Jack in the Box Inc (JACK) 2003 Q1 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 Incorporated first quarter 2003 earnings release conference call. Today's conference is being recorded. A replay will be available for seven days on the Jack in the Box Website starting today for those who could not attend the live event. During the question and answer period please use your hand set when asking a question. Please do not ask over a speaker phone. At this time for opening remarks and introductions I would like to turn the call over to Mr. John Hoffner, executive vice president and Chief Financial Officer. Please go ahead sir.

Thank you. Good morning, and welcome to the Jack in the Box first quarter conference call. I'm John Hoffner, and joining me today is chairman and CEO Bob Nugent. During this session we will review the company's first quarter operating results. Let me also mention that the company's earnings guidance for the second quarter and fiscal 2003 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, based on risks to the business. The Safe Harbor Statement and our earnings release outline 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 S.E.C. And now Bob Nugent will open our conference call, following today's presentation we will take questions from the financial community. Bob.

Good morning, everyone. Thank you for joining us. As we noted in this morning's news release, Jack in the Box continues to field the impact of aggressive discounting by the national chains, and economic weakness in some of our key markets, particularly those in the west where most of our restaurants are located. For the first quarter, Jack in the Box earned $21.2 million, compared with $26.7 million a year ago. Earnings were $.56 cents per diluted share compared with $.67 cents in the first quarter of fiscal 2002.

Same store sales at company restaurants declined 2.6%. That compares with last year's .7% increase. Despite the aggressive discounting by some of our competitors, as I mentioned, we refuse to engage in that short-term strategy to drive traffic. Instead of discounting our premium products, Jack in the Box intends to increase earnings and grow our business by focusing on attributes that can distinguish us from competitors. Like value, service, and unique and higher quality product offerings that are not typically found at a fast food restaurant.

In a few weeks we'll break ground on a new 70,000 square foot innovation center that will serve as a hub for research and product development, but we're not waiting for this facility. We're moving forward aggressively with a keen focus on introducing products relevant to a variety of different audiences. During the first quarter, for example, we added two new sandwiches. The Philly cheese stake and the Chipotle chicken sandwich. Both products are unique and great-tasting, and both appeal to customers looking for something other than typical fast food fare available at other burger chains The Chipotle chicken sandwich, was developed for customers looking for something a little lighter, yet with a bold and distinctive flavor profile. In addition to the two premium sandwiches, we also revamped our value menu to include two new products, the chilly cheese burger and the junior bacon cheese burger. Both are made with our new, larger patty, and appeal to customers looking for value priced menu items. These additions round out Jack's value menu which also includes items such as tacos, the chicken sandwich, and signature breakfast Jack. The new value-priced products were well received by our customers yet had healthy margins for our company. While we continue to offer value-priced products, we are not targeting the low margin business through aggressive discounting of premium products. Our innovation team has made substantial progress towards building a pipeline of new products. Our strategy is to develop high-quality differentiated products that appeal to young adults whose busy lives benefit from the convenience of drive-through. During the first quarter, we also announced a plan to accept credit cards at our restaurants. Currently, approximately 200 company restaurants are processing credit cards. The rollout will continue throughout next year.

In addition to pursuing new products and marketing initiatives designed to increase sales and improve service, we're quickly but prudently moving forward with our five-year goal to becoming national restaurant company. In January, Jack in the Box entered the fast casual restaurant category by purchasing Qdoba restaurant corporation which operates with 85 Qdoba Mexican Grill restaurants in 16 states. Last year Qdoba was profitable on 65 million on system wide sales and with a substantial number of new stores in its development pipeline Qdoba is well on its way to becoming national brand and leader in the fast growing segment of the restaurant industry. With the acquisition of Qdoba, we now have restaurants operating in 28 states. Our proprietary Quick Stuff convenience stores continue to perform well, and generate traffic that benefits the Jack in the Box restaurants with which they're paired. This co-branded concept which also includes a fuel station, has enabled us to build in unique locations that offer higher return potential than stand-alone restaurant sites. We remain on pace to open eight new Quick Stuff co-branded locations in the second half of 2003.

I'd like to remind you that in addition to our Quick Stuff operations, we also partner with major fuel companies at 34 other locations. Although we don't directly benefit from convenience store or fuel station sales at these sites, our restaurant sales are generally higher due to the premium locations that we can secure by partnering with these prominent operators. Both Qdoba and Quick Stuff have experienced management teams in place guiding their operations. So that our attention will remain focused on improving our core business and increasing value for our stockholders.

As indicated in today's news release, we sold nine company restaurants to franchisees during the quarter. We will continue to carefully manage these conversions, to maximize value while selectively developing new franchise relationships. With our five-year goal to reduce our direct ownership of restaurants to about 65%. Our profit improvement program continues to benefit our bottom line through cost savings as well as strategic spending. And our guests will continue benefiting from our efforts in this area from new products to faster service to more attractive and efficient restaurants. Before turning the call back over to John, I'd like to mention the high ratings that our corporate governance practices recently received from institutional share holder services. Jack in the Box outperformed 98% of our industry peers as well as companies comprising the S&P 600. These ratings can have a tangible benefit for companies as strong corporate governance can boost credit quality and contribute to lower insurance premiums. It goes without saying that we are very proud of our system of governance. And now John Hoffner will review our first quarter results.

Thank you Bob and good morning again. In the first quarter, Jack in the Box opened 22 new company restaurants. We ended the quarter with a total of 1515 company restaurants, and 1880 restaurants system wide which is an increase of 4.6% from a year ago. Company restaurant sales were $559 million compared with $553 million in 2002. As Bob mentioned, same-store sales in the first quarter decreased 2.6% versus a 7/10 of a % increase last year. System wide sales during the quarter grew 2.1% to $694 million. Other revenues in the quarter were $8.3 million versus $7.6 million forecast and $3.8 million last year, primarily related to our objective of increasing the use of franchising in our business model as we grow. We had nine conversions during the quarter compared to six forecast and three last year. Total revenues during the quarter increased 3.2% to $613 million compared with last year's first quarter. Our restaurant operating margin was 16.8% of revenues versus 18.3% in the prior year's first quarter. This was primarily due to higher PLS system upgrade, insurance and occupancy cost as well as reduced leverage on fixed cost from lower same-store sales.

First quarter gross profit rate was 18.4% of revenues, compared with 19.4% a year ago. For the same reasons just mentioned. Partially offset by higher gains on sales to franchisees. SG&A expense rate for the quarter was 11.5% of revenues, slightly higher than forecast and up from last year's rate of 11.1% primarily due to reduced leverage on softer sales and to higher pension costs. Earnings before interest and taxes, during the quarter, were $42.4 million compared with $49.3 million in 2002, and included $4.3 million in additional gains on sales to franchisees. EBITDA was $63.6 million during the quarter compared with $70.4 million a year ago.

Interest expense in the first quarter increased to $8.3 million versus $8.3 million forecast and $7.3 million in the first quarter of fiscal 2002, due to costs associated with the early repayment of $70 million in high-interest-rate real estate financing debt. Our projected annual tax rate for 2003 is 38% compared to 36.5% in the first quarter of 2002. The 2002 rate resulted from the favorable resolution of two longstanding tax matters. Net earnings were $21.2 million in the quarter versus $26.7 million in the last year. Capital expenditures were $22.4 million versus $30 million in last year’s first quarter, and were lower than forecast as the company now plans to lease a greater portion of its new stores rather than purchase them due to changes in financing market terms. Depreciation and amortization was $21.2 million compared to $21.1 million last year.

Now let's look at balance sheet and cash flow highlights. At the end of the quarter, our current ratio was .5 to 1, the same as last year. Debt to equity rare ratio quarter end was .6 to 1 also same as last year. The company’s quarter end revolver balance was $107 million compared to $52 million in the prior year, due to the retirement of the real estate lease financing debt net of sinking fund contribution. On January 22nd, we secured a new $350 million senior credit facility. This new facility is comprised of a $200 million, three-year revolving credit facility and a 150 million, four and a half year term loan with borrowing rates of LIBOR +2.25% and LIBOR +3.25% respectively. The company decreased asset sale for lease back last year as during 2002 we had selectively been purchasing more of our new restaurants instead of leasing them. The company used $36.2 million of its cash to repurchase shares of its stock during the quarter, consistent with $80 million in additional repurchase authorizations obtained from the board of directors. We have approximately $14 million of availability remaining under the authorizations.

Finally, the company's free cash flow for the quarter was $20 million versus $17.8 million last year primarily due to lower capital expenditures for fewer stores opened. As a reminder on January 21st the company acquired for $45 million in cash Qdoba Mexican Grill, an 85 store fast casual chain with system sales of $65 million. While Qdoba itself is profitable, it is expected to be marginally dilutive to Jack in the Box earnings in 2003 due to financing and amortization cost associated with the acquisition. Both the company's current and previous guidance include the effects of this slight dilution on our EPS estimates. And now let me turn the call back over to Bob and we will take your questions.

Thanks, John. Natasha do you want to call for questions please.

Thank you Mr. Nugent. If you would like to ask a question suppress the star key followed by 1 on your touch tone phone at this time. For those of you on a speaker phone, please make sure the mute is turned off to make sure the signal reaches our equipment. Please pick up your hand set and do not ask your question over the speaker phone. And we will take our first question today from Michael Albrecht with Salomon Smith Barney.

Good afternoon. Just want to get your thoughts, one your commodity cost outlook for fiscal year, and also should we expect similar buy-back for the coming fiscal year, looked like it ticked up a bit in the previous fiscal q1.

Let me deal with the commodity outlook. We believe that there's going to be, on balance, a little pressure on commodity prices, some are up, some are down, beef will be up we believe in quarters 2, 3 and 4. We'll get relief in other areas, but on balance, we should see some slight upward pressure in commodity prices. With regards to stock repurchase, no, you will not see repurchase at the same pace that you saw in the first quarter. As John indicated, we have about $14 million remaining on the board's authorization. And we expect that we will use up that $14 million over the balance of this year. Next question, please.

And we'll now hear from Robert Wettenhaul with Lehman Brothers.

Hi, good morning. Can you talk a little bit about the competitive landscape and the level of intensity you're seeing with respect to price discounting?

Yes. As you may or may not be aware, in the beginning of January, Burger King decided to sell their Whopper for $.99 cents. McDonald's responded by putting their Big and tasty on the value menu at $.99 cents. As we have understood it yesterday the franchisees for McDonald's have voted to take the Big And Tasty off the value menu and raise its price. As far as we know McDonald's in many of our markets continue to sell the Whopper for $.99 cents. Those are the key discounting initiatives that are out in the marketplace now.

Are you expecting then in the back half of the year perhaps if this tends to get some more positive same-store sales?

Yes, I would.

Robert Wettenhaul And one last question. What was CAPEX during the quarter?

Capital expenditures during the quarter were --

$22.4 million.

Great. Thanks a lot.

And we'll take our next question with Jonathan Waite from McDonald Investment.

Great job on the rollout on the Chipotle chicken and Philly cheese stake, great ad campaign here in California. I'm wondering what the consumer protection has been and what same indication as to sales mix for those two products.

Let me simply say that the consumers have responded very favorably. We have -- we don't release the exact sales mix in those things but I can tell you that when we introduce a new product, we introduce it with point of purchase material only for the first two to three weeks, and then we turn on television. We've seen anywhere from a 20% to a 50% boost in sales when we turn on television, and this -- and in this case, we've seen the upper end of that range. So we're very pleased with the consumer response.

Okay. And any planned new introductions coming up that we should look forward to?

Yes, we have new products that are in the pipeline, and we'll be rolling out, nothing additional this quarter, but you'll see in the beginning of third quarter.

Okay. And then on the Qdoba, how much of your CAPEX will be spent on Qdoba?

Well, we don't disclose the specific amount. But it's relatively nominal, nominal amount of our new forecast.

How many stores do you end up -- or you think you'll end up in fiscal '03 for Qdoba?

I think our total number of Qdoba stores probably will be somewhere around 130.

Okay.

At the end of our fiscal year, that's system-wide.

And how many of those will be company-owned?

About one-third.

Okay. Thank you.

And now we'll go to Jeff Omohundro with Wachovia Securities.

Just a couple of questions. On this shift in your CAPEX budget for '03, I'm just wondering if it's all related to this leasing strategy, or is there any shift in the core spend rate, in particular on efforts such as unit level remodeling?

No, not really, Jeff. The vast majority of that is really due to a reduction in CAPEX due to increased sale lease-back plans. So our general level of investment spending and refurbishment spending in our stores will remain comparable to slightly higher than last year.

Okay. And the average unit volumes on your new-store openings, have you been pleased with that? How have the new stores performed?

I would say in general, I think the new stores are performing to our expectations.

Jeff Omohundro Okay. And the profit improvement program, I'm wondering if you're seeing incremental savings in that program relative to your prior expectations?

Yes, we're. We certainly are. And we took a look at this most recent forecast, where you notice we lowered our same store sales guidance from approximately flat to somewhere between 1.3 to 1.7 negative for the year. But our EBIT rates, our EBIT dollars are essentially consistent with our prior guidance, and a lot of that offset is due to our continued improvements out of our profit improvement program.

is there any particular areas that you could share with us?

No, not really. There isn't any -- there isn't any really home run. It's just, you know, it's a complete company effort to kind of continually go through our operations and find better ways to run the business. So we're, you know, we're -- engage everyone in the company in that process, and so it's really a little bit from all operations throughout the company.

Very good, thank you.

Thank you.

And now we'll go to Peter Oakes with Merrill Lynch.

Good morning. I was hope hoping to follow up a little bit on your PIP, if I do the back of the envelope the shift in comps for the year translates into about $.20 cents a share. And John, you mentioned with Jeff's question and also on the press release that the bulk of that would be made up with the profit improvement programs, I heard you say that, you know, it's a lot of number -- a number of smaller items, but it's actually a fairly, you know, significant number EPS wise. So I was hoping you'd give us more detail on that for starters.

Yeah, I can give you maybe a little bit more detail. The profit improvement program for Jack in the Box is really geared to not cut costs in the short run, to make earnings. It's really built out of engineering programs to run our business better. And it can range all the way from things like work station positioning strategies, in our restaurants, which is a project we've been working on for many months which allows us to cross-train people and have them be more productive so it helps us offset labor cost increases. It's been renegotiation of some of our insurance programs, both on the medical side, as well as the property and casualty side. It has been things like determining how to do site selection or in the company, and save money doing that as well. So it would probably, I think when we went through this we probably generated somewhere over a thousand ideas in the program. And we just keep mining those ideas as we move through the process. And we've created a program to help incentivize people to identify better ways to run the business and reward them for those ideas that get implemented.

Okay, good. Can you remind us as to how much of your beef is sourced from Australia, and where was that a year ago?

I think it's about 50%. And I don't think that ratio has changed.

And just as a reminder, could you share with us kind of the differential you're seeing domestically versus the Australian beef on pricing?

I'm not sure Peter I have that at my fingertips right now. I can give you a call-back with that information.

Okay. And as far as wage rates, you've definitely anniversaried the increase there in the California minimum wage. Can you give us a sense as to what kind of wage inflation you're experiencing?

Year to year, it's just over 1%.

Okay. All right, thanks a lot, gentlemen.

Thank you.

And now we'll go to Mark Sheridan with Johnson Rice.

Bob, a question for you on menu development. As you talk about some of the premium products, the Philly cheese and the Chipotle, how do you talk about those new products which, while I don't have a Jack in the Box in the area, it sounds like something I'd be more interested in than traditional fast food, and more new products in the pipeline, and kind of talk about that in conjunction with your speed of service initiative and kind of labor complexity in the back of the house, how you kind of manage those two somewhat conflicting strategies to kind of enhance the menu, but also try to focus on speed of service.

All right. The -- well, there's no question that the addition of new products creates added complexity. So we really have a policy that talks to adding and deleting simultaneously. And sometimes we'll delete more than we add. So that's one way of mitigating the complexity and thus allowing our people to become a little more productive. We continue to use the training techniques that we develop to improve efficiency, and therefore, speed. It's a matter of internalizing those programs in our people, and we're continuing to see improvements in speed. With regards to new products, we have mentioned before that we're interested in broadening our target audience. And I think you'll see in the next few months when we come out with added products that the -- that they definitely appeal to an audience that we are not targeting at the moment. Even the Chipotle Chicken, it's a really hearty sandwich. It's less than 400 calories, so it appeals to somebody who's looking for a good flavorful product that's a little lighter.

Okay. Very good. But the answer then on complexity, you add and detract simultaneously to not over complicate things?

Exactly.

Okay, very good, thank you.

And before we take our next question I would like to offer our participants a final reminder to please press star 1 at this time if you would like to ask a question. And again, please remember to pick up your hand set when asking a question. And we'll now take a follow-up question from Jonathan Waite with McDonald Investment.

Quick question, we have seen slow down in the fast casual players in sales in the last couple of quarters, wondering what your thoughts are on that and why that is?

Well, I don't know who you're talking about. Qdoba, who we have and pay attention most importantly to, has a budget this year of significant sales increase, and they are outperforming that thus far.

On a same-store sales basis?

Yes, yes.

Okay, so you have not seen any deceleration in in same-store sales growth?

No, we have not.

Okay, thank you.

And again as a final reminder please press star 1 if you would like to ask a question. Follow-up question with Robert Wettenhaul [ph] with Lehman Brothers.

Would you say EBITDA is going to be slightly ahead or behind last year or comparable with it?

I would say for the full fiscal year EBITDA will be pretty close to what our original estimates were, right around $217 million which will be comparable to last year's number.

Okay. And what's current revolver availability?

I think a quarter and our revolver balance.

Approximately $200 million.

Okay. And what do you think gives your company an edge in the Mexican segment of the QSR business?

Simply the food. It's just fabulous food. And if -- where are you from?

New York.

Go to Hoboken. Hoboken, New Jersey has a Qdoba that's been open for a while. You can experience what we're talking about.

And would you would take it up against Baja Fresh Grill or something?

Any day of the week.

So it's just a food driven better product offering?

Yes, sir.

Great, thank you.

You're welcome.

We're going to take another follow-up question from Peter Oakes of Merrill Lynch.

Fiscal '02, your total EBIT, if you were to divide that into your company store base, it's a little over 100,000 per unit, and that be obviously includes the franchise income, the distribution income and the other line. And given the haircut that we're looking at here for '03, either Bob or John, can you give us a sense of approximately how many units, company units, are actually losing money on an EBIT basis? Thanks.

Well, we're not going to disclose how many units lose money on an EBIT basis. So I'm not exactly sure Peter what your math was. Our EBIT dollars this year, I think, are going to be somewhere around about 145 million. That's consistent with our most recent guidance and compares with about $148 million last year, as reported, and we'll have about, just so you know, we'll have about $10 million more in incremental sales to franchisees this year versus last year.

Okay. John, maybe ask another way, how many units, company units were actually closed in the first quarter?

We closed five units in the first quarter. We have plans per the reserve that we took at the end of fiscal '02 to close eight. And those remaining three restaurants will probably all close in the second quarter.

Okay, thank you.

You're welcome.

And now we'll take a question from Mitch Taylor from Wells Fargo.

Good morning, I think I missed, did you say what your stock repurchase were for the first quarter?

Yes, we used $36 million of our cash, and we bought back somewhere around $1.1, $1.7 million shares, and we planned to use our remaining $14 million dollars left on our authorization over the next few months.

Thank you.

And that does conclude today's question and answer session. Mr. Nugent I would like to turn the call back over to you.

Thank you, we appreciate talking to you again at the end of our second quarter. Good-bye.

That does conclude today's teleconference. Thank you for your participation.