Jack in the Box Inc (JACK) 2004 Q3 法說會逐字稿

Good day and welcome to the Jack in the Box Incorporated third quarter 2004 earnings release conference call. Today's call is being recorded. A replay will be available 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 handset when asking a question. Please do not ask over a speakerphone. At this time for opening remarks and introductions, I would like to turn the call over to Mr. John Hoffner, Executive Vice President and Chief Financial Officer of Jack in the Box. Please go ahead, sir.

Thank you. Good morning. Joining me today are Chairman and CEO, Bob Nugent, and President and Chief Operating Officer, Linda Lang. During the session we will review the company's third 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 fourth quarter and fiscal 2004. We have included certain non-GAAP financial information in the 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 and clicking on the link for SEC filings on our investor page.

Also please be advised that our presentation contains forward-looking statements about sales, earnings, expenses and other financial performance indicators. These statements reflect management's expectations for the future, which are based on current information. Our 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.

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

Thank you, John. Good morning everybody. As you can see from this morning's news release, Jack in the Box posted another strong quarter, our net earnings totaled 21.6 million in the third quarter, or 58 cents per diluted share which was 5 cents higher than guidance and 4 cents higher than the 54 cents that we earned last year. Our Jack in the Box restaurants continue to perform well, with same-store sales increasing 3.9% in the quarter, compared with a decrease of 0.2% a year ago. Year to date same-store sales increased 4.8%, compared with a decrease of 2.4% in fiscal '03.

During the quarter we continued our strategy to reinvent the Jack in the Box brand and in a few minutes, Linda Lang will provide an update on our efforts to improve our menu, our level of service, and our restaurant facilities. Our new subsidiary, Qdoba Mexican Grill, had another solid quarter and remains on track to produce a same-store sales increase in the high single digits for the year on top of double-digit increases in fiscal years 2003 and 2002. Qdoba added 12 new restaurants during the quarter and with 150 units now operating, the chain has increased in size more than 35% year to date.

Our Quick Stuff convenience store concept also continued to perform well, with four new locations opened during the quarter, there are now 25 sites combining a full-service Quick Stuff store with a full service Jack in the Box restaurant and a major branded fuel station. The improvement that we experienced in the third quarter from the top line of our P&L to the bottom were not simply due to a fortuitous three months of strong sales. From the innovative high quality offerings that we've added to our menu to attract a broader base of customers, to our new 70,000 square foot innovation center, that serves as the hub for research and development of new products, to the adoption of far reaching profit improvement measures, to a diversified portfolios brands with flexible growth potential. The results that we're experiencing today are largely due to decisive changes to our company that we began making two years ago. While we've made great progress we still have more to do.

Our entire team is focused, energized, and more excited than ever about our prospects for the future. Now to discuss some of our upcoming initiatives along with marketing and operational highlights from the third quarter is Linda Lang.

Thank you, and good morning. As Bob mentioned we're making progress in our comprehensive initiative to reinvent the Jack in the Box brand, especially with quality improvements to our menu, and that progress is generating some pretty impressive results at our restaurants. For example, this was the fourth consecutive quarter that we've seen an increase in same-store sales.

Throughout the quarter, two lines of innovative high quality products continue to drive sales at Jack in the Box. Our entree salads and Pannidos which are Jack's own version of gourmet deli-style sandwiches, served in an artisan [Chibada] baguette. Building on the appeal of our salads, early in the quarter we added a fourth entree, a Greek Salad, featuring spring mix and romaine lettuce topped with real Feta cheese crumbles. Our Greek Salad includes authentic Calamata olives and pepperoncini slices, imported from Greece. Red onion rings, cucumber slices and grape tomatoes, it's served with seasoned croutons and an herb vinaigrette dressing on the side. We also offer a lowfat balsamic dressing as an alternative. We also introduced the Southwest Chicken Pita, a new premium product that has proven popular among guests seeking a lighter alternatives to our burgers and sandwiches. With just 260 calories and 4.5 grams of fat, the Southwest Chicken Pita features fajita style chicken and onions, topped with black beans, roasted corn, shredded lettuce, stuffed in a pita with fire-roasted salsa served on the side. We plan to conclude fiscal 2004 with several new product introductions in the fourth quarter.

We've already replaced our French fries with new natural cut fries, a skin-on version that we successfully tested at our JBX learning lab. Next week we'll begin rolling out three new A La carte products which along with the new fries, will be promoted as our Diner Melts Combo. Two of the product are 1950s style sandwiches called sourdough melts, made with either a jumbo beef patty or chicken fillet, topped with grilled onions, a slice of American and Swiss style cheese, mayo onion sauce and sweet mustard. The fourth product is a chocolate malted crunch shake, made with real vanilla ice cream, bittersweet chocolate syrup, and chocolate covered malt pieces.

Along with improving food quality, we're also focused on enhancing the quality of service at our restaurants as the second major facet of brand reinvention. We want to exceed our guest's expectations and provide a superior and more consistent level of service when they visit one of our restaurants. To help achieve this goal we're currently rolling out new training programs, including computer-based training to all of our restaurants. When the rollout of the computer based training system is completed in September, employees will be able to train on dedicated computer terminals stationed in each restaurant, which are connected to regional and corporate offices through satellite technology.

Our employees prefer this method of interactive training, which should go a long way toward improving consistency in guest service and product quality, while also reducing crew turnover and training costs. As for JBX, we continue to test our new fast casual concept at two locations in San Diego. We remain on schedule to expand the test to selected restaurants in Bakersfield California and Boise Idaho by calendar year end. Without question our business been on the upswing. And as Bob said, our successes have not come by chance. We still compete in a very mature, very crowded marketplace, with most of our major competitors practically indistinguishable from one another, from their facilities to their food. We are taking aggressive yet calculated steps with our brand reinvention strategies, to stand apart from the pack, and to lead our industry to a new standard of excellence. The results so far are very encouraging.

With that I'll turn the call over to John for review of our third quarter performance and earnings guidance. John.

Thank you Linda, and again good morning. The highlights of our third quarter financial results, which includes 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 fourth quarter and updated guidance for fiscal 2004. As such, I will not repeat all of that information on this call, but rather will emphasize a few key points contained in the release that we hope will be helpful.

Earnings per diluted share for the third quarter were 58 cents, versus the company's guidance of approximately 53 cents and 54 cents last year. Excluding a 15 cent per share charge related to the refinancing of the company's credit facility in January, our year to date earnings per diluted share were $1.70 compared with $1.54 last year. The 5-cent increase over guidance in the quarter is primarily attributed to improved earnings from operations, which related to higher sales, continued control of restaurant payroll and fixed costs, and to lower interest expense which was partially offset by higher SG&A for additional pension accruals. Also, gains on sale of company restaurants to franchisees were slightly higher than forecast due to a timing difference on such sales in the fourth quarter.

For the third quarter, restaurant operating margin increased to 18% of sales from 16.5% last year. Primarily due to strong cost controls in the field and fixed cost leverage from higher sales, were partially offset by higher commodity costs particularly poultry, pork, and dairy. Additionally, our food and packaging costs were lower in the quarter than last year, due to start-up costs associated with the company's introduction of its new salad line in 2003. Year to date our restaurant operating margin was 17.2% compared with 16.6% last year.

Other revenues, which were primarily related to gains and fees from sales of restaurants of franchisees were 6.6 million in the quarter versus 6.9 million last year. Year to date were 19 million from the sale of 38 restaurants, versus 25.4 million a year ago with the sale of 28 restaurants. The lower average gains in fees per restaurant compared with last year ,primarily reflect differences in the sales and cash flows of restaurants being sold.

Our SG&A expense rate was 11.3% of revenues in the quarter, as forecast, compared with 10.6% in 2003. SG&A costs were approximately 1 million higher than forecast in the quarter, due to higher pension expense resulting primarily from lower employee turnover, as determined by the company's annual actuarial review of its qualified pension plans. Year to date, our SG&A costs were 11.3% of revenues versus 11.1% a year ago, primarily due to higher costs related to pension, JBX market tests and incentive accruals, which were partially offset by leverage from higher sales and continued cost reduction from our profit improvement program.

Interest expense decreased in the quarter to 3.8 million versus 5.5 million last year, primarily due to lower interest rates associated with the refinancing of our senior credit facility in January. For the full year we expect interest expense to be approximately 19 million excluding the $9.2 million charge related to the refinancing. That compares with 24.8 million last year. Additionally in the third quarter the company amended the 275 million term loan portion of its credit facility to achieve an approximate 50-basis-point reduction in its borrowing rate over the loan term. The fees paid in association with the repricing were customary for such arrangements and were not material. At quarter end, the company had no borrowings outstanding on its $200 million revolving credit facility.

Our income tax rate was 37% in the quarter, compared with 32.5% last year, which reflected a favorable resolution of a longstanding tax matter in 2003. During the second quarter, the company exercised an option to purchase 80 Jack in the Box leased restaurant properties. In the third quarter we sold and leased back 67 of these locations at more favorable rates, which increased our cash on hand balances to approximately 88 million from 11 million at the end of the second quarter. From this available cash, the company elected to contribute $13 million to its qualified pension plan during the third quarter. The additional funding was determined based on our annual actuarial review of the plan and as a result of this, our additional -- the additional contribution, the company currently anticipates that its accumulated benefit obligation under the qualified pension plan will be fully funded at fiscal year end.

Regarding our earnings guidance for the 13-week fourth quarter we expect to earn approximately 49 cents per diluted share compared with 45 cents per share reported last year. Regarding our updated earnings guidance for the 13-week fourth quarter, we expect to earn approximately 49 cents per diluted share, compared with 45 cents per share reported last year. Regarding our updated earnings guidance for the 53-week fiscal year, and excluding the 15-cent per share charge related our first quarter refinancing, we now expect to earn approximately $2.18 per diluted share versus $1.99 in fiscal 2003, and $1.68 in our original forecast of fiscal 2004. This estimate reflects the results achieved year to date, plus ongoing interest expense savings from our refinancing, and the effect of continued increases in our average shares outstanding. As a reminder, last year's fourth quarter included a charge of 4 cents per diluted share related to the assumption of lease obligations on five Chi Chi's restaurant sites which arose from the bankruptcy of that chain as it was previously owned by the company. I'd like to point out that other revenues, which are primarily comprised of gains and fees from the sale of restaurants and franchisees were approximately $7 million or 12 cents per diluted share higher in fiscal 2003 than we estimate for fiscal 2004.

Finally, the company currently expects its 2004 capital expenditures to be approximately 135 to 140 million. Lower than previously forecast, due to the rescheduling of the two JBX test markets from the fourth quarter of fiscal 2004 to the first quarter of fiscal 2005. As well as savings and timing on new restaurant development. Now I'll turn the call back over to Bob and we'll take your questions.

Vicky, we're ready for questions.

Thank you. The question-and-answer session will be conducted electronically today. If you would like to ask a question you may do so by pressing the star key followed by the digit 1 on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, star 1 if you do have a question. We'll pause for just a moment. We'll take our first question from Joe Buckley with Bear Stearns.

Thank you. Had a couple of questions actually. First, John, just on the pension contribution, walk us through that in a little bit more detail and you mentioned you'd be fully funded by year end so, you know, is this the last major contribution of this sort we should expect?

Hi, Joe. Yeah, it is. We do an annual review of our pension plans at the end of June, and in taking a look at that, we made a decision: A, our expenses went up a little bit because we have lower turnover in the company today, and so we increased our accrual by about a million dollars, and on the contribution side we made a determination that we wanted to have our accumulated benefit obligation funded at 100%. So with that level of 13 million we believe by year end, that's where we will be.

Okay. Question, in the press release discussion of JBX, there's a mention of generating incremental sales as well as benefiting from the transfer of sales to nearby Jack in the Box units. Has that been your experience in San Diego?

Joe, we're really not commenting on the financial performance of our San Diego learning labs, but we believe that we will benefit from the trade from those converted locations to our existing locations. So that is in our plan. And that is what we are doing for the Boise and Bakersfield, we are going in and selecting restaurants that we feel fit with the JBX concept in terms of the demographics of the trade area.

So in other words, you're picking out the fast casual business but your other Jack in the Box business units are picking up the fast-food business?

Correct. We believe that in the market tests for Boise and Bakersfield, and we'll learn this as we move in and convert, that we'll benefit from increasing the appeal and the reach in that market to appeal to both fast-food consumers, as well as your fast casual and even your casual dining consumers, by having both concepts in the marketplace.

Okay. And lastly, any comment on check average versus traffic count in the quarter?

No, we don't really give specifics on the breakdown of our check versus traffic. I can say they're both trending up, and as a result of our reduction in reliance on discounting, we're really seeing more of the benefit on the average check side.

Okay, thank you.

We'll take our next question from JMP Securities, Dean Haskell.

Yes, good morning. Congratulations on a great quarter, gentlemen and Linda.

Thank you.

In your fourth quarter preview or estimate, you mentioned that the weighted average share should be 37.9 million, in the third quarter they were 37.2 million. What's happening that there's going to be an increase of 700,000 shares or a 2% increase in shares outstanding?

Yeah, Dean, this is John. It's really related to stock options. These stock options are now -- more stock options are now in the money and are included in the weighted average shares outstanding calculation because the stock price has been rising.

So it's just stock options?

That's right.

Okay. Congrats.

Thank you.

As a reminder that is star 1 if you do have a question. Moving on we'll hear from Mark Kalinowski with Smith Barney.

Two things I want to ask about. In the release you cited a few commodities as causing pressure on costs during the fiscal third quarter. Absent from that list was beef. Just wondering what beef was in fiscal Q3 and maybe some comments on the outlook for beef costs. And second, with the rollout of the natural cut fries, that was an item that had actually been rolled out previously in the two JBX brand learning labs. Just curious as to whether or not you'll typically roll out items that have been tested in the learning labs at lower menu prices in the Jack in the Box system. Thanks.

Mark, this is John. On the beef question, beef continues to run a little bit higher than last year. I'd say generally it's pretty consistent if not slightly lower than what we experienced in the second quarter. We do still expect it to be higher year-over-year going forward, but the biggest increase is that we experienced in the quarter were really related to pork, poultry, and dairy, on a percentage increase basis.

And the second part of your question, Mark, with regard to the natural cut tries, you're right, those fries actually were developed initially for the JBX concept and given the success of the fries from the consumer standpoint, we tested it in the Jack in the Box system and have rolled system-wide at Jack in the Box. We are looking at products that are currently on the JBX menu and are looking at ways to roll those into the Jack in the Box if it makes sense. It doesn't necessarily mean that it's going to be rolled in at a lower price point, however. Those would most likely be the premium-priced products on our Jack in the Box menu.

So there may be times when a product that has been in the JBX learning labs might actually be rolled out at an identical price in the Jack in the Box system?

Yes, that could be the case. We're testing several products actually in the Jack in the Box system that started at that time JBX restaurant at some level. Could be a slightly different size or specification, but it generally starts at JBX and we use that as a learning lab, in addition to all the other work we're doing out of our innovation center to build a pipeline of products for the Jack in the Box system.

Thank you very much.

One final reminder, to press star 1 if you do have a question. We'll pause for just a moment. It appears there are no further questions. I'll turn the conference back over for any additional or closing remarks.

Well, thank you, everybody, for tuning in. Appreciate your support. We'll talk to you again in November about the fourth quarter and the year. Good-bye.

That does conclude today's teleconference. Thank you, and have a great day.