Jack in the Box Inc (JACK) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box, Incorporated, first quarter and fiscal year 2007 earnings conference call. [OPERATOR INSTRUCTIONS]

At this time for opening remarks and introductions I would like to turn the call over to Mr. Jerry Rebel, Executive Vice President and Chief Financial Officer of Jack in the Box, Incorporated. Please go ahead, sir.

Thank you. Good morning, and welcome to the Jack in the Box conference call. Joining me today are Chairman and CEO, Linda Lang, and President and Chief Operating Officer, Paul Schultz.

During this morning's session, we will review the company's operating results for the first quarter of our fiscal 2007. We'll also discuss guidance for the second quarter and full fiscal year. All of this information was provided in this morning's news release. Following today's presentation, we will take questions from the financial community.

Please be advised that our presentation contains forward-looking statements that reflect management's expectations for the future which 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 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 our most recent 10K and other public documents filed with the SEC.

And now I would like to turn the call over to Linda Lang. Linda.

Thank you, Jerry, and good morning.

I'm very pleased to announce that today Jack in the Box reported record quarterly earnings with net profits increasing 47% in the first quarter versus last year. This strong performance is a testament to the company's continued execution of our strategic plan. Namely, to reinvest the Jack in the Box brand, to profitably grow the business, and to increase franchising.

Since embarking on our plan three years ago to reinvent the Jack in the Box brand, we've worked to improve the overall experience at our restaurants through major upgrades to the menu, restaurant environment, and guest service. And judging from the same-store sales increase of 5.6% in the first quarter, those efforts are working.

Jack in the Box continues to resonate with our loyal, frequent customers while also attracting new, moderate fast food consumers. Our innovative menu is well differentiated in the hamburger category of QSR.

In the first quarter, for example, we continued our focus on quality by introducing the sirloin steak and cheddar ciabatta sandwich, which features tender, marinated 100% sirloin steaks on toasted ciabatta bread, cheddar cheese, red onions, tomatoes, and green leaf lettuce topped with a creamy peppercorn mayo. In addition to leveraging our equity with ciabatta bread, this product gives us an entirely new platform to work with, sirloin steak.

Continuing to emphasize variety in the first quarter, we also added products in breakfast, snack, and sides, and we're reminding guesting that unlike many other chains, Jack in the Box lets them order any product any time.

Regarding our restaurant environment, we continue reimaging our restaurant, giving Jack in the Box a new look and feel. We've been working hard over the past two years, testing a variety of designs and we're very happy with the program we're rolling out, which meets our objectives of enhancing the restaurant environment for dine-in guests. We're pleased with the sales trends of the reimaged restaurants and more importantly the redesign will help us complete better in the long run, while providing a positive halo for the overall brand image.

We're on track to reimage the entire chain in the next four to five years.

The third component of brand reinvention is guest service. Our restaurants remain accountable to a high standard, due in part to our Voice of the Customer program, in which guests evaluate their experience via telephone and internet surveys.

Thanks to this program, Jack in the Box restaurants are more focused on guest service than ever before.

During the quarter, we took another step toward improving service by installing at all company restaurants contact lists credit card reader, which offer a secure and convenient method of payment. This is also noteworthy because credit card transactions, which continue to increase as a percentage of sales at Jack in the Box, have a higher average check than cash.

Our progress on brand reinvention is making Jack in the Box more attractive, not only to guests, but also to our franchisees, who acquired 15 company restaurants in the first quarter.

Our long-term goals are to increase franchise ownership by about 5% a year and to achieve a range of franchise ownership that's more closely aligned with that of the QSR industry. We believe that our strategic plan is the right course for this company and has made Jack in the Box a much more compelling brand. Thanks to our franchise operators and employees throughout the organization who are doing an outstanding job of executing this plan, we believe that Jack in the Box is well poised for the future.

Now I'll turn the call back over to Jerry to discuss the first quarter in more detail and update our guidance for the year. Jerry.

Thank you, Linda, and again, good morning, everyone.

As Linda mentioned, our first quarter was a record for the Jack in the Box with net earnings of $1.03 per diluted share, compared with $0.70 last year.

First quarter earnings exceeded the high end of the range previously forecast by the company and analysts first call consensus estimate of $0.81.

The primary reasons for the improvement were as follows in approximate amounts: plus $0.17 from higher sales and restaurant operating margin at Jack in the Box restaurants, $0.04 improvement from a lower tax rate, and plus $0.04 due to the rollout of new employee uniforms, which was originally anticipated to be completed in the first quarter and instead began in the second quarter. This improvement was partially offset by $0.03 from financing costs related to retiring the company's previous credit facilities.

Restaurant operating margin improved 200 basis points in the first quarter to 18.4% of sales, due primarily to higher sales in 2007 and lower food costs, principally beef, chicken, cheese, and produce, as well as expense control, lower utility costs, and fixed cost leverage on same-store sales growth.

We announced this morning that our board has authorized us to repurchase up to 3.3 million shares of Jack In the Box stock during the calendar year 2007, essentially completing the repurchase of the original number of shares offered in the Dutch tender. We intend to purchase the stock at prevailing prices in the open market, using the company's cash resources. Our updated guidance for 2007 does not reflect the impact of any additional shares that may be repurchased during the remainder of the fiscal year.

For the full year, we've increased our guidance to $3.27 to $3.33 per diluted share and have raised our same-store sales increase from a 4% to 5% increase at Jack In the Box company restaurants.

Same-store sales increase forecast for Qdoba is unchanged at 3% to 5%.

We've lowered our full-year tax rate forecast to 36% to 37% to reflect the impact of reinstating the work opportunity tax credit program. New store openings are our target and our forecast remains at 40 to 45 new Jack in the Box restaurants, and 80 to 90 new Qdobas.

In the second quarter we're forecasting $0.67 to $0.70 per diluted share for earnings and increase in same-store sales of 3.5% to 4.5%.

And now I would like to turn the call back over to Linda. Linda?

Thank you, Jerry. Now we'll go ahead and take your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Larry Miller, RBC. Your line is open.

Yes, thanks. A lot of questions.

I'm just going to start with this one. Can you guys highlight for me your capital allocation strategies today as they stand as you see them over the next year or two?

What I'm specifically interested in is the distribution business, is that still a core business? Where are you investing your money in that business and some of the other businesses as the priorities as you see them today? And then, share buyback in there, and if you could just comment as you're talking about share buyback about the share count itself, because it didn't come down in the quarter, and I would have expected it to since you got the Dutch down toward the end of the quarter, so maybe you're going to see that in the second quarter.

Thanks. I have a couple more questions, sorry.

Hi, there, this is Jerry. Let me answer that capital allocation question first. Our capital allocation priorities are as follows: we look first to investing in new company stores, followed by a close second or if not on par with our reimage program.

So those are the first two priority that we have. That's really about growing the business, both with respect to new store growth and organic growth within the Jack in the Box existing store fleet.

Then secondly, we would look to share repurchases, and what we've announced is that we intend to basically round out the original 5.5 million shares that we had offered to repurchase during the Dutch tender with an additional approximately 3.3 million shares to be repurchased this year.

With respect to the distribution business, there is not a lot of investment required for the distribution business.

Most of that is -- with respect to some expansion of capacity, and to just normal capital maintenance. It is very modest. We don't talk about exactly what that is, but it's not a material number at all to our capital spending. And quite honestly, the distribution business that we have, most of it is lease today anyway. And it doesn't require a great deal of capital investment going forward.

And as you guys thinking about, is that still a core business, a strategic business, for you guys to be in, or is that something that can be potentially divested or [JVed] to give an increased focus on some of the other priorities for cash flow?

Well, again, it doesn't require a lot of cash flow at all.

The way we view the distribution business, Larry, is that if we were starting up a company today, quite honestly, we probably wouldn't build a distribution infrastructure.

The fact of the matter is, though, that we have a distribution infrastructure, it's very efficient, and is we are able to source product and deliver to our stores much more efficiently and with much less cost than with what we could do in the open market today.

And if I could just understand maybe how we should think about the sales growth in that particular business.

Because it has been growing much faster than the overall business as you were signing up additional franchisees. And it looked like in the first quarter it slowed.

Is that reflective of, potentially, lower year-over-year gas prices, or was that just something else in there?

No. It's that distribution and other sales and the slowing was primarily related to lower fuel sales at our C-Store business.

Okay, that makes sense.

Just one more question and let everyone else get in here, but typically you've given some margin detail guidance as you've given your outlook, at least on the restaurant side, and given that you had such an outstanding '06 in terms of restaurant margins, how should we think about that directionally, at least?

Larry, as you know, we stopped giving that kind of guidance beginning here for fiscal '07. I can assure you that we're not anticipating a 200 basis point improvement continuing for the balance of the year, but we are looking for an improvement year over year without being anymore specific than that.

Okay, thanks.

Maybe I could sneak one more in, just since I got you guys. On gift cards, can you give us an idea how much that increased, and how much the new grocery channel might have helped that business, and then I'll hop off. Thank you very much.

The -- we have seen that ramp up. As I'm sure you guys know, we were the first QSR chain to have these rolled out chainwide a couple years ago. We saw significant improvement in those numbers year over year.

I believe the number was about two times what we had seen the prior year, and with the rollout of the retail piece, it's very new, we had total sales of about $.5 million of that in the first quarter.

Chris O'Cull, SunTrust Robinson Humphrey. You may ask your question.

Yes. Good morning. Given the success you guys have having with the new image, do the franchisees have permission to use the new image for their reimaging efforts and also for new unit development?

This is Paul Schultz. Yes. Not only do they have permission to do it, but they are required to reimage their restaurants on a time line that we have established for them.

Okay. And then on the new unit development on the franchisees, I know that you're eventually hoping to accelerate that development.

Can you talk a little bit about the pipeline? And then also, maybe give some details regarding the new agreements that you're signing with the franchisees that are repurchasing -- or that are purchasing company stores in terms of the number of units they potentially could develop, the time line, those types of things.

We haven't provided a lot of detail in that area, but what I can tell you is that we have made a significant improvement -- rather significant improvement in the pipeline of franchise development agreements over the past year.

And this is Linda.

Most of our deals now include some kind of development agreement, especially when we're having a franchisee development a new contiguous market for us. So, for example, the Hawaii deal included a development agreement, as well as the purchase of our company restaurants in that market.

Okay. Now, Linda, let me ask you, do you -- are you trying to create -- are you trying to recruit larger franchisees that can build out an entire DMA, or are you splitting a DMA for multiple franchise developers? Or what's your approach to it?

Right. It really depends on the size of the DMA, but for the most part we're looking for the larger operators, the larger developers. That can take down a whole market.

Okay. And then can you give some detail regarding the G&A benefits you experienced during the quarter from maybe the sell of the Hawaiian market?

This is Jerry, Chris. The total savings on the Hawaii G&A would be about, in round numbers, $1.5 million over the course of a year. So we would have a pro rata decrease in that in fourth quarter.

Okay, great. Would you describe the testing process on the new promotion, the mushroom sirloin sandwich. Would you go through and describe that and also give us some expectations as to what affect you think it will have on the check and maybe the transactions?

Are talking about the steak and mushroom that was just launched this quarter?

Yes.

In terms of our testing, we follow the same testing protocol that we do with most of our products.

And that really involves prototype developments, some incensory tests, and then we get it out into field tests, starting with a few -- a handful of restaurants, maybe 15, 20 restaurants, and we expand that into a market, put media behind it and we do an evaluation and analysis of that to determine to what extent it's incremental and what benefit we get in terms of our margin on that launch.

We then, based on the positive results in the tests, we slated it for system launch and it was just launched this quarter.

So it is a line extension, so typically line extensions are not as strong as a new product platform that we would have seen with the sirloin steak when we first -- just launched the steak sandwich, but very, very positive response from the customers. Gives us a new platform to work with in terms of the steak protein. So we have -- there's a lot of potential around that product platform.

And that's comparing against a fish -- the fish and chips and fish filet last year?

Well, I -- off the top of my head, I'm not sure what my product launch -- generally the fish filet is not a primary launch for us. We generally bring out a fish event during the Lent period.

Right.

And we will in fact have the fish event again this year.

Okay. And then a quick modeling question. Do you break out the franchise and company units opened, acquired, closed during the quarter for both brands?

Yes. This is Jerry, Chris. For the opening, Jack In the Box company were seven, franchise, three, Qdoba opened one company, 28 franchises.

Okay. Any closures?

Let me check. Looks like we had one Jack in the Box company unit close and no Q -- and three closed Qdoba franchises.

Okay, great. And one last, if I may. Has the wage rate inflation that you've seen in California since this increase, has it been in line with your expectations, or will you guys need to take additional price in order to obtain the guidance you gave?

It's in line with our expectations. We took a price increase to cover the increase in the minimum wage in January.

You're not seeing any additional crew member wage rate inflation folks that are maybe above the minimum wage rate?

Nothing unplanned.

Okay, great. Thanks.

Our next question comes from Jason Belcher, Wachovia. Your line is open. Mr. Belcher, please check your mute button.

Sorry about that. It's Jason Belcher for Jeff Omohundro. Just a couple of questions, if I may. First, it looked like interest expense ticked up a little bit with the Dutch tender offer and new credit facility. And we were wondering what we should expect in terms of a run rate on interest expense for the year? And then secondly, the shares outstanding figure you gave in the release, just wondering if that was a fully diluted number?

This is Jerry, again. The share is a fully diluted number, when we divide, it is.

With respect to the interest expense, we don't guide on interest expense, but what I can tell you is that this is reflective of just last than a half a quarter's worth of interest, or actually about a half of a quarter's worth of interest increase because of the additional borrowings.

You could use that to help model going forward.

Thanks, that's helpful. And just -- I'm not sure I was clear on my shares outstanding question, but when I said shares outstanding, I meant the quarter-end figure that you gave.

Yes, the quarter-end figure that we gave would have been fully diluted.

Okay, great. Thanks.

Steven Rees, JPMorgan. You may ask your question.

Hi. Thanks. I just wanted to know if you could talk about your comfort with the current leverage. I think it's around 2.5 times debt to EBITDA, or even less if you look at net debt. Are you comfortable here and would you consider taking it higher over time, especially as you become a more franchise-dominated organization?

We have this right now at about two times debt to EBITDA. We are comfortable with that level. This program continues for the next five years on a revolver and six years on the term loan and we are comfortable with the leverage that we have on there today.

Okay. And then could we get an update on some of your speed of service initiatives, if you're seeing improvement on that metric and if you take that's adding to the comps?

This is Paul. Our speed of service results have been fairly stable.

We have been really focusing our employees on the overall guest experience rather than just speed of service, meaning hospitality, order accuracy, creating the right environment for the guest, and much of that has come through what we consider these internal service initiatives to help our managers create a better work environment for our employees.

So while speed of service is certainly something we keep our eye on, we are truly looking at the whole experience and want our employees to be focused on making that the best it possibly can for the guest on all aspects.

Okay. Just on the new credit card technology, was that just rolled out in the first quarter, or had it started earlier and was completed in the quarter?

It was completed in the fourth quarter. There may have been just a small dribble at the end of last year, but it was completed during the fourth quarter.

Okay, thanks. Could you update us on breakfast, how that business is trading for you all and would you plan to grow it, given what looks to be an increased competitive environment with some new entrants with the national competitors?

Right. We have seen growth in our breakfast day part and we've focused on launching new products in the breakfast menu category. So, we're very positive. We've got great plans for breakfast, not only in regards to an interesting campaign, but also new product introduction going forward.

Okay, great. Thank you very much.

Dean Haskell, Morgan Joseph. You may ask your question.

Thank you. Good morning, and congratulations on a great first quarter.

Thank you.

Can you give us total units by company franchise in both of the core brands?

We can.

For Jack in the Box, end of the first quarter, 1,466 company, 622 franchise. Qdoba, 71 company, 273 franchise.

Okay. And my next question is on general and administrative expenses. In the past it has gone up $35 million in '03, up $10 million in '04, up $27 million obviously, an oscillating cycle.

We're looking for approximately $12 million increase in '07. Is that in line with what your expectations are?

Dean, we have not been providing G&A guidance here for probably the last year. One of the things to remember, though, it does fluctuate based upon sales because of the advertising component, which is about 5%. So, if that helps, I can give you that.

But other than that, we have been not been guiding on that. I can tell you, though, that we have had a significant focus on cost control and cost reduction here at the company over the last couple of years.

Okay. Yes, it's been quite variable and of course the 5% deduction for marketing doesn't add significantly to that. What kind of cost controls have you been working on?

It's just good G&A discipline. We are -- we have fewer company stores today than what we had in the past. It clearly takes fewer people to support, or fewer costs to support a franchise unit as it does a company unit. And we mentioned with the selling out of the Hawaii market and with the closing of the central California region last year that we've been taking G&A costs out as a result of the franchise initiatives.

What happened to the central? Did you consolidate with -- between south and north?

Yes. That's exactly what we did.

Okay. Thank you very much, and congratulations again on a great quarter of operations.

Thanks, Dean.

Thank you, Dean.

Victoria Hart, Merrill Lynch. You may ask your question.

Hi. Yes. This is Victoria for Rachael Rothman. Given the new board authorization as to round out the 5.5 million shares bought at the Dutch, it appears you'd be comfortable repurchasing share at or near today's level. Given this, what was what was the thought process for not raising the range on your Dutch tender when the tender didn't sell?

We clearly looked at that. We're working with two sets of very good financial advisers with Morgan Stanley and with Wachovia.

And we felt at the time that it was most prudent to go ahead and complete the tender with the number of shares that were tendered and to buy the rest in the open market. Is what we plan to do.

I guess -- congratulations on a fantastic quarter. What was the biggest surprise for you given the $0.22 beat from where your guidance was that you hadn't anticipated when you gave the guidance previously?

I'm sorry, can you repeat that? I --

Given that the earnings announced today was substantially above the guidance previously given, your range, what was the biggest surprise that you hasn't anticipated when you had provided that guidance?

I think if you look at the quarter performance, there were a lot of factors that influenced the results. And some of those are macro conditions.

And if you look at the macro environment, we had a strong economy, we had strong retail sales, fuel prices came down, we had warmer weather than expected with the exception of the -- some of the markets like Denver.

The QSR segment was doing well in general, relative to casual dining, and our commodity costs, we didn't have any surprises in the commodity costs, which sometimes we do get surprises in a quarter.

So all of that really played into the performance in the first quarter that some you just can't anticipate.

And then specific to Jack in the Box, we had just a very strong marketing calendar, strong promotional calendar, and really the execution of the restaurant level was very good. And it really ramped up throughout the quarter when you go back to our original guidance, we did see a positive trend each period as the quarter went along.

Now, I believe you had commented last time that you were anticipating taking some pricing for -- to toss at the minimum wage increase. I believe you had mentioned 20 basis points, if I'm correct. Is that in line with the price increase that was taken for the period?

Yes. This is Jerry. We -- I think Rachael may have asked the question last time.

We said it was roughly about 20 basis points worth of price over the change to compensate for the California wage increase. As Linda mentioned, we have taken that increase and we're not having any surprises on the cost aspect of the minimum wage.

Okay. So the 20 basis points was just relative to California only? What is the --

The 20 basis points is across the entire chain, but that's offsetting the minimum wage in California.

Okay. And if you factored in the minimum wage increase across your entire system, what is the expectations for price increase then to offset the labor inflation?

If you -- if this is relating to the proposed federal minimum wage increase, if you look across most -- let me rephrase that and say several of our major markets, California, Washington, Arizona, Oregon, they all have current minimum wages that are higher than the proposed federal.

We expect no impact on those particular markets. When you look at say Idaho and Texas and come across the southeast, we will have some impact there.

But fortunately, the free market works in most of those areas and the market-driven minimum, or the market-driven wage is already above what the federal minimum proposed is, with the exception of taxes. So we'll have a little bit of a ding there if that goes through over the course of the remainder of the year. That's expected to be very small, something in the $200,000 to $300,000 range.

Previously you had mentioned that your long-term EPS growth target was 12% to 15%. Could you decompose that for us so we have a better understanding of how that lines up with the various categories on income statements?

No, we really haven't given that, and we have no expectation that -- well, provide that level of detail.

Okay. Well, I guess, then, in the context of you're planning to refranchise 5% of the stores every year, there's going to be a dilutive affect from the refranchising efforts, what will be making up for the lost earnings?

Well, there isn't always a dilutive affect. If you just look at Hawaii when we sold that market, we have a variable royalty process there, which we expect that those earnings going forward will be neutral to what we would have had, had we continued to run those locations.

So it's not safe to assume that in every case will -- there will be a dilutive affect on the refranchising. I believe there is, but it's not always the case.

Well, could you comment on how much G&A leverage you can extract from the refranchising efforts then?

What we've told you is that we do give G&A leverage. I think we've communicated in the past year two such examples. One was the Hawaiian market, one was the closing of the central California region there in the neighborhood of $1 million -- $1.5 million worth of G&A savings each. In terms of rounding out the model for you, I'm not going to be able to help you beyond that.

Okay. And what was -- what led to the decline in the guidance for refranchising gains? I think, previously, it was at $35 million to $37 million and now it's at $29 million to $31million.

What the guidance was previously was regarding to other revenues.

What we identified in our press release this morning is that we have decided to reclassify the gain portion out of other revenues and put that down as a discreet line item and operating cost. It doesn't impact operating earnings, but it's a more consistent presentation of what most of the industry does, and it's consistent with the level of detail we're providing on just the gains within our cash flow previously.

So it lines up better and we'll probably provide just a bit more transparency, although we do believe that our gains were fairly transparent in the past.

Okay, so essentially there's no change in the guidance?

No change. It's just how it breaks out.

Okay. And then, I know you commented briefly on the Capex for the year, but the -- your range now for the high end has been revised a little upwards. But the unit growth remains the same. Can you comment on why you anticipate higher Capex for the year?

The higher Capex is related to some kitchen enhancements that we plan to begin rolling out this year and to complete next year, which will have a pretty dramatic impacts on -- with utility cost savings, and other operational impacts, particularly with respect to continued new cost product introductions.

And then, does that account for the $10 million?

That accounts for the difference.

And with the remodels, are they still running around $125,000 per store, or has that increased any?

We had said $100,000 to $150,000 before. I think the reality is, is that most of them will be closer to the $150,000, but you will have some less than that depending on the size and the age of the facility.

And how many were remodeled in the period?

In the first quarter, we only had a handful.

Just a handful.

That we remodeled. We held off a little bit in the first quarter. It was our plan to ramp up starting in the second quarter. We made some minor revisions to the design package, so we're ramping up.

We expect to do between 150 to 200 this fiscal year and we're still on track to complete those.

Do you have any -- an update for us on what the sales list has been from the ones that you have completed so far?

We are not providing detail on the sales list. We have said that we're happy with the sales list that we're getting, we're happy with the customer response, and we're moving forward. So it's meeting our internal hurdle rates that we've established.

Lastly, could you break out the revenue component for Qdoba versus Jack in the Box for the quarter and the EBITD?

You can -- if you -- if I can get you just to wait until later on today or tomorrow morning, you can take a look at the Q. It's in the segment reporting section, but --

But the Q will be issued today?

Yes, either later today or tomorrow.

Okay. Thank you.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] Matthew Colin, TFW. You may ask your question.

Hi, guys. Thanks for taking my call, and congratulations on a solid quarter -- a phenomenal quarter, actually.

Just two questions. One, we haven't talked -- we didn't talk that much about Qdoba. Any sort of thoughts on -- I know there were some questions about spitting it out with a sort of accelerated momentum of the Jack in the Box brand. Are you still happy with Qdoba, does it still need to the part of the company?

And secondly, in the press release, Linda, you had a quote I think that said -- I don't know if it was Linda or just in general, Jack in the Box is a much more compelling brand than it was a few years ago. Can you give some qualitative examples of that? Here on the east coast, we don't get to see the stores as much as we'd like. Thanks.

With regards to Qdoba, no plans at all to divest that or spin it off. It really -- we believe there is added value by having it being under the portfolio of the company and keeping it a part of Jack in the Box.

So there are synergies and we do provide a lot of support for Qdoba.

With regard to my comments on being a more compelling brand, I think if you look at our strategic plan to reinvest the brand, it really has to do with improving the overall guest experience for our guests. And that includes looking at our facility image. If you were to look at our new image, our newly reimaged restaurants, they are much more appealing in terms of the ambience and the environment compared to our old design.

So that is one pillar, what we call a pillar, of the brand reinvention.

If you look at our menu and number of items we have rolled out over the past three years, given the capability that we have because of our innovation center, we are -- we have really enhanced the quality of our product offering.

So we not only appeal to those that are looking for something in the value arena, but really we've brought in those more moderate users with things like our salad line, with a line of ciabatta, now with our steak products, so really have enhanced our menu offerings. And then in regards to our service execution, we've really focused in on through our Voice of the Customer program, those things that really are going to make a difference in terms of the customer experience related to service.

So all of that together has made it a better experience for our customers and a stronger brand.

Okay. Just to be clear, you're seeing traffic increases in the nonreimaged restaurants as well. So it's not just these ones that are imaged versus these ones that are not?

I absolutely agree. It's probably the menu, number one. Our product innovation. Service number two, and reimage coming in as an added bonus.

Okay. Okay.

And we've had a very -- we continue to have a strong advertising campaign.

Okay. Just to refresh my memory in terms of reimage markets, we've already talked about Seattle and Waco, did you guys share what the 2007 reimage markets are? Just kind of the geographic plans?

Yes. We haven't disclosed what markets we're doing. Some smaller markets throughout our system and then we're doing several restaurants that are scattered throughout the system. So we haven't announced the particular markets at this point in time.

Okay. Just correlated to that, in terms of the question that someone asked before about you requiring your franchisees to reimage the restaurants, what's their sort of penetration in terms of how -- what percentage of franchised Jack in the Boxes have been reimaged?

There -- this is Paul. There have been not been any franchised restaurants reimaged yet, but there will be in the not-too-distant future.

Okay. So they clearly still are lagging the company-owned stores?

Well, it's not a question that they are lagging. We wanted to ensure that we were happy with the program that we developed before we required the franchisees to begin their reimaging process.

Okay. Fair enough.Terrific. Thank you.

Dean Haskell, Morgan Joseph. You may ask your question.

I wanted to clarify something on the remodels, the remodel cost is $100,000 to $150,000?

Right, Dean, with probably going to be more towards the $150,000.

Okay. And that includes what?

That is the cost of all of the exterior work that we're doing, which is essentially painting and landscaping before clean up. And then all of the interior work related to the decor. So it's lighting, flooring, new furniture, fixtures, TVs -- plasma screen TVs, music.

Okay. Excuse me. The additional $10 million being spent in the kitchen enhancements that might begin in the second quarter and continue on for about a year, is that correct?

They'll continue on into 2008, yes. We don't know exactly how long they'll take to complete that, but they'll go into 2008, yes.

Okay. And I estimate about $6,000 per store, $10 million over 1,400 stores?

We're not going to -- no, that's not accurate. We don't plan to do 1,400 stores this year. There'll be a portion of the stores this year. We haven't discussed how many that's going to be.

And the solution is little bit different depending on the mark type of the restaurant.

Okay. Talk further, this new design, new glow, or just new equipment?

It's an enhancement to some of our equipment that's in the back of the house that makes it more efficient from a labor standpoint and from a utility, really that the utility standpoint.

And gives us greater flexibility for new product platforms coming down the road.

Okay. I look forward to seeing that kitchen stuff in the kitchen.

All right.

Okay.

Thank you.

So are we.

Harry DeMott, King Street Capital Management. You may ask your question.

Hi, guys. Thanks, I missed some of the beginning of the call, so I apologize if this question becomes redundant.

You talked in the past about franchising a bunch of your stores. You've continued to do that. Are you sort satisfied with the pace of that, I guess, is question number one. And in talking to some of your franchisees, if you can find them, everyone seems super happy what with what you guys are doing. Which is great. And there seems to be a good demand for these. So, I was just wondering how you stage these and how you go out doing that? That was question one.

Question two. Given all the financial engineering, we'll call it, going on out there between CMBS and rolling up franchise fees into the asset-backed market and things of that nature. How do you look at those sort of financial techniques, as it regards your selling of franchises and refranchising efforts? Is this something you sort of look at and say, maybe we should take some of the underlying real estate and put it into CMBS and then turn around and sell the asset, or do you look at it just sort of and say, let's just push it out there as is? Thanks.

This is Paul. And I'll take the first part of the question with regard to the pace of franchising. We are very comfortable with the pace that we're on. We think it's a very intelligent measured, reasonable way to go about it.

We are doing it in essentially a two-pronged fashion. We have quite a bit of demand from existing, very strong franchise operators to continue to acquire restaurants and develop for us, not only in the markets that they currently are operating, but others, but also as Linda referenced earlier, are looking for larger operators who can take down larger territories. The pace that we're on is very important to us.

We want to be able to maintain a very high quality of operator. We want to be able to pick the best of the best. We certainly want to minimize negative impact on the company operations by any further acceleration, and we frankly like the ongoing cash flow and earnings stream that is produced with this pace.

With respect to the financial engineering, if you will, we -- let me talk about real estate first. We own C-Simple properties, about 10% of our properties.

I think that there's a perception out there that we have a significant amount of real estate holdings and the reality is that it's relatively modest. With respect to what I've seen some of the others do as far as barring against future revenue streams, we actually looked at that and put in the new credit facility, but we like the flexibility that we have with the new credit facility and quite honestly, we like the rates that we have with the new credit facility.

And furthermore, as we begin to pay down debt and lower the debt to EBITDA ratio, the [inaudible] spread to LIBOR actually decreases for us. So, we're very happy with the flexibility that we have and we do look at the other things, but we think that this is the right answer for us.

Great. Thank you.

I show no further questions at this time.

Great. Thank you for your questions and thank you for joining us this morning.

This concludes today's conference. Thank you for joining. You may disconnect at this time.