kind of a strategy?

I can tell you that at this point we are looking at everything.

Okay. Thank you.

As a final reminder please press star 1 on your telephone keypad. Ask your question. We will take up follow up question from [Andrew Borsh] from Bank of America.

Hi guys I may miss that but I am not fully understanding what else is taken place on the quality improvement side on the best burgers have been in the packing I mean there have been ingredient changes or size changes or you know changes in their produce specs or something like that. And have taken any menu pricing associated with this initiative. And I guess packing costs you mentioned those are down, does that continue to be the case even with the new packing that your are rolling out?

Well see there are number of questions. The improvements in the actual sandwiches yes they do run across the board. And virtually every ingredient in those sandwiches has been changed from the bread to the meat, to the bacon, to the sausage, to the [indiscernible] virtually all of it.

Okay.

The question about the packing there was very slight increase in the packing cost to the best burger ever. The price increase no we are not anticipating any price increase with associated with the products.

Thank you.

And gentlemen now no further questions at this time. I turn the call back over to you for any additional closing comments.

Thank you all for joining us. Appreciate your support look forward to talk to you about the fourth quarter. Good-bye.

Again that conclude today's Jack in the Box incorporated third quarter 2002 earning release conference call. We thank you for joining us.