Jack in the Box Inc (JACK) 2004 Q4 法說會逐字稿

Good day and welcome to the Jack in the Box Incorporated fourth-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.

(OPERATOR INSTRUCTIONS) At this time for opening remarks and introductions, I would like to turn the conference over to Mr. John Hoffner, Executive Vice President and Chief Financial Officer of Jack in the Box Incorporated. Please go ahead, sir.

Thank you, Rebecca. Good morning and welcome to the Jack in the Box conference call. I'm John Hoffner, EVP and CFO; and joining me today is Chairman and CEO Bob Nugent. During this session we will review the Company's fourth-quarter and fiscal 2004 operating results.

Additionally, as stated in the press release issued this morning, the Company has affirmed its earnings guidance for the first quarter and fiscal 2005.

We have included certain non-GAAP financial information in today's news release and this conference call to help supplement and enhance our investors' overall understanding of our current financial performance as well as our prospects for the future. Reconciliations to GAAP reported results are also included in this morning's news release.

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 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 news 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; and following today's presentation, we will take questions from the financial community. Bob?

Thank you, John. Good morning, everyone. Before I begin, I want to let you know that our President and Chief Operating Officer Linda Lang, who usually participates on these calls, is in Portland addressing a contingent of restaurant managers and administrative employees from our North Central region.

It's one of the last stops on a system-wide tour of our 12 regions by teams of Jack in the Box executives who every year update our field associates on Company direction; they preview new products and new initiatives, and recognize employee achievements. So, with Linda in Portland John I will do our best to stand in for her.

As we stated in this morning's news release, Jack in the Box ended a very strong fiscal 2004 by exceeding our sales and profit expectations for the fourth quarter. Net earnings totaled 21.7 million or 58 cents per diluted share, compared with 16.4 million or 45 cents per diluted share in the same quarter a year-ago.

For the 53-week fiscal 2004, net earnings increased to 78.5 million or $2.12 per diluted share, compared with 73.6 million or $1.99 per diluted share in fiscal 2003. As was explained in our news release, after you exclude the extra week in fiscal 2004, as well as special charges and other revenue from sales of restaurant in both years, our operating earnings per share increased 20 percent in 2004.

We also announced this morning that on October 27 the Company completed a 35 million share repurchase program that was authorized in September by our Board, which resulted in the repurchase of more than 1 million shares of Jack in the Box stock.

After I'm finished, John will provide some additional financial highlights for the fourth quarter and fiscal 2004. But let me say how pleased I am with our Company's performance, especially the improvement in our Jack in the Box store operations.

Same-store sales at Jack in the Box restaurants increased 4.1 percent in the fourth quarter on top of a 9/10 of a percent increase a year ago; and for the full year, same-store sales increased 4.6 percent compared with a 1.7 percent decrease in fiscal 2003.

This improvement is largely due to new product introductions like our Pannidos deli-style sandwiches, Sourdough Melts, Natural Cut Fries, and new flavors of ice cream shakes. Looking ahead at some of the products currently in various stages of development or test, we are optimistic that we can continue the momentum that we generated over the past year.

Developing a menu of high-quality products that appeal to a broader base of consumers is a key aspect of the holistic approach that we are pursuing to reinvent the Jack in the Box brand. In a moment I will discuss the progress we are making with the other major aspects of brand reinvention, including initiatives to enhance guest service and our restaurant facilities, as well as update you on the new fast casual concept that has emerged from these efforts that is called JBX Grill.

But first a quick update on other brands which also continued to perform well during the year. Qdoba Mexican Grill, our fast casual Nouveau-Mexican chain, posted high single digit same-store sales increases in both the fourth quarter and the fiscal year, while also achieving a unit growth of 60 percent in 2004.

Qdoba has delivered an increase in same-store sales for 21 consecutive quarters, and in 2004 the chain was neutral to earnings. We expect Qdoba will be slightly accretive in 2005.

We opened 4 new Quick Stuff convenience stores during the quarter. We now operate 29 cobranded sites that combine a full-service Quick Stuff store and major branded fuel station with a full-size Jack in the Box restaurant. Operating all 3 businesses at these sites we're able to generate multiple revenue streams and grow our Jack in the Box brand using locations that we otherwise would find too expensive for a stand-alone restaurant.

During the year, we sold 49 restaurants to franchisees and are progressing toward our goal of increasing the percentage of franchised Jack in the Box units to approximately 35 percent of our system-wide total within the next 4 to 5 years.

Franchise units currently constitute about 22 percent of our system total, which is up from 20 percent a year-ago. We're excited about the expanded relationship with our franchisees and believe that franchising will continue to be a strategic and profitable way for us to grow in the years ahead.

The progress that we have made in successfully executing the elements of our strategic plan has not gone unnoticed among our investors. During fiscal 2004, the stock price for Jack in the Box increased by nearly 90 percent, as did our market cap, which totaled more than 1.2 billion at fiscal year-end.

Moving on to the current fiscal year, we have already enhanced our Jack in the Box menu with several new products, including a Chicken Cordon Bleu sandwich and a Pumpkin Pie Shake. With fast food consumers seeking more nutritious options for themselves and children, Jack in the Box added to each Kid's Meal a 4-ounce serving of Mott Applesauce; and in January we will introduce a new entree salad.

We will also launch next week a holiday promotion that includes a new antenna ball free with large combo quarters. This time Jack's familiar likeness will feature reindeer antlers and a bright red nose.

Speaking of the holidays, our Jack in the Box customers can now get in the gift-giving spirit with reloadable Jack Cash store value cards which can be purchased in amounts from $5 dollars $100. We are the first quick serve hamburger chain to offer these kinds of stored value cards in virtually all Company and franchise restaurants.

Earlier, I mentioned the improvement we have made and are making to our Jack in the Box menu to reinvent the brand with innovative high-quality products. Another emphasis of brand reinvention is enhancing guest service. One way of achieving this objective is through improving the internal service that we provide our restaurant employees.

At Jack in the Box, we embrace a concept called the service profit chain which shows how guest service influences profits. Key to this philosophy is developing satisfied tenured restaurant employees who offer higher and more consistent levels of guest service.

Ours is a very competitive industry; yet among QSRs we believe that we can be the employer of choice by creating a superior working environment. We recently took a big step in this direction by offering all of our restaurant crew members access to health coverage including vision and dental benefits.

In addition to further reducing our all-time low crew turnover levels, this program, which we believe is a first of its kind among major QSR chains, is also expected to reduce training costs and workers compensation claims.

We are also rolling out a new program for evaluating guest service called Voice of the Customer which provides restaurant managers with more relevant and more frequent guest feedback regarding their Jack in the Box experience. Voice of the Customer asks randomly selected guests to rate their restaurant experience in an automated survey either via telephone or Internet, and provides each restaurant several reports every week.

Regarding the third major aspect of brand reinvention, which is upgrading our Jack in the Box restaurant facilities, we are on target to begin testing new interior and exterior designs by midyear. We believe it is important to create more of a destination dining experience for guests and remain consistent with our goals of upgrading the quality of our food and guest service.

We are on schedule with our plans to expand testing of our new JBX Grill concept before calendar year-end. We're converting 3 Jack in the Box restaurants in Bakersfield, California, to the new fast casual JBX Grill concept, and 4 in Boise, Idaho; and we're building 1 new restaurant in each market.

As the name suggests, these restaurants will feature an enhanced, flame-grilled menu as well as facility design improvements developed from learnings gained in the first 2 locations which opened in San Diego last March. We are also planning to upgrade these 2 restaurants to reflect the enhancements being made in Bakersfield and Boise.

Later in fiscal 2005, we plan to test JBX Grill in Dallas. We will continue to carefully evaluate the performance of all of our JBX Grill restaurants to determine the best course for continued expansion.

The past year has indeed been a very busy one for Jack in the Box. We expect to maintain this pace of activity throughout the year ahead. We're just into the first quarter and have already launched 2 major industry-leading initiatives along with several new products. Jack in the Box is a rock solid brand and is emerging as a leading restaurant company.

To our 46,000 employees who are dedicated to their jobs and committed to building our brands, I want to say thank you for the great results achieved in 2004. Their contributions are inspiring, and I have no doubts that they're ready to meet the new challenges that our strategic plan has set forth for us in the years ahead.

I would also like to extend the gratitude of our management team and Board of Directors to our major stakeholders, who have been tremendous in their support. Our bankers, our franchise partners, vendors, and all of our investors, thank you.

Now, I will turn the call over to John for a review of our financial performance and earnings guidance. John?

Thanks, Bob. Again, good morning. The details of our fourth-quarter financial highlights, including comments on both the income statement and the balance sheet, have been provided in our news release this morning.

Also provided in the release is the Company's affirmation of its sales estimates and earnings guidance of approximately 69 cents per diluted share for the first quarter of fiscal 2005 and $2.43 per diluted share for the fiscal year itself. As such, I will not repeat all of that information on this call, but rather will emphasize a few key points that are contained in the release which I hope will be helpful.

As we reported, earnings per diluted share for the fourth quarter were 58 cents compared with the Company's guidance of approximately 49 cents, and 45 cents last year. Excluding a 3-cent contribution for the extra week in the fourth quarter of 2004, and a 4-cent charge in fiscal 2003 related to lease obligation assumptions, our diluted earnings per share were 55 cents versus 49 cents last year.

The 53rd-week contribution was higher than the Company's original 21-cent estimate due to higher sales, improved restaurant operating margins, and a lower tax rate.

The 9-cent increase over guidance in the quarter is primarily attributed to the following. Higher sales and improved restaurant operating margin, approximately 10 cents; higher other revenues, 1 cent; lower interest expense from lower than anticipated borrowing rates, 1 cent; and a tax rate reduction of 2 cents. This was partially offset by higher SG&A costs affecting us by a negative 5 cents.

As Bob previously stated, our reported net earnings for the 53-week fiscal year were $2.12 per diluted share, compared with $1.99 per diluted share in fiscal 2003. Excluding a first-quarter charge of 15 cents per diluted share related to our refinancing of the Company's credit facility, and the 3 cents per share contribution from the 53rd week, fiscal 2004 earnings were $2.24 a share, compared with $2.04 a share year-ago after excluding the fiscal 2003 lease obligation charge I previously mentioned.

Other revenues, primarily related to gains and fees from sales to restaurant franchisees were 5.5 million in the quarter versus 5.6 million last year. Year-to-date, other revenues were 24 million primarily from the sale of 49 restaurants, versus 31 million a year ago primarily from the sale of 36 restaurants last year. The variance in average gains reflect differences in the sales and cash flows of the restaurants being sold.

As Bob mentioned, when you exclude other revenues in both years as well as the special items mentioned above, our operating earnings per diluted share were up 20 percent in 2004.

Total revenues were up 20 percent versus last year with a significant increase in our distribution and C-store sales that are related to a significant increase in the number of franchisees on our distribution system, an increase in the number of our new C-stores, and an increase in fuel sales at higher prices.

In the fourth quarter, our restaurant operating margin increased to 17.8 percent of sales from 16.9 percent forecast, and 15.8 percent last year. This is primarily due to additional leverage from higher sales, effective labor management, and lower costs for occupancy and insurance, the latter resulting from an implementation of a new safety program this year in our restaurants. These reductions were offset in part by higher incentive accrual and commodity costs.

Fiscal 2004 restaurant operating margin was 17.3 percent of sales, compared with 16.4 percent last year, primarily for the same reasons, as well as good control of our restaurant managed costs from our Profit Improvement Program initiatives.

Our SG&A rate was 11.6 percent of revenues in the quarter, compared with 10.9 percent in 2003. Our SG&A costs were higher than last year, primarily due to higher pension expense and incentive accruals, as well as the additional costs for the 53rd week.

Fiscal 2004 SG&A costs were 11.4 percent of revenues, versus 11.1 percent a year ago for the same reasons, as well as including Qdoba overhead for the full year in 2004 versus 3 quarters last year, partially offset by leverage from higher sales and continued cost reductions from our Profit Improvement Program.

In fiscal 2004, our interest expense was 27.3 million, or 18.1 million excluding the $9.2 million charge related to the Company's refinancing. This compares to 24.8 million in 2003. The decrease is primarily due to lower interest rates associated with the Company's refinancing, as well as the subsequent repricing of our senior credit facility during the year.

Our income tax rate was 36.6 percent for fiscal 2004, compared with 37 percent forecast, primarily due to additional tax credits we obtained, and compares with 36.2 percent last year. The Company's income tax rate is expected to return to its normal level of 38 percent in fiscal 2005.

As Bob mentioned, the Company also announced it has completed on October 27 a $35 million share repurchase authorization, acquiring 1.08 million shares of its stock at an average price of $32.46.

During the fiscal year, the Company elected to contribute $30 million to its qualified pension plans from available cash on hand. The additional funding was determined based on our annual actuarial review of the plan. As a result of these additional contributions, the Company's accumulated benefit obligations under the qualified pension plans were fully funded as with plan's measurement date.

Our capital expenditures were 130 million for the year, compared with 128 to 133 million forecast, and 121 million last year.

We accomplished a great deal in fiscal 2004. Following is a summary of some of our more important financial highlights. Same-store sales at Jack in the Box restaurants increased 4.6 percent on top of a 1.7 percent decrease last year.

Same-store sales at Qdoba restaurants increased in the high single digits on top of a double-digit increase in fiscal 2003. Additionally, Qdoba grew its unit count at a 60 percent rate during the year, and was neutral to earnings.

Our consolidated restaurant sales topped $2 billion for the first time in the company's history. Our restaurant operating margin increased 90 basis points to 17.3 percent of sales in spite of higher food costs.

In January, we refinanced and subsequently repriced our revolving credit facility, which resulted in a $7 million decrease in interest expense excluding the related refinancing charge. We financed our new innovation center out of operating cash flow instead of through a sale leaseback transaction as originally contemplated.

The Company reduced its occupancy expense by exercising an option to purchase approximately 100 leased properties, and subsequently reselling and leasing back most of them at more favorable rates.

The obligations under the Company's qualified pension plans were fully funded as of our measurement date. We reduced the pension liability charge to stockholders equity by $26 million.

Our cash balances were 132 million at fiscal year-end, primarily due to strong operating cash flows, payments from franchisees on notes receivables, reduced working capital requirements, and proceeds from sales of restaurants to franchisees.

Our debt to equity ratio improved from 0.6 to 1 last year to 0.5 to 1 this year. Our return on assets excluding the refinancing charge and excess cash improved to 7.2 percent from 6.7 percent last year. Now I will turn the call back over to Bob.

Thanks, John. Before we open the call to your questions, I would like to take a moment to express my sincere appreciation to John for his dedicated service to Jack in the Box. This morning we announced that John will be retiring from the Company as Executive Vice President and Chief Financial Officer.

As you can see from today's earnings report, and as you just heard, the financial condition of Jack in the Box is as strong as it's ever been, and we are in great shape to fulfill our strategic goal of becoming a national restaurant company.

John has been a key member of our leadership team. He has had tremendous impact on the company during his tenure, and I know that I speak for everyone at Jack in the Box when I wish him well and all the best in his retirement.

I would also like to congratulate Jerry Rebel, who will succeed John as CFO near the end of January. Over the next year, as he transitions to his new role, Jerry will continue working closely with John and the management team, as he has done since joining Jack in the Box 14 months ago.

Jerry will be participating in the next quarter's conference call, and we will be scheduling meetings to introduce him to our analysts and investors. I hope you will join me in congratulating Jerry on his very well-deserved promotion.

John, is there anything you would like to add before we turn the call over to the operator?

Thank you, Bob. It has been a distinct pleasure working for you and with all the wonderful people here at Jack in the Box. Together, I think we have accomplished a lot over the past few years; and I am grateful to have had the opportunity to help set our new strategic direction and strengthen the Company's financial condition.

I will miss everyone very much. But I am looking forward to my retirement, where I can do some teaching and some volunteer work, as well as play some more golf. I know Jerry will do a wonderful job in his new role, and I look forward to supporting him over the course of the next year.

Thanks, John. The best to you. Okay, Rebecca, do you want to open it up to questions, please?

(OPERATOR INSTRUCTIONS) Jeff Omohundro, with Wachovia Securities.

Congratulations on the quarter and John on your retirement. I wanted to jump right in with the comment made by Bob regarding your optimism on continuing the momentum into the new fiscal year, particularly in light of the more challenging comparisons.

I am wondering, if your optimism is a function of the new product pipeline; or if you could perhaps put some more color around that?

We have guided both for the quarter and for fiscal '05 same-store sales increase of 2.5 to 3 percent. I'm still very comfortable with that. As I indicated, we have got our marketing calendar set for the year. I am very excited about it. I think we did a great job of marketing the business last year, and I think will do an equally good job of marketing it this year if not even better.

We have got some very exciting new products, some very exciting promotions. The execution level in the restaurants is at an all-time high. Employee turnover is at an all-time low. This thing is operating on all 12 cylinders. In case you didn't know, we are driving a V-12 here.

I guess now that you've had a little bit of time with the innovation center up and running, I'm just wondering has it met your expectations? Exceeded it? What have you learned about that?

I have some pretty high expectations, but I would say it actually exceeded it. The people are producing some incredible products and at a pace that -- you know, we were in the new product business for many, many years beginning back in April of 1980; and that is the tactic that we used for the subsequent 12 years.

We were able to get the new product process, development process down to 11 months, which we thought was the best in the business. I can tell you that we have blown away. It is all a function of providing them this facility, I believe.

Lastly, there was apparently some construction delays that impacted the pace of new unit openings. Where are you on that? Maybe a little more color on what is going on there.

You hit the nail on the head. There are some things you just don't have any control over, and a lot of it has to do with the landlords getting their shop in corner. If they drop the ball, it is our problem.

It is a tough market out there, construction wise, and permit wise. More and more communities are making higher and higher hurdles. But we are on track to open what we said we were going to open this year, both in terms of not only Jack in the Box, but Qdoba and Quick Stuff. Do you have Anything to add to that, John?

I would just say it is also, Jeff, not just landlords but the permitting processes in municipalities is also getting lengthier and more complex as well. We really do think that these are short-term delays, and we are on track to meet our opening schedule in Q1 as well as the year at this point.

Very good, thank you.

Joseph Buckley, Bear Stearns.

Let me add my well wishes to you, John. A couple of questions. Does the guidance for '05 staying the same, despite beating the fourth quarter and full-year '04 numbers by so much? (inaudible) when you issued the fiscal year '05 guidance in the September, you might not have known exactly where the numbers are going to be, but you knew you were running so strong?

What I would say, Joe, is, number 1, we are very early into the year. Don't forget that Q1 is a 4-period quarter. We tend to be a bit conservative in how we approach those things. But as Bob said, our initial guidance on same-store sales was a range of 2.5 to 3 percent for the year.

Even with slightly better performance in Q4 we are still generally in that range, we believe; and I think we're still in that range for Q1. So it seems to us right now a bit premature to change that guidance this early in the year. We will see how it unfolds.

Okay. Question on the restaurant operating profit margin in the fourth quarter running 17.8. Any reason to think you're going to come off that level? Not on that sort of (inaudible) unit, sorry, but say the first quarter, given trends?

Not at this point. I think we generally said that what we are seeing is pretty darn good control of our operating expenses; and we're comfortable with our sales estimates.

We do have some exposure on produce costs in the tomato shortage, but we are working to mitigate that. We are seeing some softening in some commodity trends in the areas of beef, shortening, some dairy. So the general outlook for our commodities is generally pretty respectable with the exception of the tomato situation.

Okay. The tomato situation, John, that will be resolved within a month or 2, just as other regions produce crops? Is that correct?

Well, I don't know about resolved, Joe, but Florida should start to come back with its replanted supply starting mid to late December. Whether it is going to be sufficient to take care of the demand is not known yet.

But we are under pressure today. That pressure will continue to build over the next 4 weeks, and then we will see what happens with Florida's harvest.

Okay. Last question.

Joe? Excuse me for interrupting. I just wanted to mention, just so you know, we have giving guidance in Q1 on restaurant operating margins in our last press release. It is a 16.9 percent for the quarter versus 16.1 last year. So I would like to make sure I call your attention to that.

No, I knew that. That is why I was wondering why it would be so much lower than the 17.8 that you just ran.

I think it is really mostly seasonality of the business. That is generally how we trended in the first quarter of last year.

Okay. Last question, just the extended healthcare plans. What will that cost you and where will that show up in the income statement?

Obviously there is a cost to it, Joe. But we are not going to disclose precisely what it is going to cost. I will tell you this, that what we need is about 1/10 of an improvement, 1/10 of a percent improvement in turnover to pay for it. We feel very, very comfortable that we will get that result.

Joe, it is really not a material cost for the year based on the way the plan is structured. It is a shared program. It is based on tenured employees. You need to have been with the Company a year to be able to participate. The estimate of that cost is baked into out guidance for the quarter and the year.

Very good. Thank you.

(OPERATOR INSTRUCTIONS) Rachel Rothman at Merrill Lynch.

John, I know we were just getting started, but it was a pleasure working with you.

Thank you very, very much. I appreciate it.

I just wanted to a slightly bigger picture question, if you guys could, on your free cash flow allocation. You are in a very positive situation, in that based on our model we are looking for you guys to generate over $1.00 in free cash next year. That is after all CapEx.

With your share repurchase authorization behind you, can you just sort of prioritize for us what you are looking for in terms of using that cash flow?

I would say we are clearly looking at that. We have not made any definite decisions yet. We're having discussions with the finance committee of our Board, and we're looking ahead. We have not come to any conclusion.

I think we have demonstrated a willingness to repurchase shares. We are also considering debt paydown. We also look at investment in our facilities, where we're going into a remodel program where we think we can generate some pretty good returns on that capital as well.

So we clearly have it on our radar screen and we're looking at it very, very diligently right now.

Great. Just one more if I could. This may be more of a Linda question, but could you just characterize for us what the similarities and differences are between the current 2 learning labs that you have in San Diego and the restaurants that you will be opening in Boise and Bakersfield? Is it mostly, the image, the exterior, the interior?

Let me see if I can walk you through some of that.

That would be terrific.

The single biggest change is the cooking platform. We will now been preparing the sandwiches, the protein of the sandwiches, on a flame-grilled broiler versus a flat broiler. To reflect that change, we have changed the name from JBX to JBX Grill.

We're also making some changes in the menu in terms of offering another line of sandwiches, enhanced the quality of the Pannidos. We have increased the quality of the salads.

We have made physical plant changes. Some of the concerns that were fed back to us by consumers was it was too claustrophobic, if you will. So we have addressed that.

There are other minor changes that we were making that we think will satisfy all of the issues that consumers pointed out to us. Does that help?

It does. Have you guys made significant inroads in your value engineering as you get closer to a prototype?

Yes, we are. We have a team whose task it is to get the value engineering effort full speed ahead. That is being somewhat reflected in these test markets. But certainly until you get to some degree of scale, can you really fully optimize that effort.

Understood. I appreciate it. Thank you, gentlemen.

(OPERATOR INSTRUCTIONS) Gentlemen, at this time there are no further questions. I would like to turn the call back over to you for any additional or closing remarks.

Thank you, Rachel. Thank you, everyone, for joining us today. We will look forward to being back in touch with you in February when we will talk about our first-quarter results. Goodbye.

This does conclude today's conference call. We do thank you for your participation. and you may now disconnect at this time.