Jack in the Box Inc (JACK) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Inc. first-quarter 2004 earnings release conference call. Just a reminder, today's call is being recorded. A replay will be available on the Jack in the Box website for those who could not attend the live event. During the question-and-answer period, (OPERATOR INSTRUCTIONS). Now at this time for opening remarks and introductions, I would like to turn the call over to Mr. John Hoffner, 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, EVP and Chief Financial Officer. Joining me today are Chairman and CEO, Bob Nugent, and President and Chief Operating Officer, Linda Lang. During this session, we will review the Company's first-quarter operating results. Additionally, as stated in the press release issued this morning prior to our conference call, the Company has updated its earnings guidance for the second quarter and fiscal 2004. We have included certain non-GAAP financial information in this conference call to help supplement and enhance investors' overall understanding of our current financial performance and our prospects for the future. Reconciliations to GAAP reported results are included within this morning's press release, which was filed on Form 8-K with the SEC. You may access that filing through our website, JackintheBox.com, by clicking on the link for SEC filings on our investor page.

Also please be advised that this presentation contains forward-looking statements about sales, earnings, expenses and other financial performance indicators. These statements reflect management's expectations for the business and are based on current information. Actual results may differ materially from these expectations based on risks to the business. The Safe Harbor statement in today's earnings release outlines some of these risks and uncertainties and is considered a part of this conference call. Other material risk factors, as well as information relating to Company operations, are detailed in public documents filed with the SEC. And now, Bob Nugent will open our conference call. Following today's presentation, we will take questions from the financial community.

Thank you, John. Good morning, everyone. Jack in the Box today reported earnings of 15.6 million for the first quarter, or 43 cents per diluted share, compared with 21.2 million, or 56 cents per share last year. Excluding an after-tax charge of 5.7 million related to last month's refinancing of the Company's credit facility, earnings per diluted share were 58 cents, 5 cents higher than forecast and consensus estimates.

Each of our three brands, Jack in the Box, Qdoba Mexican Grill and QUICK STUFF, performed well during the quarter. Sales at Jack in the Box restaurants, for example, continued to improve, due largely to several high-quality products that we introduced during the quarter. In a few moments, Linda Lang will offer some details on those new products, as well as other marketing events that contributed to the stronger sales. She will also discuss three new premium sandwiches called Pannidos that will launch next week. Not since the introduction of Jack's Ultimate Salads last April have we been so excited about a new product.

Our Qdoba subsidiary produced yet another increase in same-store sales, its 19th consecutive quarterly increase, and is on track to deliver a high single digit same-store sales increase in 2004. Additionally, we are now expecting Qdoba to open fewer company stores than originally forecast for 2004 and to expand in the future with a higher percentage of franchise restaurants in its growth model. This will enable Qdoba to improve its operating margins and returns on capital, as well as sustain manageable growth rates over time. Our third brand, QUICK STUFF, is performing well and meeting our plan. We had 18 co-branded convenience store sites operating at quarter end and several under construction. As planned, we expect to add 15 additional QUICK STUFF locations over the remainder of the year.

This spring, Jack in the Box will complete construction of its new innovation center here in San Diego, where we will develop new product and processes for our restaurants. Shortly thereafter, we will open two restaurants also in San Diego that will serve as learning labs to test reinvention of the Jack in the Box brand. Linda will provide additional detail on both of those initiatives.

Let me say that I am very excited about where Jack in the Box is right now. We are executing on all elements of our strategic plan, from our multifaceted growth strategy to brand reinvention. And we are already seeing some positive results. Admittedly, we have a lot of work ahead of us, but we are confident in the direction that we're heading. Now Linda Lang will discuss marketing and operations and provide a brief update on our innovation center and brand reinvention initiatives.

Thanks, Bob, and good morning. Along with Jack's Ultimate Salads, which continue to perform well, the new products introduced during the first quarter helped Jack in the Box restaurants increase same-store sales 3.1 percent versus last year. Reflecting our commitment to provide our customers with high-quality products, in October, Jack in the Box introduced (indiscernible) strips, which are made with white meat sliced from whole chicken breasts. And in November, we began offering two deli style sandwiches on hearth-baked rolls, a Roasted Turkey and an Ultimate Club. A month later, we introduced a Monster Chicken Taco to complement our popular beef tacos, which we've offered as a permanent menu item since the 1950s. The response to all three new products has been strong.

During the first quarter, we also began offering guests low-carb versions of their favorite Jack in the Box burgers and sandwiches. Upon request, we will hold the bun and sauce and serve the item in a sealable container, with a knife and fork on the side. An increasing number of quick service customers want the ability to customize their meals. Whether that means forgoing the bun and sauce or substituting ingredients, our guests now have that flexibility at Jack in the Box.

Moving on to the current quarter, we are now into the fifth week of our first systemwide promotional game in 25 years. It is called Win Jack's Stuff, and it offers guests two ways to win more than 5 million food or merchandise prizes, instantly and through a collect-and-win component. As the contest name suggests, guests can win jet skis, motorcycles and MP3 players, and other high ticket items that you might find in Jack's house or garage or airport hanger. Win Jack's Stuff will continue through this coming weekend.

On Monday, Jack in the Box will introduce three premium sandwiches, unlike anything ever offered in the quick service restaurant category. We worked closely with internationally renowned Center for Culinary Development on these new sandwiches, which we are calling Pannidos. What makes them unique, in addition to their name, is their look and blend of high-quality ingredients. Our zesty turkey, ham and turkey and deli trio Pannidos feature real cheeses and deli style meats, like aged salami, Black Forest ham and oven-roasted Turkey, all served in a sleek, foot-long toasted ciabatta baguette. Portability is important in our guests, so we have packaged our Pannidos in a form fitting bag, ideal for on-the-go drive-through customers. They're unique, they're portable, they taste great, and we think our customers will love our new Pannidos.

Earlier, I mentioned Jack's low carb options and other opportunities for our guests to customize their meals. By mid-March they will also be able to log onto the Jack in the Box website and custom build their own burgers and sandwiches, and evaluate the nutritional content of each. This is a great feature for those guests wanting to know how they can create a Jack in the Box with the flavor and nutritional composition that suits their appetite. As expected, the new products introduced during the first quarter, along with the Pannidos and others planned for rollout, add some complexity to our kitchen operation. However, we are maintaining speed of service through improved training procedures and a multiphase product deletion strategy that continues to streamline our menu.

Never before have our guests enjoyed so many options or so many products featuring such an array of high-quality ingredients. And we expect things to improve further when we open our new 70,000 square foot innovation center within the next month. We will relocate our R&D and marketing departments to that new facility, along with other key support functions. Not only will we develop new products at the innovation center, we will also design new equipment and processes that will enable Jack in the Box to bring those new products to market faster.

On the subject of brand reinvention, we are currently converting two restaurants in San Diego that will serve as learning labs. These restaurants will reopen within the next 60 days, and will feature an upgraded menu, totally redesigned facility, both inside and out, and a substantially higher level of guest service. Our goal is to create a dining experience that is better than what any other chain is offering in the QSR industry. We will apply our learnings from these two concept stores on a larger scale before fiscal year end with the conversion of two test markets. As we have stated previously, brand reinvention is anticipated to be a three- to five-year program, which will roll only after sufficient testing.

As you can see, with Pannidos on the horizon, along with a new state-of-the-art facility to accommodate additional menu innovations, as well as the first real test of brand reinvention less than two months away, we have a lot of exciting activities underway. And now I would like to turn the call over to John to review our first-quarter results and earnings guidance.

Thank you, Linda, and again, good morning. Highlights of our first-quarter financial results, including comments on both the income statement and the balance sheet, have been provided in our news release issued this morning. Also provided in the release is the Company's earnings guidance for the second quarter and updated guidance for fiscal 2004. As such, we will not repeat that information on this call, but rather will emphasize a few key points contained in the release that we hope will be helpful.

Diluted earnings per share for the first quarter, excluding the charge of 15 cents per share related to our recent refinancing, were 58 cents versus 53 cents forecast and 56 cents last year. This 5 cent increase over guidance can be summarized as follows. Approximately 2 cents from slightly lower average shares outstanding and lower interest expense; approximately 2 cents from higher gains and fees on sales of restaurant to franchisees, related to the closing of a transaction which was forecasted in the second quarter. For fiscal '04, other revenues are still expected to be approximately 23 million, from 35 to 40 conversions (ph), as originally forecast. And finally, a net one-cent pickup from improved operating income related to higher same-store sales.

Same-store sales increased 3.1 percent in the quarter versus a forecasted increase of 1.5 to 2 percent. With this improvement in sales and in our current level of restaurant operating margin, we would normally expect a higher pickup on earnings per share versus the one cent we achieved. This shortfall was related to beef costs, which were approximately 20 percent higher in the quarter than last year as a result of recent market trends in the beef industry. Partially offsetting these higher beef costs was improved leverage on restaurant payroll and fixed costs from higher sales. The Company expects beef costs to continue to be higher than last year in the second quarter and then moderate for the remainder of the year. We are continuing to utilize forward buying positions to help keep these costs in line, and currently, we anticipate that for the full year, beef costs will end up approximately 5 to 7 percent higher than last year.

As mentioned, in the first quarter, the Company completed a refinancing of its Senior credit facility. We increased our term loan by 125 million to retire our 8 3/8 percent Senior Subordinated Notes. The maturities of our revolving and term loan facilities were extended by 2 years and 3.5 years, respectively. And the term loan amortization was set at 1 percent per year for the first six years of the seven-year term. The Company incurred a $9.2 million pretax charge in the quarter related to the write-off of deferred financing fees and the redemption of the Senior Subordinated Notes. In addition to providing us with a more flexible capital structure, the new facility is expected to lower our borrowing costs by approximately $3 million per year on average over the term of the loan. Additional comments on the refinancing can be found in our news release issued December 12, 2003.

Furthermore in the first quarter, we completed the rollout of our new satellite-linked POS system to all Company restaurants. In addition to allowing for credit and debit card purchases, which have higher average tickets than cash transactions, the new POS system provides better information and is easier for our employees to use. Using this new POS technology, we also plan to roll out a computer-based training program in all of our restaurants. We believe this program will result in more effective training at lower cost, will improve employee retention and will help reduce some of the administrative demands on our restaurant managers.

Regarding our earnings guidance for the second quarter, we expect to earn approximately 28 cents per diluted share versus 44 cents per share last year. This lower estimate is primarily explained as follows. Ten cents from lower gains and fees on sales of restaurants to franchisees and 6 cents for higher beef, workers' comp insurance and POS rollout costs. Leverage from higher same-store sales of approximately 4 to 4.5 percent; and 3 cents in lower interest expense from our recent refinancing are expected to approximately offset higher SG&A for pension, insurance and innovation center relocation costs, as well as brand reinvention market test costs.

Regarding our updated earnings guidance for fiscal 2004, when excluding the impact of the 15 cents per share charge for the refinancing in the first quarter, we now expect to earn $1.74 per diluted share versus $1.68 per share in our original forecast for this 53-week year. This 6 cents per share increase is primarily explained as follows. A net pickup of 3 cents per share in the first quarter after excluding 2 cents for the timing difference on gains on sale, plus an additional 6 cents per share pickup on lower interest expense over the balance of the year from our recent refinancing. Positive leverage from higher sales estimates is not expected to fully offset higher cost for beef, primarily in the second quarter, resulting in a net negative effect of approximately 3 cents for the remainder of the year.

On a full-year basis, our cost of revenues are expected to be 83 percent versus 82.8 percent originally forecast, primarily due to higher beef costs; and our SG&A rate is expected to be 11.6 percent of revenues, as originally forecasted. Now I will turn the call back over to Bob, and we will take your questions.

We are ready to take questions.

(OPERATOR INSTRUCTIONS) Mark Sheridan of Johnson Rice.

Bob, a question on -- as we've talked in the past, obviously you're making a lot of changes to your menu and you did reference on the call that you try to manage the kitchen side of your operations by prudently looking at product deletions along with some of the introductions. Can you maybe give us some examples of product deletions and what the mix requirements might be for items? I don't know if you think of it that simply, but just give us an idea of some of the paring back to the menu that you're doing.

Linda, why don't you talk about that?

Sure. We have developed a three-stage deletion strategy. And we really look at more than just the menu mix. We look at the number of unique ingredients, how difficult is it to execute operationally, the profit margin on a particular item, and then of course, the volume, the sales mix. Let me give you an example of a product that we ended up deleting. The Teriyaki Bowl was a product that was on our menu. It had several unique ingredients, and operationally it was very challenging. So that is an example of a product that we deleted and really helped in the operations. We've already implemented two phases of our depletion strategy, and we have one further phase to go. And we've continued to evaluate the mix and profit contribution to each item on our menu.

Linda, then, a follow-up, and I guess this is probably applies to you as well. When you talk about learning labs and having a couple of those done in that market in the next 60 days or so, can you give us -- are there square footage adjustments, or is it more so just a remodel with a new look? And is it too early to guesstimate as to what the costs may be to go forward with the system?

On the cost side, we are really too early into the project on the cost side. Now, the two particular locations in San Diego have undergone a quite extensive remodel, and that does include an expansion of the dining room in those particular cases. With regard to the rest of the system and the market test, we are going to have a full range of remodel solutions. Some will be more extensive because the restaurant is small and older; and some will be less extensive because it is a newer location and really just requires a re-image. Does that help?

Yes ma'am. Very much. Thank you.

Jeff Omohundro of Wachovia Securities.

Just a couple questions. I'd like to start maybe with Qdoba and dig in a little deeper on your decision on changing the development strategy there. I wonder if you could tell us how returns on the stores you've opened in the last year have tracked relative to your expectations and the trend there. And what is your sense of that subcategory in terms of capacity, given the expansion efforts of your competitors and also pricing action in that (multiple speakers)?

Let me take part of that, Jeff. The decision to cut back on the Company stores in Qdoba is based on a decision to make that organization focus heavily on becoming a franchising organization and not so much an operating (technical difficulty) organization. So with regards to the returns, John, you want to -- ?

Sure. Jeff, the business model in general has not changed and it has tracked to and above our standards. We have disclosed in the past that a mature store will do somewhere around over $900,000 in sales. It will cost right around $400,000 to buildout and it will throw off pretax cash flow returns of somewhere north of 30 percent. We really like that model, and that has not fundamentally changed in the business. We think that over time there is still a capacity for 700 to 1000 restaurants. And we think that we can get higher operating margins and better returns on capital out of a business that has a higher percentage mix of franchise units in its operation. And currently, Qdoba has more than 300 stores in the pipeline supporting this strategy, to grow primarily on a franchising basis.

That's very helpful. Thanks. My second question relates to just the state of franchise relationships, given the pace of menu initiatives and developments and also the pace of re-franchising. Perhaps you could give us a little bit of color on that.

Linda, why don't you talk about that?

Let me talk about the franchise relationships. I would say if you asked any of our franchise operators, we are -- our relationship between our franchise community and corporate is excellent at this point in time. There is a lot of interest in what we are doing from a marketing standpoint. There is a lot of interest with regard to the brand reinvention strategy. In fact, last July at our franchise conference, we unveiled the brand reinvention plan, including the design and the menu upgrade and so forth. And they are very excited, very much behind the strategy. We've kept them involved in the process. And so I would say on a whole, it is excellent at this point in time.

There is also a great deal of interest in franchise conversions. There is still a demand for our existing franchise community to expand their base of restaurants, so we are having no problems getting the interest in our conversion strategy.

I think we indicated at the beginning of the year, Jeff, that one of the reasons we pulled back on the number of conversions this year versus last year was the difficulty in getting the financing for these conversions. That situation seems to be alleviating itself somewhat, but it is still not to where we think it should be. So until the financing picture brightens up a little bit, we will probably stay at a reduced rate.

Very good. Thanks.

(OPERATOR INSTRUCTIONS) Mark Kalinowski of Smith Barney.

Have two questions. First, I just want to see if I understand the beef cost outlook. You're talking about beef prices being higher year-over-year and the fiscal second quarter and moderating in the third and fourth fiscal quarters. Just so I understand what you mean by moderating, does that mean beef prices will still be up year-over-year and those two quarters?

Yes, it does.

Okay, and the second question is on the Pannido. Looking at some of the products that Jack in the Box has brought out the last couple years, the Ultimate Salads, the turkey burger, some of the revamped hamburgers, how has the Pannido done in test in terms of mix and cannibalization relative to those other tests in general?

The results of the market tests of Pannidos have really been excellent. This is a product that is very unique, very innovative. It has been designed around portability of a sandwich, but really includes very high-quality ingredients. So because it is a unique product and has sort of a differentiated positioning and it has a unique name, it does require a pretty broad -- a program that really reaches a broader consumer market. So we've used some interesting ways of couponing and direct-mail and media placement that will reach some of the more moderate users. So we are capturing new users to Jack in the Box, and the mix has been excellent. And it is sustained at a very high level over the course of the market tests. So we are actually planning a pretty lengthy campaign against the Pannido launch.

So it sounds like cannibalization may be a little bit less than some of the other products that have been tested?

Yes, because it is really targeting a little bit broader audience -- a little older and both male and female (indiscernible).

Okay. Good luck with it.

Thank you.

Dean Haskell of JMP Securities. I'm sorry -- that line was bumped out. If you will press Star 1 again. Mark Sheridan of Johnson Rice is next.

One other follow-up. On the brand reinvention strategy, if I remember correctly, there is a general expectation of higher food costs associated with all the new product launches. It is just the beef costs in the recent term have been even higher than expected beyond that -- correct?

Correct.

I think overall, we probably think we may be looking at lower food costs over time. But I think we should separate the menu strategy change from the beef situation, because they are very different issues. We and other chains in the QSR hamburger sector have been affected pretty negatively by the change in the beef markets over the last few months. And we continue to see that going and that has had a pretty impactful result on our food costs today. But going forward overall, we think we are going to have some improvement to food costs with our deletion strategy, as well as new product introductions.

Mark, in addition to that, we have substantially reduced our level of discounting, which has had a positive impact on our food costs.

Yes, Linda, I think that is probably the part that I didn't factor in as well. I just assumed with your premium product focus, that there might be higher costs associated with that. But I guess they're still better costs than are associated with heavy discounting.

Right. And what has been unexpected has been the beef cost increase.

And lastly, Linda, as with the salad rollout last year and some of the new products and some of the menu deletions, have you seen any discernible change in your burger -- in your core burger mix in terms of the Ultimate, the Sourdough, and the core Jumbo Jack?

Not really. On the Jumbo Jack, it has been reduced because we have increased the price point on that. So that has been -- the mix has been reduced. But that is really a function of the price increase.

Okay, good. So it is interesting that even though your communication with customers has focused more on some other products, you really haven't seen any meaningful shift in kind of the premium burger mix.

We still had a very loyal following among those that come specifically for the Ultimate Cheeseburger and the Sourdough Jack.

Okay, thanks again.

(OPERATOR INSTRUCTIONS) Dean Haskell of JMP Securities.

A question for you. Franchisees do not own a lot of the land and the buildings, and part of your refranchising effort you are keeping the land and the building. On the re-imaging, how is that going to work? Are they going to have to contribute some percentage of the remodel cost, or you going to do that completely out of your funds?

That will be the responsibility of the franchisee.

And question two and three, you have upgraded the QUICK STUFFs from 10 expected in '04 to 15, and then how many Qdobas around the Jack in the Box distribution network?

We've always said 15 QUICK STUFFs, ending the year with 33. So there is no change there. With regards to Qdoba, I'm going to need some help here.

We think, Dean, it's somewhere around between 35 and 40.

And that's franchised Qdobas only?

No.

Okay. That's total?

Hang on. That's not right. We're at about 85 Qdobas franchise and company for the year.

Anything further, Mr. Haskell?

No, that's it. Thank you.

There are no further names in the queue at this time. Therefore, I will turn the conference back to Mr. Hoffner for any additional or closing remarks.

Okay, everybody. Thank you for joining us. We appreciate your support. Look forward to talking to you about quarter 2 results. Goodbye.

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