Jack in the Box Inc (JACK) 2002 Q4 法說會逐字稿

This is premier conferencing. Please stand-by. We're about to begin. Good day and welcome to the Jack in the Box fourth quarter 2002 earnings release conference call. Today's call is being being recorded. A replay will be available for seven days on the Jack in the Box website starting November 13 for those who could not attend the live event. During the question and answer session period today we ask you that please use your handset when asking a question and do not use a speaker phone. 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 fourth quarter conference call. I am John Hoffner, EVP and Chief Financial Officer. Joining me today by phone is Chairman and CEO Bob Nugent, Linda Lang, our Executive Vice President of Marketing and Operations is unable to join us because she is speaking at our annual restaurant managers conference.

During this session we will review the company's fourth quarter and fiscal year results. Let me also mention that revisions to the company's earnings guidance for the first quarter and fiscal 2003 can be found in the press release issued this morning prior to the conference call. As a reminder all earnings comparisons exclude one-time after-tax charges in the fourth quarter of 4.3 million for the upcoming closure of 8 underperforming restaurants. And $6.1 million for the settlement of a class action lawsuit in the state of California. As well as one-time after-tax charge of $1.9 million in fiscal 2001 related to the adoption of SAB-101.

Please also be advised 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. Based on risk to the business. The safe harbor statement in our earnings release outlines some of these risks and uncertainties and is considered a part of this conference call. A more comprehensive outline of material risk factors, as well as information relating to company operations are detailed in public documents filed with the SEC.

Now Bob Nugent will open our conference call following today's presentation we will take questions from the financial community. Bob?

Good morning. As John mentioned in his introduction, today's earnings discussion excludes one-time charges in both years so we can better compare results. Jack in the Box earned $24.4 million in the fourth quarter compared with $20.7 million a year ago. Earnings were 61 cents per diluted share compared with 52 cents in the fourth quarter of fiscal 2001. For the year the company earned $93.4 million. Compared with $84.1 million last year and 233 per diluted share compared with $2.11. Same store sales and company restaurants declined 2.7% in the fourth quarter compared with last year's 3.8% increase.

For fiscal 2002, same-store sales declined 8/10ths of 1% compared about a 4.1% increase last year. It has been and continues to be a challenging and highly competitive industry with extremely high levels of discounting by the national chains. However, we are confident that our focus on providing high quality, differentiated products, and excellent guest service will result the long term growth of our business. We have our renovation team in place whose mission is to stay ahead of consumer trends, to drive sales growth through menu and quality innovation. In the short-term, we have already made significant progress towards building a pipeline of compelling new products with two new premium sandwiches scheduled to debut in the first quarter.

While our focus is on our premium products, we understand the need to stay competitive on the value front. And to that end we are also expanding our value menu to include two new products which we will introduce in December . These new products have been developed with profitability in mind as we do not believe aggressive discounting is consistent with our goal of increasing shareholder value. We are also enhancing our profit improvement program by more actively engaging employees throughout the organization who we believe can identify additional savings opportunities.

Additionally, our new restaurant design will provide a great look with more flexibility at a lower cost. And thus our current units will benefit by virtue of more capital available for remodeling. I am very encouraged by our new growth strategy. A comprehensive approach towards achieving our goal of becoming a national restaurant company. For example, we are expanding our branded convenience store concept that we call quick stuff which operates next to a full size Jack in the Box and fuel station. This format allows us to leverage the cost of prime real estate sites due to the combined returns from three businesses. But that's just one component of our growth plan.

In addition to new company restaurants, we are also committed to expanding the franchising part of our business to improve returns to shareholders. And we are actively exploring high quality acquisition opportunities. But there is one thing that won't change. We will remain focused on building our brand. Companies with dispointing sales that fear the current environment compete on price, stop reinvesting in their businesses and short change themselves and their customers for a quick return.

Jack in the Box stands for quality and for offering a great restaurant experience. One that our guests can count on for a long time to come. Now John Hoffner will review our fourth quarter and fiscal 2002 results. John?

Thank you, Bob. Good morning, everyone. In the fourth quarter Jack in the Box opened 22 new company restaurants and opened 100 new restaurants for fiscal 2002 as forecasted. We ended the year with a total of 1507 company restaurants, up 5.3%, and 1862 restaurants system wide. An increase of 5.7% from fiscal 2001 year end. Company restaurant sales increased 3.1 percent to 424 million from the fourth quarter of 2001. And for the year company restaurant sales increased 6.3% to $1.82 billion compared with last year.

Total revenues during the quarter increased 4.7% to $463.3 million compared to last year's fourth quarter and were up 7.2% for the fiscal year to 1.97 billion. Other revenues in the fourth quarter were $7.2 million versus $3.7 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 eight conversions during the quarter compared with seven last year. And for the year we converted 22 restaurants versus 13 in 2001. This represents only slightly more than 1% of our average number of restaurants for the year. Gains on these conversions make up virtually all of the 20.1 million in other revenues for fiscal 2002 versus 9.1 million last year.

As Bob mentioned, same store sales in the fourth quarter decreased 2.7% versus the 3.8% increase last year and for the full year decreased 8/10ths of a percent compared with the 4.1% increase in fiscal 2001. System wide sales during the quarter grew 3% to $522 million and increased 5.6% for the year to $2.24 billion. Our gross profit rate was $19.6% revenues versus 19.1 percent in the prior year fourth quarter. This is primarily due to the increase in gains from franchise conversions as well as to improvements in restaurant operating margin. For the year, gross profit rate was 19.4% of revenues compared with 19.4% last year. Due to higher gains from conversions, offset by lower restaurant operating margins.

Fourth quarter restaurant operating margin was 18% of sales compared with 17.8% a year ago. Margin improvement was primarily related to lower food, utility and supply costs which were partially offset by higher occupancy costs on newer stores whose sales have not yet matured and to higher insurance costs. Fiscal year restaurant operating margin was 18.4% of sales versus 18.8% last year. Primarily due to higher occupancy and insurance costs which were offset in part by lower food and utility and supply cost.

SG&A expense rate for the quarter excluding the one-time charges as described previously was 10.9% of revenues slightly higher than last year's fourth quarter rate of 10.7%. Primarily due to reduced leverage on softer sales and to slightly higher advertising bonus and pension costs. Which were partially offset by continued profit improvement program savings. Fiscal year SG&A expense rate was 11.1% of revenues versus 11% last year due to the same factors mentioned previously except for advertising costs which were slightly lower for the full year. Earnings before interest and taxes during the fourth quarter were $40.1 million compared with $37.1 million in 2001. And for the year were $164.2 million at 8.4% of revenues versus $154.8 million at 8.4% last year. EBITDA was 56.8 million during the quarter compared with $52.3 million a year ago and for the full year was $234.5 million at 11.9% of revenues versus $219 million at 11.9% in 2001.

Interest expense for the quarter increased to $5.3 million versus $4.9 million in the third quarter, fourth quarter of fiscal 2001 due to the decision to accelerate payment of certain real estate lease financing debt. Annual income tax rate for fiscal 2002 was 33.9% compared to 35.5% in 2001. Due to the favorable resolution of two long standing tax matters during the year. The effective tax rate applied to the fourth quarter to achieve the annual rate was 26.6%. This compares to last year's fourth quarter rate of 35.7%.

Earnings were $24.4 million in the fourth quarter versus $20.7 million last year. And for the year earnings were $93.4 million versus $84.1 million in fiscal 2001. Fourth quarter earnings per diluted share were 61 cents versus 52 cents last year and after the inclusion of one time charges were 35 cents.

Year to date earnings per diluted share were $2.33 versus $2.11 in 2001 and after the inclusion of one time charges were $2.07 versus $2.06 last year. Capital expenditures were 51.8 million versus 53.1 million in last year's fourth quarter. And for the year were $143.1 million versus $166.5 million in 2001. Capital expenditures were lowered than forecast as a result of savings on new store, remodel and systems projects as well as over estimates of costs for fiscal '03 new stores incurred in fiscal '02. Deappreciation and amortization was 16.7 million compared with 15.3 million last year's fourth quarter and for the year was $70.3 million versus $64.2 million in 2001. Now let's move on to the balance sheet and cash flow.

At the end of the fourth quarter our current ratio was .3 to 1 compared about .5 to 1 last year as our revolving debt and certain real estate lease financing debt are now classified as current. Our debt to equity ratio at year end was .5 to 1 compared to .7 to 1 last year. The company's year end revolver balance was 34 million compared with 65 million in the prior year.

As a reminder the company's revolving bank credit agreement expires March 31, 2003. The company is currently engaged in a refinancing effort and we are confident we will be able to replace our existing facility well in advance of its maturity date at which time our revolving debt will be reclassified as current. The company decreased asset sale per sale and lease at year end as it began its program of selectively owning more of its new restaurants instead of leasing them. The company used $33 million of its cash to repurchase shares of its stock during fiscal 2002.

Consistent with $80 million in additional repurchase authorizations obtained from the Board of Directors during the year. The company contributed approximately $15 million in cash to its define benefit pension plan during the year to offset declines in the returns on its investment portfolio and to insure adequate funding of future benefit obligations related to increased growth.

Finally the company's free cash flow for fiscal 2002 with 10.7 million versus a negative 18.2 million in fiscal 2001. Primarily due to lower capital expenditures for 26 fewer stores open. Now let me turn the call back to Bob for some final remarks and we will then take your questions.

This goal in 2003 will be a rebuilding and investment year for Jack in the Box. Today's environment presents challenges that dictate we be more conservative in our sales estimates. Thus we have reduced earnings guidance for 2003 today. Through our new five year strategic plan we are prepared to target significant new opportunities. Product innovation to improve quality and offering appealing new products to our broader consumer base. Investments in restaurant renovation and advances in speed of service to enhance the guest experience. Our profit improvement program to help us increase margins and returns and the multi-faceted growth strategy that includes continued steady company store growth, expansion of our quick stuff convenience store concept, and a commitment to prudently expand franchising to move the ratio of company to franchise units from 80/20 to 65/35 in five years while improving our operating margins in the process.

As a final part of our growth strategy we will evaluate high quality restaurant acquisition opportunities to balance the risk associated with growing solely in the highly competitive quick service segment of the restaurant industry. Many of the fundamentals of our approach to running Jack in the Box will remain. But we believe that our new strategic plan will make us more competitive in a changing and more challenging environment. Now, Kim, we will be happy to take questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question please do so by pressing the star key followed by the digit 1 on your touch tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Also please use your handset when asking a question and do not ask over a speaker phone. Once again that is star 1 to ask a question. We'll go first to Michael [Cheric](ph) with Morgan Stanley.

Thanks. Good morning. A couple of questions. First, can you talk a little bit, you're launching two new sandwiches here in the first quarter plus adding to the value menu, and yet your same store sales expectation still a decline of 1.5%, again its become an easier comparison. Can you I guess comment on what you are seeing in the competitive landscape that despite all this sort of new news and product coming out you still have a cautious outlook in the first quarter?

The new value sandwiches will be out approximately January 1. And the two new premium sandwiches are actually gonna be introduced sometime just prior to that. One will go in one half of the system, and the other in the other half of the system. Then they'll flip flop in February . So I think the answer to your question, Michael, is that before we see the benefits of those new products there's too much of the quarter has gone by to turn the sales situation from negative to positive.

And can you talk a little bit to putting that into context talk about increase in competitive environment. Obviously, there's been a lot of focus on the 99 cent menu at Burger King as well as the dollar menu at McDonald's. Can you talk a little bit about what you see in terms of our traffic trend and so forth?

You are breaking up pretty badly, Mike. Try it again please.

There's obviously been a lot of conversation with regard to the competitive environment in particularly the 99 cent menu at Burger King and the dollar menu at McDonald's. Can you talk about the impact you have seen in terms of traffic?

Well there's no question that the value customer is looking for the best value and Burger King came out with a very interesting offering. Think it had some impact on our bottom tier business. But I am highly confident that the products that we have developed and will be introducing in about five weeks, six weeks will regain that business for us.

Thank you.

Could we remind people not to use a handset just go ahead and speak directly into their own phone.

Not to use a speaker phone.

Not a use to speaker phone. We're a breaking up.

We could not hear hardly any of Michael's questions at all here.

And my feedback is such that I am having trouble hearing myself speak.

Next we'll go to Mark [Kellanowski](ph) with Solomon, Smith, Barney.

Hi. If you wanted -- oh this is interesting. One second. Is that better.

Very good. Thanks, Mark.

Is that better?

That's better, Mark.

Okay. If you separate just roughly the issues that the fast-food sector is facing into two baskets, one being economic concerns and the consumer pulling back, and the other being discounting activity that's being undertaken by some chains in the industry, I understand they're inner related to some extent, but if we want to try to separate those two things, which of them do you feel is having a worse impact on the downturn in the segment sales that we've seen recently?

I can't give you a highly quantifyable answer to that. But in my view it is the economy that is having the biggest impact. And we're seeing that in varying degrees depending upon what region of the country you're in. I'm sitting here in Houston, Texas now and I can tell you that certain markets, whether it's Baton Rouge or Austin or Dallas, or in you know the economy is in pretty bad shape. As you know northern California is also suffering significantly. So it just varies by region. But to me it's the economy more so than the competitive effort.

Okay thank you very much.

You are welcome.

Next we'll go to Jeff [Omahandro](ph) with Wacovia Securites.

Well, yeah, I guess my first question is related to the sheer count guidance. You're targeting a weighted average share count for 2003 of 37.5 million. You uhm--the Q4 number was $39.7 million. I wonder if you can tell me what you ended the quarter with and if I read this right you are look at buying back about 5% of your shares implicit in that guidance. I am curious how you would expect to accomplish that. Maybe more details on that and the financing of that.

Take it away, John.

Okay. Hi, Jeff. The company ended the year with $39.7 million in shares outstanding at the end of fiscal '02. And the guidance I think we gave in our release was for approximately $37.5 million weighted average shares outstanding for the year. We've been on an accelerated repurchase program given the $80 million of authorization we received this year because we believe our stock is undervalued and still represents you know a good buy in the market place.

So our plan right now is to use up the majority of that authorization probably pretty close to the end of the first quarter of fiscal '03. And right now we do not currently have projections for additional authorizations. As far as the financing side of that, that really is coming out of the company's operating cash flows and revolver.

And this would be through open market purchases rather than tendering for that quantity of shares?

Yes. Open market purchases currently we're just in a final stages of completing those purchases in consistent with the 10-b 51 plan that we filed earlier.

Okay. My next question relate to the media program and I guess specifically what you're thinking about in terms of your total media spend in 2003 as it relates to 2002. As a percentage of sales. And what sort of media would you be pursuing?

Our spending will remain at approximately 5% of restaurant sales for both company and the franchise. And the preponderance of the media that we use will be electronic mainly tv.

Okay. And I guess I might have missed it but the cap-ex target for 2003?

It's right around $181 million, Jeff. That hasn't changed from prior guidance.

Great. Thank you very much.

Thank you.

Your next question will come from Bob [Wittenhall](ph) with Lehman Brothers.

Good morning. This is [INAUDIBLE] from Lehman. Just one housekeeping item. You mentioned the Cap Ex in the fourth quarter but I missed it.

Cap-ex in the fourth quarter of the year was about $51.8 million.

Okay.

Compared with $53.1 million last year.

Right. On the store closure charge, how much of that is cash? How much of that will be spent in cash?

Very little. Very little. Really just for miscellaneous demolition and maybe some moving costs. But the vast majority is for -- is non-cash charges.

I see. So these stores were owned? The stores that are being closed were owned?

No they're leased stores.

Did the lease expire?

No.

Okay. You don't have to pay lease --

We will have on-going lease liability and that's included in the calculation of the reserve for the closure.

I see.

The intent will be to sublease those stores.

That is correct.

Sure. And on the repurchase, I guess you mentioned you repurchased $32 million of stock?

Yeah during the year we used $33 million of our cash to repurchase stock.

Okay. And so that leaves basically $48 million left on the program?

No. in fiscal '03 we've continued to repurchase shares at an accelerated rate. So as I mentioned just a minute ago we'll probably use up our -- come pretty close to using up our cumulative $90 million of total authorizations probably by the end of the first quarter.

Okay. And do you anticipate having an additional share repurchase program after that?

Well, no we do not. However, the -- that's subject to change. But we don't have any plans to go back to the board for additional authorization at this point.

Okay. And given the current environment in burger segment, you know, are the same-store sales guidance of 1.5 to 2% -- just seems -- since your closest competitors appear to be having negative comps it's just hard to reconcile positive comps in your case versus negative comps from the two largest players. Can you give us any color?

Yeah. We believe that the -- where we have kind of missed the boat for the last few years or at least the last year and a half is sticking with our core advertising strategy of advertising core products. We have not been developing new products. And we believe that's part of the problem with our marketing strategy.

So as we have been talking for sometime now we are very much focused on developing a much more innovative approach to marketing and putting together a team to develop products that are more in demand by consumers today. And we have done that. And the team has been together now for about 90 days. They have developed some very interesting, exciting new products. We think we needed to make a few tweaks to the advertising campaign. We've done that. And that coupled with the fact that we're going to be rolling over a little softer comps as we move into this year give us comfort that we can in fact get the business into a positive comp position again here very quickly.

Okay. And the same store sales decline in the fourth quarter, was that mostly traffic count? Was the price fixed or relatively stable?

It was mostly traffic count.

The price was up just slightly.

Okay. And then one last question. Is the competitive environment or is the consumer reaction to the various discounting programs, does that vary meaningfully from market to market in the markets you operate in?

There are some markets that are -- that we consider more price sensitive than others. But I would not characterize it as a real meaningful change in our major markets, no. I would say major market to major market it's not meaningful but there are some markets where you could characterize it as meaningful.

Any guesstimate as to when this discounting environment would abate?

Well you know the discounting environment ebbs and flows if you will. And the industry has been very mature for long time and it's a characteristic of the industry for a long time. And we have figured out how to compete in that environment for many, many years. So I am not really sitting here holding my breath waiting for it to subside. I think it's probably with us for a long time to come. But that's okay. We know how to compete in that environment.

Thank you.

You are well -- welcome.

Joe Buckley with Bear Stearns has our next question.

Hi thank you. Had a couple questions as well. First just on the distribution side of the business, the revenues are up quite considerably really for the full year but even more so in the fourth quarter. If I back out the distribution expenses it looks like the profits are very, very modestly. I guess I am curious just what is driving top lying growth and why the seem to disconnect with the expense line or the profit line.

Hi, Joe. This is John. The principal reason for the increase is not only increase in distribution sales but that's also where we have the sales of our C stores recorded. So that will primarily represent the increase in C store sales and fuel.

Okay so. The company -- with all the sales of the C stores be in that line?

Yeah.

The restaurant sales. Okay. Yep I think I knew that actually. Okay, that makes good sense. So the sale of the 400 company units over the next five years, the plan to do to move into more franchizing. Do you have an estimate of what that might raise in total dollars?

[Are you] talking about the franchise conversions?

Yes.

Over the five years?

Yes.

Was that your question?

Yes it is.

Okay. Well that's hard to say. I mean we just started the program. We've only converted you know a few percentage points of our, you know, our existing restaurants. And you can kind of do the math on what the average gains are relative to those conversions. But let's just say hypothetically that over the course of five years, if the company were to convert 400 restaurants, we would probably have somewhere around, maybe, 200 million dollars of cash flow from gains on conversions. And that is exactly part of our strategy. Number one is to evaluate those conversions so that we can sell restaurants at prices above our indifference model and then reinvest that cash to help us grow the business and redeploying it into higher return vehicles.

Okay. And, John, I think you mentioned the free cash flow number for fiscal '02 was a little over $10 million. Based on the cap-ex requirements in your guidance, is there any free cash flow this year?

No. Free cash flow for fiscal '03 is actually going to be negative.

Okay. And then just one last one on the share repurchase. I know you are trying to complete the full 90 million cumulative authorization by the end of the first quarter. Where were you at the end of the fourth quarter? I mean how much are you buying back in the first quarter? Is it -- John?

Yeah, I'm right here.

I'm sorry I thought I lost you.

It's okay. So far year to date we've bought back about $33 million.

Okay, so $57 million more to go in te first quarter?

No, we have already bought $33 million in fiscal '02. So right now the company probably has somewhere let's just say in round numbers between $15 to $20 million to go.

Oh, okay. You gave me what you have done first quarter to date, I'm sorry, okay.

That's correct.

Okay. Thank you.

Thank you, Joe.

We'll move next to Andrew [Ebbersaul](ph) with KDP Investment Advisors.

Good morning. Just wanted to follow up on the question regarding the conversion proceeds. It looks that the gains that you guys have been taking average out a little over a million dollars per conversion. And the number that you suggested was about $2 million per conversion. I guess is the difference basicly the non-cash offset to those gains that you are booking?

No I think really the difference is again just to repeat the company has only done you know a relatively nominal number of conversions to date in its plan. And those conversions are in the early stages are relatively high because it represents some of our most attractive deals. We would not want to make the representation that going forward when the company then begins to convert almost by the end of five years almost 25% of its existing restaurant base, that we would want to count on that level of gains. So we're somewhat more conservative and modest in the potential.

So the gains that you guys reporting are those the total cash proceeds that you are receiving for those conversions?

No. They're recorded on the other revenue line of the company. And they're net of the net book value of the writeoff of equipment.

So that's what I'm getting at. For the conversions that you have just completed what would be the cash proceeds for those conversions?

We don't disclose that. I gave you some general guidance. On that. And you might assume that, you know you, might assume that the company has got, you know, a couple hundred thousand dollars of average write off for its equipment.

And is there -- has there been any real estate associated with the transactions that you have done to date?

No.

Okay. Can you talk a little bit about the composition of cap-ex in 2003 please?

Yeah. As I said the total is about $181 million. Generally I would just say between $105 million to $110 million will be a new size. That's a little higher than historical because the company in '02 began a program of purchasing a higher percentage of its sites rather than leasing. And then the next largest block would be what we call sort of facility improvements which would be remodels and interior and exterior image enhancements. And that will probably run between let's just say in round numbers $55 to $60 million. And then the remainder really for systems, capital and distribution and corporate capital.

The remodels, how many stores are you going to be touching for the funding that you suggested?

I think we'll probably try to do somewhere between five and ten. But that also includes a number -- those are large scale remodels. There will be quite a number of minor remodels that are related to what we call interior and exterior image enhancement programs.

Okay. And how should we model for sale lease-backs going forward over the next couple years?

Well I think a good plan would be that the company would probably sale lease-back somewhere around 20 to 30, maybe 30, let's just say 30% of our stores.

And what's been the typical proceeds generated from a typical sale lease back?

I don't think we've disclosed that. I am not sure there is a typical one.

Okay. And finally, can you talk about the market for refranchising out there? And is it softening in conjunction with the general difficult environment for quick service restaurants? And does this suggest that maybe you are going have to help out with financing some of these situations more than you would have originally thought?

Well I think it's -- I think I would categorize it as this. Since the company has announced its strategy to expand franchising, there has been a lot of interest. Both within our existing franchise community as well as as interest from franchisees around the United States. And in a number of franchisees that are large scale multi-concept operators who are well financed and in shape to -- good shape to do expansion. Now that said, I think it's clear that as the company begins to expand franchising, we will have to be in a position to help out and provide a variety of support to our franchisees and we are actively looking at that right now. We're look at programs that have been used by other people in the industry such as McDonald's and--and Yum for example.

Thank you.

Our next question will come from David Rose with J and P Securities.

Hi, I have a couple questions. One is maybe following up on the franchise side of the equation. In terms of what the other programs have been for other franchiseors, some have had participated in a guarantee of 10% of their own balance sheet or 10% of the loans the franchisee through for example GE Capital. Would you be inclined to assist the franchisees with 50% of the loan, 100% of the loan? What sort of level of risk as investors can we expect the company to assume?

Well I don't think we've settle on that, Dave. You know I think we're like I said we're just barely into this. And we are -- we have been actively exploring what other people are doing. And we have found that it I ranges across the board. We've not yet settled in on a particular strategy. And I doubt that there will actually be one. I think that we'll take on different forms depending on the franchisee and the deal.

Okay and when you've already started negotiating with your lenders on the revolver, have had the discussions with them about the refranchizing strategy? I am assuming this is all--sort of all inclusive.

Yeah we have. We've started those discussions. For the most part you know my view of that is that people think the strategy is a good one for the company to help improve its cash flows as well as its returns.

Now great. Two other questions. One has to do with your same store sales assumptions. This actually piggy backs off an earlier question. Your assumptions are down one and a half percent in the first quarter. What are they like for the second through the fourth quarter? Are they back ended weighted?

Well they're more back end weighted because as Bob said --

They're easier comparisons, sure.

The comparisons are easier as they flow through the year. But also our product pipeline strategies, new product pipeline is as you might expect having just gotten started is more back loaded to the latter part of the year.

So based on your guidance of one and a half to two percent for the year, it would imply you are looking for 3 to 4% in the back end of the year?

Yeah I think that's fair.

Okay. So 3 to 4% in the back end of the year, and I'm assuming part of it is because of the new sandwiches as well. And that's the seconds part of the question. The sandwiches you've tested so far a on number of markets, can you give us some color in terms of how many markets you tested the sandwich--the two premium sandwichs and the two value sandwichs to give us some comfort that this is a little bit better than our best burgers ever.

Would you like to comment on that, Bob.

Yeah I will. The one of the -- as I indicated the two premium sandwiches. One of them has been test marketed in a major market and did very, very well. We're gearing up suppliers for it. We can't get one supplier geared up soon enough so we'll only be introducing that in half the system. Quite frankly the other sandwich that we have developed was operationally tested but was not market tested. We have high confidence though that it's--its going be well received in the market place but I can't give you any color on market results. We're kind of shooting from the hip on that one a little bit.

Okay. And I am sorry one last question. Because you have mentioned it a couple times. Regarding acquisitions, you mentioned that you're looking for high quality acquisitions. Branker uses a formula of the top two players within that segment. Can you give us some color whether they'll be the top one or two players within the segment? And in terms of the quality of operations I am assuming this is not going to be a turn around story. Is that -- can you give us some color?

Sure. I use criteria that is probably different than Branker. First off anything that we buy is not going to be competing with Jack in the Box. Secondly, it must have a good track record and a good management team in place. I do not want a buy/turn around situation. Thirdly, it must be scalable to a national chain. Fourth, it must either have the ability or own the quality position in whatever segment it competes in. It is my belief that that's the proper way to compete in that business long term. Whether it's one or two is not in my view an important qualification. I'd look at the competitive set and the QSR hamburger and there's you know four or five folks that do very well in that segment.

Okay. Great. Thank you very much.

The next question from Mike Stratgas(ph) with Delaware Investments.

Hi, guys. I just wanted to see if you could comment a little bit on the trends in the southeast?

We continue to invest in the southeast. We continue to make progress in the southeast. I was talking with one of our area folks from those markets today, and I am still very confident that those units will be contributing to earnings in about two years.

Thanks.

We'll move next to Jim Costel with [Kyoga] Capital.

Yeah, hi. Two quick things. First of all on the capital spending, the $181, in addition to that how much and I take it that includes capitalized leases, how much operating leases will be on that too?

Well operating leases are are not capitalized. Right, that's correct.

So the 181 would include the capitalized leases correct.

Yeah a very nominal amount of capitalized leases.

About how big will the operating leases be?

We do not disclose our rent costs as a line item. So I would prefer not to answer that question. You may look at our annual report and from an accounting point of view determine what our forward lease obligations are going to be. And then this year we're we plan to open 90 stores.

Will the mix be materially different from what it's been historically?

No. The only difference will really be that we'll be purchasing a slightly higher portion of our real estate as we did in '02 and '03. How long that trend will continue depends solely on the financing markets.

Okay. Secondly, given that the Burger King if it -- takes a a given that the Burger King property trades, does that help the competitive situation or hurt it?

I don't know that it has a significant impact on the competitive situation. It is my view that perhaps they have juiced up the marketing of that business to try to get it sold. So to that end there will probably back away from that strategy and that could have a positive impact.

Thank you very much.

You are welcome.

Just as a reminder there are only a few questions remaining in the queue, if you would like to ask a question please do so by pressing star 1 on your telephone. Next we'll move to Paul [Westrough] with SG Cowan.

Hi guys just wanted to follow-up on one question from modeling. Can you quantify the impact of the FAS-142 for '03 guidance and quantify for the year the 2003 estimate for other revenue?

Yeah, the impact on pretax basis for FAS-142 is about $4 million a year. And our guidance for '03 on other revenues I think is pretty close to $28 million.

Great. Then the--on your sale leaseback question, just wanted to follow up, 20, 30% of units. I assume those are existing units? And how does that jive with the strategy of owning more real estate? Can you just compare those two?

Well I think as I mentioned I think approximately 30% of our units in '03 will be sale lease-back.

The new units in '03?

Pardon me?

The new units you're building?

Yes.

Okay, I just wanted to make sure that was the case, and then lastly following up on the refurbishment cap-ex number of 55 to 60 that's five to ten percent of the existing units?

Yep.

Okay, and the average refurbishment number backs into 300 to 400 thousand that's the major renovation piece?

Yeah, I would say you know we are going to be cycling through our exterior and interior image enhancements programs at a little higher rate than normal. And we'll be doing a few more major remodels than we have done in the past so that amount of our capital has increased a bit over prior years.

Great. And then one last question on the share repurchase can you again quantify at the end of the fiscal year September how much share repurchasing have you done and how much have you done I guess first quarter to date?

Last year the company spent about $33 million of its authorization on share repurchasing. So far this year we've spent about $33 million. And we have somewhere let's just say between you know 17 to 15 to 18 million left to go on our current authorization.

Alright. So when you say this year you mean fiscal 2003.

Fiscal 2003 we're in the first quarter.

Right in the first quarter. Great, thank you very much.

Thank you.

Peter Oaks with Merrill Lynch has the next question.

Hi. I actually have a couple questions. First one is could you share with us how updated you view your asset base? Bob or John.

Bob, you want to comment first?

You go ahead.

I would say that -- I would say it's pretty updated, Peter. I think that, you know, the chain in total 50 years old. But we've been opening a lot of new stores over the last five to six years. So our age hasn't really increased. But we do think that we ought to be spending more of our capital on remodels because we think it is a way to not just protect our investment, a way to increase returns.

Could you actually quantify for us what you think is pretty updated? Because clearly you have a bit of a bar bell on your portfolio as far as asset age and appearance to the consumer.

I really don't think I could quantify it.

Okay. As far as first quarter comp guidance. You mentioned the release down one and a half. Is that representative of what you are seeing thus far? Or have things a little bit better than that?

Let me just say I think that as Bob mentioned our two new value sandwiches and our two new premium sandwiches have not yet been introduced in the quarter. So you might infer that the sales to date are a little bit lower than our guidance for the full quarter.

Okay. And lastly as you mentioned you want to make the brand and the product a little more appealing beyond what traditionally has been kind of the core 18-34-year-old market. Can you share with us how you think about where that core market actually is demographically? Thank you.

Yeah. We have been focused very heavily on the 18-35-year-old male for the last six years. Focusing on that target has paid us handsome dividends. We believe now that it's time for us to see if we can broaden that target. And to include more women and to probably go a little more higher in terms of age demographic. So to that end you know we have our marketing group focused on exactly how we achieve that. And you know we'll keep you posted as we develop our strategy for doing that.

Okay. Thanks a lot.

You're welcome.

We have a follow-up question from Michael Cheric(ph).

Thanks. John, can you talk a little bit with regard to cash flow and how this is all going to work. If the revolver had about $130 at the end of the year and obviously your cap-ex is up this coming year and you are buying back aggressively in the start of the year, how is it that the interest expense and I know we're obviously swapping the high rate that was on the leases. But it sames like the revolver is going go up more than what's being taken off from the leases that you are retiring. So if you could walk us through that number one.

Yeah, I would say that really the change in the revolver balance year over year I think it goes from somewhere around $34 million to about $130 million projected. And you know the majority of that due to the additional share repurchases that we talked about as well as the reclassification of the real estate financing debt which was -- which in itself was about $70 million. So those two items alone I think make up the big difference in the change in the revolver balances. And don't forget that cap-ex last year was somewhere around $143 million I think. And our projection for this year is right around $181 million. So those are the main factors. And we did increase our interest rate forecast for the year as well as our total interest expenditures. I think for the full year we're now looking at somewhere around $22 million on interest expense versus our prior guidance of right around $21 million.

But I guess my question is if I look your guidance I think assumes about $9 million in the first quarter of this year?

in Q1?

Yeah. Because you are talking $47 pretax.

Yeah, that's about right.

If I look at that and normalize you know that's over 16 weeks then I normalize that for a 52 week year that put me in the upper 20s for interest expense. So what drives it down? Does that not reflect the retirement of the leases. Is it the sell lease backs.

Yeah it does, it reflects the retirement of the CRC debt which was $70 million.

So that's already reflected in the 9?

Yeah.

What gets us down to I think you guys said 22 in your release? What gets us down to 22 from sort of the run rate that we're on in the first quarter?

Well part of the interest charge in the first quarter is due to the initial fees that we're paying to retire that debt.

So that's included in the $9 million of early retirement.

Yes it is.

How much is that piece?

I think it's total of over a million and a half.

Okay.

Plus we don't retire until January 1st.

Right.

Okay.

And if I heard Hal in the back you he said you don't retire until January 1, is that right?

That's correct.

January 1 is the target date to retire that, so a good part of the quarter we still have that debt outstanding.

Okay, that explains it very well. Thank you.

Thank you.

We have a follow-up question from Bob Whitenhall.

Yep. Stars the revolver is concerned is it going to be the same size and duration and structure?

Are you talking about the new financing?

Yep.

No it's going be a higher amount than what we currently carry right now.

Okay. So a larger facility similar ten-year three, four, five years?

Yeah, I think we're targeting in that range, yes.

Okay. And then on the DNA front, DNA for the [INAUDIBLE] '03 would be comparable to '02?

The DNA fund?

I mean--.

[Are you] talking about deappreciation and amortization?

Yeah.

Oh, okay,

Sorry.

Well I think our forecast for deappreciation and amortization is somewhere around about 72 to 74 million against last year's number of $66 million.

Right. Thanks.

We have time for I think about one more question.

We have a follow-up from David Rose.

Hi. Quick question on the amortization of goodwill that stopped. Are you as a result of FAS-142 are you going to stop including your trade area rights? Are you going to continue to amortize those?

The trade area rights will be--are directly affected by FAS-142, Dave. And so they will be put on the balance sheet and reviewed annually for impairment.

Okay, so that's something new for you. So your prior estimates or prior estimates did not include that?

Well our guidance for the year has always included and I think Paul [Westrough] asked the question about $4 million is the impact. And they are comparisons for '03 since we just adopted it in the first quarter of '03 to '02. That normalization is included in our guidance.

Okay, I was just trying to understand the shift. So it's because you are including trade area rights now?

Yeah.

Thank you.

Yeah, those are directly subject to FAS-142.

Yep, I thought that was the case in the past. Thank you.

Thank you. Okay everyone. Thank you very much for joining us. We look forward to talking with you in February to discuss our first quarter results. Bye.

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