Jack in the Box Inc (JACK) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Inc. fourth quarter fiscal 2011 earnings conference call. Today's call is being broadcast live over the Internet. A replay of the call will be available on the Jack in the Box corporate website starting today. (OPERATOR INSTRUCTIONS).

At this time, for opening remarks and introductions, I would like to turn the call over to Carol DiRaimo, Vice President of Investor Relations and Corporate Communications for Jack in the Box. Please go ahead.

Thank you Stacy and good morning everyone. Joining me on the call today are our Chairman, CEO, and President Linda Lang, Executive Vice President and CFO Jerry Rebel, and Executive Vice President and Chief Operating Officer Lenny Comma.

During this morning's session, we'll review the Company's operating results for the fourth quarter and fiscal 2011 and discuss our guidance for fiscal 2012. Following today's presentation, we'll take questions from the financial community.

Please be advised that, during the course of our presentation and our question-and-answer session today, we may make 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 yesterday's news release and the cautionary statement in the Company's most recent Form 10-K are considered a part of this conference call. Material risk factors as well as information relating to Company operations are detailed in our most recent 10-K, 10-Q and other public documents filed with the SEC. These documents are available on the Investors section of our website at www.JackintheBox.com.

A few calendar items to note -- Jack in the Box management will be participating in RBC Capital Markets' 2011 Consumer Investor Day in New York City on December 8, and our first-quarter fiscal 2012 ends on Sunday, January 22. We tentatively plan to announce results on Wednesday, February 22 after market close with our conference call to be held at 830 a.m. Pacific Time on Thursday, February 23.

With that, I'll turn the call over to Linda.

Thank you Carol. Good morning.

Our number one priority in fiscal 2011 was to leverage the investments we've made to enhance our food, service and restaurant facilities to drive sales and traffic at Jack in the Box. We did just that, posting same-store sales and transaction growth in every quarter.

The 3.1% increase in Company same-store sales for the full year was driven entirely by traffic. The progress we made during the year on several key strategic initiatives has positioned the Company for sustained sales growth as well as margin expansion in the years ahead.

So let's recap the progress we've made during the year. Our investments to prove our core products, operational execution, and consistency at our restaurants are resulting in higher attribute ratings for food quality and service and improvements in speed of service.

Secondly, we are nearing completion of our comprehensive restaurant reimage program, which has been a priority for our entire system. At the end of the fourth quarter, substantially all Company restaurants and nearly 80% of franchise locations featured all of the interior and exterior elements of this program, which we expect to be largely completed by the end of the calendar year.

On our refranchising strategy, with the sale of 332 restaurants during 2011, the Jack in the Box system was 72% franchise at the end of the year. We've achieved our original goal of increasing the percentage of franchise ownership to 70% to 80% two years ahead of plan. Over the last six years, we have refranchised more than 1000 restaurants and expect to refranchise 150 to 200 restaurants over the next couple of years, which will bring our Jack in the Box franchise ownership to approximately 80% of the system.

Turning to our Q4 results, we are very pleased to see the sales momentum that's been building for more than a year continue during the fourth quarter. Same-store sales at Company Jack in the Box restaurants increased 5.8%, driven by an 8.5% increase in traffic. This was our fifth consecutive quarter of sequentially improving two-year sales trends and represented a 650 basis point sequentially improvement in two-year cumulative same-store sales.

System-wide Jack in the Box same-store sales growth for the quarter exceeded that of the QSR sandwich segment for the comparable period according to the NPD Group's Sales Track Weekly for the 12-week time period ended October 2, 2011. Included in this segment are the top 11 sandwich and QSR burger chain competitors.

Our major markets each posted strong same-store sales growth for the fourth quarter. Year-over-year, sales were positive across all dayparts during the quarter, which we attribute to the progress we made in enhancing the entire guest experience.

Breakfast was again our strongest daypart, driven by a compelling new product we introduced in August, The $2.99 Jumbo Breakfast Platter. Although we're still early into fiscal 2012, we're continuing to see strong same-store sales growth through the first seven weeks of the first quarter, despite more difficult comparisons.

We believe part of the improvement in our results this year has been due to the quality improvements we've made to our core products. These actions are clearly resonating with our core customers who crave new products. Our latest initiative in this area focuses on several improvements to our classic burgers, which are being introduced later this month across the entire system. The introduction will be supported with advertising, merchandising material, and social media initiatives later this quarter.

Moving on to Qdoba, fourth-quarter same-store sales increased 3.1% system-wide, representing the third consecutive quarter that two-year cumulative same-store sales have been greater than 9%. We continue to increase a percentage of Company ownership of Qdoba restaurants. At the end of the fourth quarter, 42% of the system was corporate owned compared to 36% at the end of last year and 31% at the end of fiscal 2010. For the year, 67 new Qdoba restaurants open system-wide, including 25 Company locations. We also made opportunistic acquisitions of 32 franchise locations in several markets.

For fiscal 2012, we will further accelerate Company Qdoba growth and forecasted Company locations will comprise approximately half of the 70 to 90 new restaurants we plan to open system-wide. We plan to more aggressively build out the number of Qdoba -- of Company Qdoba locations over the next several years through new unit growth and opportunistic acquisitions of franchise locations. Accelerating the growth of our Qdoba brands by increasing market penetration should generate heightened brand awareness.

Looking ahead at the coming year, we're focused on building upon the sales momentum generated in fiscal 2011 and further expanding restaurant margins through continued execution of the following actions -- delivering a more consistent dining experience, including improving speed of service to increase throughput at our restaurants; enhancing our top-selling core products along with innovative new menu items; increasing franchise ownership to approximately 80% of the Jack in the Box system over the next couple of years; and accelerating the expansion of Qdoba through new unit growth and opportunistic acquisition of franchise locations.

I'm looking forward to talking with you more about these and other initiatives. We're planning an investors day in late February in San Diego where we will outline our major strategies and initiatives and provide long-term guidance on key metrics.

In closing, I'd like to thank our hard-working employees for a great year. Because of them, we met or exceeded several major goals over the course of 2011, including sales and transaction growth, refranchising, and restaurant reimaging. I'd also like to thank our franchise community for their ongoing support and unwavering commitment to our Jack in the Box and Qdoba brands.

Now, I'll turn the call over to Jerry. Jerry?

Thank you Linda. Good morning. I'll touch upon some financial highlights for the quarter and full year before reviewing our fiscal year 2012 outlook. All of my comments this morning regarding per-share amounts refer to diluted earnings per share.

Fourth-quarter earnings were $0.49 per share compared to $0.07 last year. Full-year EPS was $1.61 versus $1.26 last year, and last year's results included a $0.33 charge in the fourth quarter relating to the closure of 40 restaurants.

Operating earnings per share, which we define as EPS on a GAAP basis plus gains from refranchise, were $0.19 in the quarter and $0.83 for the full year, ahead of our most recent guidance, despite mark-to-market adjustments which negatively impacted our Q4 SG&A by approximately $0.06 per share. Refranchising gains of $0.30 in Q4 and $0.78 for the full year also exceeded our expectation.

We completed the sale of 106 restaurants in the quarter, including 55 restaurants in Phoenix, which is now entirely franchised.

Average weekly sales for Jack in the Box Company restaurants were up 14.9% for the quarter, resulting in part from the 5.8% increased same-store sales as Linda discussed. Company AUVs for the full year we're just over $1.4 million, up 8.3% from last year due in part to same-store sales growth of 3.1%. The increases in both the quarter and the year are also due to the benefit of refranchising activities as well as the impact of (technical difficulty) Q4 last year.

Restaurant operating margin of 13.5% of sales for the quarter was 100 basis points better than last year's fourth quarter and also improved 100 basis points sequentially in Q3. The 100 basis point improvement in margins as compared to last year included 190 basis points of higher food and package costs. This was more than offset by 290 basis points of improvements which was driven by the benefit from refranchising over the past 12 months, as well as historically [closed] in last year's Q4, as well as lower repairs and maintenance, insurance, and utilities costs this year versus last year.

The increase in food and packaging costs was due primarily to commodity inflation of approximately 7%, which was in line with our expectation, compared to approximately 3% inflation in last year's fourth quarter. The increase was partially offset by pricing, which was about 2.7% higher in the quarter at our Company Jack-in-the-Box restaurants, reflecting a 1.4% increase that was taken in mid-May, and an incremental 1% price increase taken at the end of August.

Moving on to our refranchising strategy, we sold 106 Company-operated Jack-in-the-Box restaurant to franchisees in the fourth quarter and 332 restaurants during the year, the highest number we've sold in any year since we embarking on this strategy and ahead of (technical difficulty) guidance. Our refranchising activity in 2011 generated nearly $120 million (inaudible), which we used in returning over $193 million to shareholders through the repurchase of over 9.1 million shares of our stock at an average price of $21.27 per share.

To give you some perspective on the impact refranchising is having on our strategy to evolve to a higher-margin Company-operated footprint, our pro forma restaurant operating margins for fiscal year 2011, excluding the stores we refranchised this year, would have been approximately 100 basis points higher (inaudible) reported 12.7%.

As Linda mentioned, we intend to refranchise an additional 150 to 200 restaurants over the next couple of years. Excluding these restaurants and the ones sold in 2011, our pro forma Jack in the Box restaurant operating margins for the year would have been in excess of $0.16, even with 2011's 5% commodity price inflation.

Before I review our guidance for fiscal year 2012, let's talk about our commodity cost outlook for the upcoming year. Overall, we expect commodity costs for the full year to increase by approximately 5% with higher inflation in the first half of the fiscal year. Most everything in our commodity basket is forecast to be higher in 2012.

Some key points with respect to our major commodity purchases and where we have some coverage. Beef, which accounts for approximately 20% of our spend, will likely remain the biggest wildcard we have in forecasted (technical difficulty). For the full year, we currently expect these costs to be up 9%, 10% with inflation in the high teens in the first quarter.

Chicken is about 9% of our spend. We have fixed-price contracts that runs through March 2012.

Cheese accounts for about 6% of our spend. We have 100% coverage on cheese through the end of March, 50% coverage through the end of fiscal 2012.

Bakery accounts for about 8% of our spend. We have 90% of our bakery needs covered through December 2011, approximately 70% covered through March 2012, and 30% covered through May 2012.

Let's move on to the rest of our guidance for fiscal 2012. For the first quarter, we expect same-store sales for Jack in the Box Company restaurants to increase 4% to 5%, lapping a 1.5% increase last year. System-wide, same-store sales at Qdoba are expected to increase 2% to 3% versus a 6.4% increase in the year-ago quarter. Commodity costs for the first quarter are expected to increase by approximately 8%.

A couple other comments on Q1. Because we only had a handful of markets left to refranchise, predicting the exact timing of these transactions is more difficult. That said, we are not currently forecasting the [excluding] any refranchise (technical difficulty) in Q1. We expect our franchisees to substantially complete their reimages by the end of December, which means that the bulk of the $0.07 to $0.09 of reimage payments in 2012 are expected to occur in the first quarter.

I won't repeat all of the full-year guidance included in the press release, but here is our current thinking on some of the key line items. Same-store sales are expected to increase 2% to 4% at Jack in the Box Company restaurants, and 3% to 5% at Qdoba (inaudible).

Restaurant operating margin for the full year is expected to be in the mid-13% range, depending on same-store sales and commodity inflation. While the refranchising of restaurants in 2011 and same-store sales growth should have a positive impact on margin, we expect this to be offset in part by commodity inflation of approximately 5%.

SG&A is expected to be in the mid-10% range. Our SG&A forecast includes higher non-cash pension expense, costs related to the implementation of upgraded restaurant technology, and higher G&A related to Qdoba growth as we accelerate (technical difficulty).

Impairment and other charges, which include accelerated depreciation and other costs on the disposition of property and equipment, are expected to be approximately 30 to 40 basis points in 2012 as compared to 60 basis points in 2011.

Capital expenditures are expected to decline to $90 million to $100 million in 2012 from $129 million in 2011. The decrease is primarily due to lower reimage and maintenance CapEx of approximate $32 million, including partially offset by CapEx for 35 to 40 new Qdoba company restaurants compared to 25 in 2011.

Our full-year guidance for diluted earnings per share is $1.10 to $1.43, with the range reflecting uncertainty and the timing of anticipated refranchising transactions, as well as same-store sales results and commodity inflation. Operating earnings per share, which we define as diluted earnings per share on a GAAP basis plus gains from refranchising, are expected to range from $0.90 to $1 (technical difficulty). Operating EPS includes $0.07 to $0.09 of reimage (technical difficulty) payments to the franchisees in fiscal 2012 which again are expected to occur mostly in the first quarter.

Reimage (inaudible) in fiscal 2011 were $8.2 million or approximately $0.11 per share. Gains from refranchising are expected to contribute $0.20 to $0.33 [per guest] as compared to approximately $0.78 in fiscal 2011. We expect to generate $15 million to $25 million in gains from the sale of 80 to 120 Jack in the Box restaurants to franchisees, with $35 to million $50 million in total proceeds resulting from the sales. As I said earlier, we don't expect any gains or proceeds in the quarter.

We now estimate EPS sensitivity as follows -- for every 1% change in Jack in the Box system same-store sales, we estimate the annual impact of earnings is about $0.08 to $0.09 a share, approximately half of which relates to Company operations depending on flow through and assuming stable costs, and the other half relates franchise to revenues which are not subject to commodity costs or other inflation. The impact of a 1% change in Qdoba same-store sales is approximately $0.01 or $0.02. For every 10 basis point change in restaurant operating margin, we estimate an annual EPS impact of approximately $0.01 to $0.02 per share on a consolidated basis.

Lastly, as we approach completion of our Jack in the Box refranchising strategy, we expect our business model transformation to result in a higher AUV, higher margin Company-operated footprint, generate growing annuity-like royalty and rental income streams as we now sublease approximately 90% of our franchise location to franchisees, be less capital intensive with more capital deployed for growth versus maintenance, [resulting] in lower SG&A, increase our return on invested capital and EBIT margins, and [result] in growing free cash flow.

At the same time, Qdoba has become a more significant part of our business and will continue to become larger still as we aggressively grow the brand in the fastest growing segment (technical difficulty). We look forward to speaking to you in more detail about our outlook for the future at our analyst day in late February in San Diego. Carol will be providing more logistical details in the coming weeks.

That concludes our prepared remarks. I'd now like to turn the call over to Stacy.

Thank you. We're now ready to begin the question-and-answer session. (Operator Instructions). John Glass, Morgan Stanley.

Thank you very much. My first question is I just want to make sure I understood you correctly on the components of same-store sales for the fourth quarter. I thought you said traffic was up something like 8.5%. If you combine that with your comments about pricing, it would suggest there was a fairly significant negative mix. Can you just review that -- those components to make sure I got them straight, and why they would be the way they are? Can you also just talk about the difference between Company and franchise same-store sales because they seem to be growing?

Sure. We did report -- of the 5.8% increase in Company same-store sales, 8.5% was traffic. Check was down 2.7%, price was up 2.7%, so that leaves mix down 5.4%. Most of that is really driven by some strong promotional activity, especially the Jumbo Breakfast Platter, the $2.99 breakfast platter. That was really designed to drive trial at breakfast and to introduce guests back to -- or to introduce guests to the new bacon that we rolled out. So we made a pretty significant investment in our enhanced bacon and we designed a great, very compelling product around that that we launched last quarter. So that impacted the mix.

In terms of the gap between franchise and Company, I'll have Lenny talk about that.

This is Lenny. If you take a look at the major initiatives that we really focused on this year, both the reimage and the guest service experience, and you were to both focus specifically on speed of service within the guest service experience, you would see that the Company operations were often a much faster start in improving the overall speed of service. And so throughout the year, we saw that the progression in the improved speed accelerated with the Company operations faster than with the franchise operations. So we know that is one component.

Another big component in the gap in sales between franchise and Company is simply the timing of the reimages. Most of the Company operations completed their reimages in the first cycle of the year, and most of the franchise restaurants hadn't even started their reimages until the back half of the year. So, we know that the franchisees are sort of right in the thick of it right now, and we expect that to come to a close and with that to see the gap in sales diminish.

then my second, my follow-up question is regarding, Jerry, you mentioned commentary around restaurant level margins. I think -- again, I would make sure I heard this correctly -- 16% would be the number that you would have gotten in '11 had you not only the refranchising that occurred throughout the year at the beginning of the year, plus the [incremental] that you plan to refranchise. So does that mean that the next 150, 200 units are going to improve margins by, I don't know -- there seems to be an extra 200 basis points, like there's going to be a larger, disproportionately large impact on the last couple hundred units of refranchising on your margins. Did I hear that correctly?

You did, I'd say that your math is pretty accurate also.

This is just -- due to the type of units the last 200 that you're going to sell have very, very low margins, is there a market, is there some characteristic about them that -- because you're not predicting your gains or that your proceeds are going to go down?

The gains are not predicted to go down this year. Remember, we're talking about the 150 to 200 units over the next couple of years. The ones that we have slated for refranchising this year will be similar in terms of performance of our refranchising activity that we saw in fiscal 2011. The biggest impact will be the restaurants that we would expect to refranchise in fiscal 2013. To the extent that we can move those up any faster, we'll see that benefit come much more quickly.

Thank you very much.

Jeff Omohundro, Wells Fargo.

Yes, thanks. I wonder if you talk a little bit about concept positioning at Jack in the Box, particularly around the product evolution, and in particular perhaps some color on the planned new burger line rollout at Jack. Thanks.

Sure. We'll probably talk a lot more about the positioning in February at the analyst meeting, but just to kind of recap the plan that we had going into the year and that started several months ago, it was really about improving the overall guest experience to drive kind of long-term sustainable sales. So we really focused not just on the food improvement, Jeff, and continuing with new, innovative new products, but we also kind of redefined value this last year with the bundled deals. The Jumbo $2.99 Jumbo Breakfast Platter is the perfect example of the type of bundled value deals that are really very compelling and they're meeting the needs of those consumers that are looking for value in today's market.

The other areas, though, are the reimaging, and that includes the menu board upgrade, the new uniforms. We're seeing the results of that with more dine-in business. We've seen fantastic growth in our dine-in business as a result of the reimages.

Service, Lenny talked about speed of service. We've even staffed more at late night, so we're seeing the benefit of the late-night staffing, focusing on order accuracy, friendliness and cleanliness. We're seeing all of that come back, and we're seeing in the research where we're getting higher attribute ratings in those areas. So it's really positioning around the entire guest experience. That includes the food, upgrading the quality of the food. I mentioned in my comments the upgrade to our burgers, so we are rolling that out as we speak. It should be completed by the end of this week. We have completely reformulated our hamburger patty, and that now has improved taste, texture, juiciness. All of that has been done through our R&D efforts. We know we have a statistically significant preference with the new patty. We also had rolled out an improved bun, and we have new saucing procedures. So that, again, is improving the food quality at Jack in the Box, along with the bacon improvement, the fries, the coffee, and the taco. Does that help?

Thank you.

Jeffrey Bernstein, Barclays.

Thank you very much. Actually I had two questions. The first one on the restaurant margin side, I know we're talking about the mid-13% range in fiscal '12. Just wondering if you can give some granularity. I know the food costs, you're expecting the basket to be up 5%. My guess is that would lead to some deleverage on the food cost line. Just wondering the magnitude of the benefit on the labor and occupancy side of things. I know the occupancy was much more favorable than we were anticipating this quarter, so I'm just wondering if you can give kind of the color of the three components within that restaurant margin, and just to clarify if all the unit were refranchised as of the beginning of this year and all the additional units to be refranchised were done, is it then reasonable to assume a 16% restaurant margin starting by the end of fiscal '13?

What I would -- let me answer the last part of that question first. So based upon what we described on a pro forma 2011 margin, which we said was north of 16%, assuming that all of the 11 restaurants were gone day one of fiscal 2011 and the remaining 150 to 200 restaurants had also been sold at the beginning of 2011, yes, that would be north of 16%. So assuming that commodity cost or other items don't just run away from us, I think that what you just said is a reasonable assumption, assuming that we're able to complete the refranchising transaction in that time.

Let me go onto the first part of your question. The way I would look at this would be, if you take the 12.7%, commodity inflation at 5% is going to be, in round numbers, 150 basis points. Then when you look at what we have talked about with our refranchising activities in '11, we just indicated they would have been 100 basis points higher. Then when you -- so that would help to offset that. Then the remaining part of the growth is going to come from a Jack in the Box 2% to 4% of same-store sales growth, which includes some pricing as well as the Qdoba 3% to 5% improvement in same-store sales.

But the favorability on occupancy and labor, is there anything unusual about that, or should we assume significant favorability in '12?

I was really referring to the overall flow-through of the anticipated sales improvement for Jack and Qdoba rather than walking you through the individual parts. I think, at the end of the day, it's about delivering the restaurant operating margin, and not necessarily about the individual component part [of that], so --.

I get you. Then just to clarify, I know you said, from a cash issued standpoint, there was like $190 million in share purchase in fiscal '11. Just wondering how you're thinking about that free cash for fiscal '12, whether we should think about something similar in a repo versus dividend, or maybe what the share count assumption would be in fiscal '12 based on your guidance?

What I would say there is, one, we are anticipating free cash flow in fiscal 2012, given where we expect our performance to be, and with the lower CapEx that we've guided to. So I think that's good news.

The way we always look though at the capital deployment would be first in growth-related activities. Those growth related activities would primarily be in Qdoba, new restaurant growth, as well as opportunistically buying some existing franchise locations that are high-performing units, so we'd look to doing those items first. Then after we then ensure that we have reasonable leverage, then we would take a look at returning some additional cash, assuming that the (inaudible) that we think value is right there.

But is there a share count assumption for year-end fiscal '12 that you're assuming right now or --?

It's not too dissimilar from what we have -- what we ended the year with.

(technical difficulty) end of the year share count is nondilutive (technical difficulty).

You'll have the diluted impact there, so in round numbers, around 46 million shares outstanding for the year.

Got it, thank you.

David Tarantino, Robert W. Baird.

Good morning. Just a clarification question on the restaurant level margin during the quarter. Jack in the Box comps came in well ahead of your guided range, but the restaurant margin came in within the range. So I was just wondering if there was something underlying the performance on the margin side that surprised you in a negative way.

That's a great question. We did get some benefit from Q3 on a sequential basis from not having the menu boards and uniforms roll out again. But that was fully -- or almost fully offset by higher utility costs because of the heat wave that we saw throughout much of the Southwest through July, August, and into September. Utilities costs was about 60 basis points the quarter.

That's helpful.

If I could ask, on that line of questioning, just thinking about sort of how you protect restaurant margins from commodity inflation, just wondering how you're viewing your ability to take pricing going forward, given all the improvements you made to the brand. Does that give you a little bit more latitude to take some pricing to offset some of the inflationary pressures you're seeing? If so, why not be more aggressive as you look towards your 2012 plan?

First of all, just remember we did take a 1% price in late August, and we do have some price planned for fiscal 2012. But the way that we look at price is we pay attention to what our key competitors are doing on price, as well as what food at home grocery store inflation is doing. What we know is that we want to be -- we would like to be lower than the food at home inflation and be competitive with our key competitors in inflation. But I would suggest that we'll likely be a follower on this and not a leader on price.

We continue to work with our outside consultants, so we'll continue to track the pricing environment, also to Jerry's point, the grocery store inflation which actually has ramped up, so that may give us a little bit more cover.

Great, thank you.

Brian Bittner, Oppenheimer.

I've got two questions. The first one is actually kind of more of a clarification question. If the 16% margins you talk about for the restaurants that you plan on keeping in the base would have been 16% this year, does that mean that the restaurants you plan on selling -- my simple math tells me those restaurant margins are near 6%, 6%, 7%. Is that accurate?

No. My calculation is higher than that. So, what we're looking at is a higher number than that, but clearly less than the pro forma of 13.7% this year, again the 12.7% plus 100 basis points [of] what we already refranchised.

Okay. Thanks for that.

Then the second question is kind of getting a better understanding of how that operating EPS power begins to build in fiscal 2013. Outside of talking about improvements in the restaurant margin, I was trying to get a better sense of how certain things impacting fiscal 2012 could reverse. For instance, in the SG&A line, the updated restaurant technology, is that something that could reverse and help you, the 30 to 40 basis points in impairment? Is that something that reverses and helps you out, the reimaging incentives, is the tax rate going to be lower? Can you just kind of talk about that?

Sure. Let me talk about what I think some the drivers to future EPS growth are going to be. So, let's talk about the -- let me hit the G&A piece first. So if you're looking at the items that we talked about on G&A, I think the Qdoba G&A will be ongoing because of the announced ramped up growth in the Company units for Qdoba. So I would expect that Qdoba G&A will continue to grow along with their growth base.

The pension piece, it is non-cash. It's just purely based upon volatility, so it's volatility in the market and volatility in discount rates on AA bonds. So that's what drove that. Volatility could just as easily drive that wild it the other way, so I wish I could predict that.

The technology piece on Jack, this is related to a rollout of some new technology activities and training also. As that becomes fully rolled out, we would expect that number to start to wane over the next couple of years. So I would not view that as being as a structural ongoing burden on our G&A costs.

So let me talk about the other drivers here. So I think on the Jack in the Box side, there's a number of items. First of all, the completion of the reimaging incentive payments as the franchisees complete their reimages, we said that's $0.07 to $0.09. That's not an ongoing structural burden that we're going to have to deal with. So that could come back into operating EPS beginning in 2013. We've also talked about the EPS sensitivity where 1% in system-wide Jack sales creates $0.08 to $0.09 of EPS improvement, given somewhat static operating costs.

I think the important thing to note here is because of our business model where we get those annuity-like cash flow streams from the royalties as well as the rental streams, that is half of that number. So typically, you expect Company operations to be much more than half of an overall 1% growth rate in same-store sales. That 1% that we're getting -- excuse me, the roughly $0.04 to $0.045 that we're getting on franchise same-store sales growth has very little cost risk associated with that, so I think that's important to note.

Lenny also mentioned earlier that franchisees were not quite as far along on some of the initiatives as the Company restaurants were if you expect to get some benefit as those sales catch up with it, where the Company units are.

Also the completion of the refranchising strategy, 150 to 200 additional units that we sold, it stands to reason that as those units have lower restaurant operating margin, that we expect those to be accretive selectively. As we sell those, we expect that to be improving (inaudible) operating margin but also improving operating EPS.

Then I also want to mention, on a long-term basis, the more rapid growth of Qdoba Company-owned units will be long-term accretive. Remember that it does take Qdoba a little longer to reach maturity that it does a Jack in the Box unit. But the franchise acquisitions that we've been embarking on and that we may have an opportunity to do on a go-forward basis, those are accretive day one typically. So those are the drivers from -- that I'd say [will] impact EPS, EBIT and EBITDA. Then of course we also have the ability to improve EPS through (technical difficulty) share repurchasing.

The tax rate I wish I could tell you. I think a 37% to 38% tax rate is typical. Where we have significant fluctuation from that is typically on mark-to-market adjustments.

Thanks for the thorough answer, appreciate it.

David Carlson, SunTrust Robinson Humphrey.

Thanks, it's actually Chris. Good morning guys.

I had a question, Jerry, just as a follow-up on the pro forma margin information you provide. You mentioned that it would be accretive to earnings to sell the 150 -- collectively to sell the 150 to 200 units. Could you help quantify what the absolute benefit to earnings and cash flow will be once you sell these stores? I'm assuming there are some expenses below the restaurant margin line that would go away as well?

Yes. I think it's probably better to talk about that on our analyst day when we can give you guys a more comprehensive view for the long-term outlook. It looks like we provide enough detail so it all makes sense.

Fair enough. Then what about -- I think you mentioned -- did you say what the pension expense expectation is for next year?

No, I didn't, but I'm more than happy to. If you -- we have a number of items that flow into the retirement program line item, but the pension expense specifically is going to be up around $3 million year-over-year.

Thank you.

Keith Siegner, Credit Suisse.

I want to follow up on a question from earlier, although asked in a slightly different way. Jerry, for four years now, you've been actually free cash flow negative, and that's defined as cash from ops plus CapEx. I understand the proceeds from the refranchising program have helped fund some of these programs like reimages. It's also helped to fund some of the stock repurchases, etc. But with the program mostly done, another 150 to 200 units is all that's left. How should we start thinking about the free cash flow capabilities of the Company going forward? So even for fiscal '12, we've got a CapEx number. What does the free cash flow picture look like? Then when you get to '13, it sounds like, if you're at a 16% restaurant level margin, you're going to have even lower potentially CapEx. Help me understand how free cash flow looks following this four years of negative free cash flow. Thanks.

Let me say a couple of things on that. We would -- we've been talking for some time as we complete we refranchising strategy that we would expect to be a free cash flow generator. We expect that to begin in '12. So beyond that, I think it is better that we'll provide more guidance on the longer-term outlook in the February analyst day.

But I think the way you might want to think about this is if you look at the annuity-like cash flows from the rents and royalties, with us being right now 72% franchise, that's going to flow through. That's all free cash flow. So, I think you are right. As you continue with building the restaurant operating margin of the remaining locations that (inaudible) post 150 to 200 restaurants that will sell, that we should expect much lower maintenance CapEx, even than what we're anticipating for this year. So we did say that we're cutting maintenance CapEx by about $32 million in fiscal 2012. But with remaining fleet, we still expect that there's going to be somewhere in the neighborhood of $30 million to $35 million in maintenance CapEx. So as we continue to sell restaurants, that will continue to wane. Of course, that will be offset perhaps by the rate of expansion of Qdoba. I think the good news though is Qdoba CapEx is a growth-oriented CapEx.

One other question for me then. With Qdoba becoming much more important from a Company operated revenue and profit stream and it was like single-digits contribution two years ago and now it's over 20, I'm curious. Have you thought about breaking out Qdoba more explicitly on a quarterly basis in terms of the P&L just so we can see the relative contributions of the concepts more explicitly?

Yes. As a matter of fact, we do. So if you look at the 10-K which we will file soon, you will see some additional disclosure. Then on the analyst day, you'll probably see more [stilts]. But we'll able to have much broader discussion about that.

Thank you very much.

Bart Glenn, D.A. Davidson & Co.

Thank you. Just had a couple of questions, one on the distribution sales margin. I was curious if you think that's a business that can have breakeven margins over time and how to think about that.

Yes, I think the way that I think about the distribution business is that it should be breakeven. It's designed to be a profit neutral flow-through service for our franchisees. We've clearly subsidized that over the last couple of years modestly, but I would expect, as volume continues to improve, that subsidy would no longer be necessary.

Then on the franchise margins, the franchise margins have been under pressure on a year-over-year basis. Was just curious what your perspective was on the ability for franchise margins to stabilize or start to show some improvement.

I think there is -- you really need to look at the component parts of the franchise margin. So on the royalty and the franchise fee side, you would expect that to continue to be fairly high margin. The issue, though, is because we have -- this isn't an issue, this is really a benefit. Because we have the rental stream also, the rent that we charge franchisees is above the royalty rate. We've talked about a rent spread in the 3% to 3.5% range, so therefore you would expect lower margins on the rental side of the income. However, it's generates a ton of cash flow for us. Our rent costs, remember, are essentially fixed, and the franchisee rent cost fluctuates on sales, so as their sales improve, we would expect the rental revenue to improve also. So I'd pay -- I think I would pay more attention to the cash flow and the earnings stream from the rent and royalty rather than paying attention to margin rate, because when you compare us to others, there aren't many others in the industry or in the space who have both a royalty and a rental cash flow stream in their story.

Thank you.

Conrad Lyon, B. Riley Co.

Good morning, thanks. I want to talk more about Qdoba. I know Jerry, you said you would provide more details on your analyst day, but what changed conceptually to want to grow the Company concentrations recently? Was there something economically that you're seeing that is increasing or looking stronger?

No. This has been a plan for quite a while actually as we've acquired opportunistically several small markets over the last two years. This year, we have 32 units. Last year, we had additional units as well. What we've stated is we've essentially said that, for Company restaurants, we're going to go in and more quickly penetrate the larger, more urban markets because we see a benefit in terms of AUVs, that the higher the brand awareness, the higher the AUVs. We just want to accelerate that process in the larger core Company markets, will allow franchisees to continue to grow in those smaller, more suburban markets as they have been doing. So we're kind of on strategy. We announced the strategy probably about a year ago, but we've decided to accelerate it as we've moved to a more franchise model on the Jack in the Box business.

Okay, so that's kind of where I'm going. So from a corporate perspective here, we're (inaudible) see Jack be that cash flow generator that perpetuates Qdoba growth, but are we going to see the Qdoba Company--o franchise mix skew one way?

Yes, it will continue to grow towards more Company ownership.

Got you. Okay. Last question, perhaps a Jerry question. Where might we see the debt balance by year-end of '12?

We're not going to give any guidance on that. I can tell you that we are well within all of our covenant requirements, so we have no issue with where we are with respect to debt. I don't anticipate any either.

Okay, thank you.

Peter Saleh, Telsey.

Thanks. Just wondering if you could give us a little bit more color on regionally where you think the 70 to 90 units for Qdoba are going to kind of shake out in terms of the growth for next year?

Yes. We don't provide details on where the new unit are growing. Yes, as I said, on the -- for the Company units, it will be more in our core markets that we've identified for Qdoba.

Then on CapEx, could you give us a little bit of a breakout in terms of what's going to new unit growth versus maintenance and other items?

Yes, I had mentioned that we expected maintenance to be in the $30 million to $35 million range, and growth in the $40 million to $50 million range. We also talked about the IT system. We expect IT costs to fill in a good portion of that gap, but again I would not expect ongoing IT investment of that rate going forward.

Great, thank you.

We have time for one more question I think.

Jake Bartlett, Susquehanna International Group.

Thanks for taking the call. I had a question about the negative menu mix and really what drove that. It sounds like it was the breakfast promo being successful. Can you talk about what mix the breakfast promo was, also whether the chicken combo had a dilutive effect to check or any other driving the negative menu mix? I had one follow-up question.

Yes. It's both the Jumbo Breakfast Platter at $2.99 and the Really Big Chicken Sandwich Combo. There were some other beverage promotions, but for the most part, I'd say it was the Breakfast Platter, which we had -- which was very successful. We don't disclose mix, menu mix, but the really -- the bring back of the Really Big Chicken Sandwich Combo was also very successful.

Okay. Because I thought you had some of the Chicken Combo in the third quarter as well, but it didn't have as much of a negative mix effect.

We were lapping that also from last year.

Yes, we brought it back, yes. It was only two weeks in the third quarter. It was predominantly a fourth-quarter event.

Okay. Then the other question, you mentioned your guidance of 4% to 5% for Q1 and also strong trends in so far in the quarter, first seven weeks. Are the first seven weeks above that 4% to 5%? I believe it gets a little more difficult in the latter two months or latter periods of the quarter.

Yes, we don't provide details on the trending.

In past releases, you've have language that kind of said as reflected in current trends. I guess the omission of that says something?

It's really we're seven weeks into a 16-week quarter, so we have a little longer runway to go in the rest of the quarter.

Thanks a lot.

I think that's all the time we have this morning. Appreciate your patience and have a wonderful Thanksgiving holiday.

This concludes today's presentation. Thank you for your participation. You may now disconnect.