Jack in the Box Inc (JACK) 2012 Q3 法說會逐字稿

Good day everyone and welcome to the Jack in the Box Inc. third quarter fiscal 2012 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 Chairman and CEO, Linda Lang; Executive Vice President and CFO, Jerry Rebel; and President and Chief Operating Officer, Lenny Comma. During this morning's session, we'll review the Company's operating results for the third quarter of fiscal 2012 and update our guidance for the remainder of the year. 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. As a reminder, our fourth quarter ends on September the 30, and we plan to announce results on Monday, November the19 after the market close. Our conference call is currently scheduled to be held at 8.30 AM Pacific time on Tuesday, November the 20. With that, I'll turn the call over to Linda.

Thank you Carol, and good morning. Jack in the Box reported another quarter of strong operating results yesterday, with continued sales growth at our Jack in the Box and Qdoba locations, and substantial improvement in restaurant operating margins and operating earnings. At our Jack in the Box Company-operated restaurants, same-store sales remained strong with a 3.4% increase, driven by traffic growth of 1.2% and a 2.2% increase in average checks. Once again, all of our major Company markets saw an increase in sales, transactions, and average checks on both a one-year and two-year basis. In fact, our two-year [cume] for same-store sales at Jack-in-the-Box improved 170 basis points from the second quarter.

Four weeks into the fourth quarter, our same-store sales are tracking above our Q3 results, although we'll be rolling over high single-digit comparisons for the balance of the quarter, which is reflected in our guidance. Breakfast was again our strongest day part. Our compelling new Waffle Breakfast Sandwich, which we introduced last month, is expected to continue to drive growth in this important day part. We also saw sales growth in our other day parts which we attribute, in part, to continued improvement in speed of service. For the third quarter, we improved speed of service by 30 seconds versus a year ago. We've now seen six quarters of sequential improvement in speed of service across all day parts. We believe this improvement is building trust with our guests and driving additional visits.

We've talked for the last two years about our investments in improving the entire guest experience, when focusing on key elements of service, along with upgrading our menu and modernizing our restaurant facilities. We believe our seven consecutive quarters of same-store sales increases and continued improvement in overall guest satisfaction scores are due to this comprehensive approach, and we expect these efforts to continue to drive sustainable sales growth. Turning to Qdoba, same-store sales for the third quarter increased 3.3% at our Company locations, within the range guided, and were up 2.1% systemwide with franchise same-store sales lagging the Company.

We attribute part of the variance between Company and franchise restaurants to more promotional activity in Company markets, as well as the continued strong performance of restaurants in markets that we recently acquired from franchisees. Importantly, the promotions at Company Qdoba restaurants did not negatively impact restaurant operating margins, as we saw significant margin expansion versus last year. The Qdoba system was approximately 50% Company-operated at quarter end versus 41% at the end of the year ago quarter, reflecting the acquisition of 53 restaurants over the past 12 months, as part of our continued brand expansion through organic unit growth and strategic franchise acquisition.

As we noted last quarter, we've been conducting a comprehensive review of our organization structure, including evaluating opportunities for outsourcing, restructuring certain functions, and reducing our workforce. In connection with this review, we offered a voluntary early retirement program in the third quarter. This, along with other restructuring activities, should create a more efficient organization, while moving toward our goal of G&A expense in the range of 3.5% to 4% of systemwide sales. Since the end of the quarter, we entered into agreements to outsource our distribution business. We expect to complete the transition of this business by the end of Q1 2013, subject to the anticipated completion of certain closing conditions.

While we are on the subject of change, I want to let you know that our Chief Marketing Officer, Terri Graham, has decided to leave the Company after 22 years with Jack in the Box. We can't thank Terri enough for her countless contributions to our organization, including oversight of our award-winning advertising campaign and our product development efforts, which have contributed to our high level of brand awareness, as well as an impressive record of sales growth. Terri has put together a very strong team, experienced team, and she'll be assisting us during the transition.

Before turning the call over to Jerry, I'd like to take this opportunity to thank all of our employees and franchisees for their outstanding contributions in driving our results. I'd especially like to thank our employees for their focus and dedication throughout the restructuring process. Now I'd like to turn the call over to Jerry for a more detailed look at our operating highlights and outlook for the remainder of the year. Jerry?

Thank you Linda, and good morning. I'll begin with a discussion of our Q3 results, followed by our updated fiscal year 2012 outlook, and then before Q&A, I'll provide additional information regarding our restructuring activities, as well as our decision to outsource distribution. All of my comments this morning regarding per share amounts refer to diluted earnings per share.

Third quarter earnings on a GAAP basis were $0.26 per share, compared with $0.38 last year. Operating earnings per share, which we define as EPS on a GAAP basis, excluding gains from re-franchising and restructuring charges, were $0.37 in the quarter versus $0.25 last year, up 48%. Restructuring charges of approximately $0.16 per share in Q3 and $0.19 per share year-to-date are included in impairment and other charges, and are excluded from our full-year operating EPS guidance.

Moving onto the results for the quarter, average weekly sales for Jack In The Box Company restaurants were $30,200, and were up 10% in the quarter from last year. Consolidated restaurant operating margin of 16.5% of sales for the quarter was 400 basis points better than last year's third quarter, which was negatively impacted by 50 basis points worth of costs relating to new menu boards and uniforms. Jack In The Box margins improved from 11.8% to 15.8%, and Qdoba margins improved from 16.7 - excuse me, from 16% to 18.7%, in the quarter.

The key contributors to the improvement in consolidated margins as compared to last year were, in approximate amounts, sales leverage, 140 basis points; food and packaging costs, 160 basis points; re-franchising, 50 basis points; Qdoba acquisitions, 40 basis points; the new menu boards and uniforms, 50 basis points, which were partially offset by higher credit card fees. The 160 basis point decrease in food and packaging costs resulted from the benefit of price increases and favorable product mix at Jack In The Box, as well as a greater proportion of Qdoba Company restaurants, which more than offset commodity inflation.

Commodity inflation moderated to approximately 1%, driven by lower beef, cheese, dairy, pork, and produce costs. Before I review our guidance for the fourth quarter and full year, I'd like to provide an update to our commodity cost outlook for the remainder of the year. Overall commodity costs are now expected to increase by approximately 3.5% for the full year. In key points, with respect to our major commodity purchases, and where we have coverage, beef accounts for approximately 20% of our spend, and remains the biggest challenge we have in forecasting commodity costs. For the full year we now expect beef costs to be up approximately 5%, reflecting a continuation of lower costs for beef 50s.

Chicken is about 9% of our spend, and our contract fixed the cost through December of 2012. Cheese accounts for about 6% of our spend, and we have 50% coverage through the end of fiscal year 2012. Bakery accounts for about 8% of our spend, we have 100% coverage through September 2012 and 30% coverage through December 2012. For the quarter, we expect commodity costs to be flat to up 1%. Now let's move onto the rest of our guidance for the balance of the year. I won't repeat all of the full-year guidance included in the press release, but here's our current thinking on some of the line items that have changed since our May guidance.

Same-store sales are now expected to increase 4% to 4.5% at Jack In The Box Company restaurants, and 2.5% to 3% for the Qdoba system. Restaurant operating margin for the full year is now expected to be approximately 15%, depending on same-store sales and commodity inflation. Our full-year guidance for SG&A and impairment charges assumes distribution revenues are reported as we have historically done, Operating earnings per share, which we define as diluted earnings per share on a GAAP basis, excluding gains from re-franchising and restructuring charges, are now expected to range from $1.12 to $1.22, and diluted earnings per share are now expected to range from $1.48 to $1.58, excluding restructuring charges.

Now let me discuss our restructuring activities and our decision to outsource distribution. Restructuring costs incurred in Q3 were primarily associated with our voluntary early retirement program, approximately $10 million of the $11.3 million in total restructuring charges. As you know, we have established a target for our G&A as a percent of systemwide sales of 3.5% to 4%. With our broad reaching restructuring activities, including the early retirement plan, we have identified approximately $10 million of annualized reductions in G&A, and we will begin to see the benefit of this in our cost structure beginning in 2013. We are engaged in additional restructuring activities, and expect to incur incremental restructuring charges to yield further benefits, and we'll provide more information on our year-end call regarding the expected costs and savings.

In the fourth quarter, we entered into an agreement with MBM Foodservice Distribution to outsource our distribution services, subject to the anticipated completion of certain closing conditions. This agreement is expected to provide long-term price stability for both Company and franchised restaurants. MBM distributes to many in the restaurant space, including key brands in QSR. The outsourcing of distribution will free up approximately $60 million in working capital currently tied up in franchise receivables and distribution center inventories that we can deploy to further enhance shareholder returns. We expect to report the distribution business, along with the associated exit costs for asset write-off and continuing lease obligations, as discontinued operations in the fourth quarter.

That concludes our prepared remarks. I'd now like to turn the call over to Stacy to open it up for questions. Stacy?

Thank you. We are now ready to begin the question-and-answer session.

(Operator Instructions)

Due to time considerations, we ask that you please limit yourself to one question and one follow-up per turn. If you do have additional questions, you may re-queue at that time. Thank you.

Jeffrey Bernstein, Barclays.

I had one question and one follow-up. The question I think, specifically around cash flow usage, Jerry, you just talked about the opportunity to further enhance shareholder returns of the $60 million freed up. Just wondering whether you could talk about your thoughts on utilizing that cash flow, and potential for leverage incremental to that. And how you think about that on dividend versus share repurchase? And then I had that one follow-up.

Okay, certainly. First of all, we would expect the $60 million to be freed up following the completion of the transition to MBM sometime during the first quarter.

On our leverage right now, we'll be at something less than 1.9 times debt-to-EBITDA at the end of the third quarter, and we would expect that number to come down naturally, without regard to the $60 million that we're going to free up from the distribution outsourcing agreement. So I would expect that we would utilize the $60 million as we have identified capital deployment opportunities in the past.

So first, in return-oriented capital, such as we've been doing by buying EBITDA through the purchase of high-performing, high-margin restaurants from Qdoba franchisees. We'll continue to look at that.

And then, of course, we also have $100 million worth of share repurchase authorization from the Board that is still there, and goes through November 2013. So that will also get consideration for the deployment of that freed-up capital.

Got it, and then, well actually, you mentioned the acquisitions from Qdoba. Just was wondering whether you can give some color in terms of your outlook, whether that pace should accelerate from here or is there some sort of long-term target?

Then just my follow-up was high level on the $2 in earnings by fiscal 2015 that you talk guys talked about at your Investor Day. Obviously as we now push to the end of fiscal 2012, just wondering whether you give any kind of insight in terms of the pace of growth to get there and whether you think you said the outsized opportunity near term for upside to -- relative to a steady state growth rate to get there, whether you think there's outsized opportunity in the short term? Thanks.

Yes. There's a lot in there.

As far as the Qdoba purchases go for additional franchise businesses, we are currently looking at that. I'm not sure that I would say at the pace would accelerate. We bought more than 60, I think 69 units, over the last 12 months, so we've -- excuse me, over the last two years. So we've had a pretty good pace on that going back to 2011. I wouldn't expect that we'd accelerate that pace, but I would expect that we would continue to look for opportunities there.

Then as far as the outlook going forward, I'm going to give you a piece of what you're asking for, but I'm not going to be able to talk about all of it at this time. We'll give you more color on full-year guidance when we get to the November call, but what I would say'd be a couple things.

So one is the restructuring activities that we've engaged in thus far, and the identification of the $10 million worth of annualized savings in G&A. I would look at that as an acceleration of what our previous expectations were on that G&A from the 3.5% to 4% range. We did not expect to be as far along in these activities as we are today.

With respect to other outlook items for 2013, on food and packaging costs. I'll tell you that our current outlook is about 2% inflation for next year. Clearly beef and corn are wild cards, and the only thing I can tell you is I'm sure that the 2% outlook will change somewhat by the time we get to our November call, but let me tell you what that's based on so far.

We are anticipating that beef 50s will not remain at their current low levels, that they will go up into 2013. That we would expect that beef 90s would continue at their historic high levels, with perhaps even some spikes up for periods of time in 2013.

Corn, though, currently a little bit above $8. We would expect that to be in the mid-$6 range for next year. Those are the two caveats that we have in that 2% outlook for inflation for next year.

Than the last thing I'll mention about the 2013 outlook is the re-franchising activities. If you recall back to our February Investor Day, we identified the pace of re-franchising and the completion of those re-franchising transactions to be anticipated to occur in 2013. We talked about gains being roughly in the $0 to $5 million range. We haven't changed that outlook, and then as a result of that, in our guidance on a go-forward basis into 2013 and beyond, we're likely to not guide on re-franchising gains going forward. We'll just comment and guide on operating EPS.

So, and then the last thing I want to mention here is, as you're looking at your 2013 plans, is that we have $0.10 to $0.11 in re-image payments that are going to franchisees this year. And we would expect that to be down rather significantly next year.

Jeff, let me just add a comment on the Qdoba acquisitions. We are highly selective on those acquisitions. So we're looking, as Jerry mentioned, for solid performance in terms of sales and sales growth, higher than average AUVs, as well as opportunities to develop out the market. And in each of the cases of these acquisitions that has occurred. And in fact some of the difference between Company and franchise sales is a result of those acquisitions of the stronger performing franchise markets.

David Tarantino, Robert W. Baird.

Congratulations on good results. I had a question, Jerry, about the distribution business and the decision to outsource that. I think in the past you said you've looked at that several times, and came to the conclusion that it was best to keep it. So just wondering, what changed in your minds about that business and why you made the decision now to outsource it? Then I have a follow-up.

Sure. The way that we've historically approached our distribution business, and the thinking about that, has been around the objective of providing Company and franchise restaurants with very low cost distribution services. In fact, over the last several years we've looked at our distribution business as a zero profit model so that we could pass on, again, the best possible costs to franchise and Company restaurants.

When we went to outsource this time and look at it, contrary to what we've seen in the past where we saw significant price increases to go ahead and outsource, we were able to find an outsourcing partner this time here that will provide a long-term contract with good price stability going forward. And with initial pricing that will be marginally better than what we currently have for the Company restaurants here.

So that's the big change this time, has been that we actually were able to find an outsourcing partner that had a lot of experience in the restaurant space that gave us a price that fit in with our current distribution philosophy, again, of providing high-quality, low-cost distribution services to the entire system.

Great, makes sense. Then I think the follow-up, which you might have just answered in some way, but just wondering what the impact on the P&L of removing the business is going to be. It sounds like perhaps you might be thinking you'll get a modest benefit on cost of sales. But are there any other lines that might benefit from removing the business, other than the lines that you show on the P&L, with the sales to franchisees and the cost to franchisees? For example, might the G&A line benefit from removing that business?

Well, the G&A related to the distribution business was already included up in distribution costs. You're right, we will expect modest, I will emphasize the word modest, benefit on the cost of sales line.

I think where the real benefit is going forward, again, is this price stability with price increases, while scheduled, they're not tied to a Consumer Price Index or any kind of index. So we know what they are and we know when they're going to it occurred. So we get some certainly there.

The other opportunity, though, is MBM purchases a large number of products that we and other restaurant companies use that are not specific to Jack In The Box, such as straws, napkins, and other type of items such as that. But we do have the opportunity going forward, although we haven't quantified that yet, to be able to leverage on some of their purchasing power for some of the non-Jack specific items. So you'll have more information on that going forward, but as of now I don't have a view on that, other than to know that there are some opportunities there.

Great. Thank you.

Keith Siegner, Credit Suisse.

I just have some questions on Qdoba. So on last quarter's conference call, part of the message, it sounded like to me, was comps did decelerate a little bit for the system, but there was a lack of promotional activity, and that contributed to this big upside to restaurant-level margins. But that this quarter there would be a resumption of the promotional activity, margins might be a little lower, comps a little higher, et cetera. But we had another slight deceleration and another big upside surprise to margins here.

Can you help me understand, like, what the promotional effort actually was, how broad-based it was? I mean, it seems very aggressive, at least in the markets near me up here in New York, but help me understand maybe what the change in promotional effort was. And should we think about this maybe near-term as being a higher margin if less promotional concept than maybe it sounded like last quarter? Thanks.

Yes. We did ramp up the promotional activity. There was a bit of a delay on one of the digital promotions that we rolled out in the third quarter, and not all the franchisees participated in that promotion, as occurred in the second quarter on the promotional activities. So I would say there is a slight ramp-up in the promotional activity.

There will be additional promotional activity in the fourth quarter. We are working to get the franchisees to participate in that promotional activity. And in addition, we had some new product news. We rolled out a whole wheat tortilla systemwide at Qdoba. We just finished that rollout. We'll have some new product news in the fourth quarter.

However, we're seeing the strong benefit on margins as a result of the sale leverage on the Company sales growth. And because of the model, the business models at Qdoba, we really do see nice leverage when we get increases in sales. So that's reflected in the margin increase that we saw in this quarter.

Keith, just a little extra color on that. If you look at the variable costs necessary to drive the incremental sales dollars, or to support the incremental sales dollars, it's significantly lower at Qdoba than what it is at Jack In The Box. If you look at food and packaging costs at Jack In The Box in the quarter, 33.3%; Qdoba, 29.1%. Labor and benefits, 29.5% at Jack In The Box, 26.1% at Qdoba. So even with promotional activity, Qdoba can get some nice sales leverage because of what that variable cost structure looks like.

Yes, and just an objective going forward is really to get traffic back in the restaurants at Qdoba. So we have additional -- we've back-end loaded, and fourth quarter we'll have additional advertising expense at Qdoba, and we would expect to see additional promotional activity in the fourth quarter.

Okay. So the guidance that you provided for Qdoba for fourth-quarter assumes incremental advertising and incremental promotional activity? Is that correct?

That's correct.

Okay.

Yes, and now, the guidance does reflect the trends that are occurring now; however, the Company continued to outperform the franchisees.

Okay. Thank you.

Dave Carlson, KeyBanc Capital Markets.

Thanks. It's actually Chris O'Cull. My question, I guess, is for Lenny, and it relates to franchise revenue growth. It seems once the re-franchising program's over, franchise margin had the potential to show some meaningful growth or expansion, as the franchise revenue grows. So my question is, does the development pipeline look pretty strong at Jack In The Box? Then I have a follow-up.

I think we have a significant number of re-franchising deals that were tied to development agreements. So the pipeline looks pretty strong. We're confident that the franchisees will have the ability to develop the sites that they've signed up for, and we have an infrastructure in place to assist them in doing that. I would not say that we expect that to ramp up at some significant level, but what they have agreed to is what you'll hear in our forecast going forward for growth.

Can you quantify how many stores are in the pipeline right now?

I don't think we've given that guidance to that level of detail. So what we give you in general terms on an annual basis for the whole Company will be what we continue to prodict forward.

Chris, this is Jerry. Just one important thing to consider there is remembering that the franchisees, particularly those who bought back restaurants and signed the development agreements that Lenny just spoke of, those development agreements are going to have a little longer tail than what you might expect to see typically, and that what Qdoba would be, because the franchisees are still digesting the assimilation of the large number of restaurants that they've purchased, as well as the re-image of all of those locations.

So going to need some time to let that sit, and we'd rather have them do that and then build when it's appropriate. So the development agreements actually reflect a little longer tail on that.

That's helpful. Then my follow-up is, Lenny, can you comment a little bit about franchise comparable sales? They don't seem to be as strong as the Company sales growth. Where are the franchisees in terms of implementing some of the initiatives, some of the service initiatives that you guys have done?

Yes, we've spoken about this a few times in the past, and I think first I'll start with, think about the franchise mentality. They're running slightly lower AUV locations, the margins are a little tighter. So when we roll out these initiatives, what they're really looking for is some proof positive that these things are going to work. So we typically prove it out in a Company op environment, and then we're are able to show that return on investment to the franchisees and get them on-board.

So they're typically lagging us a little bit. But if you look at the sales performance, you'll notice that they have closed the gap in the last couple of quarters. And also, if we look at their speed of service, which is probably the best indicator of where they are versus us, they've lagged us, but they are continuing to close the gap there as well.

So what we're seeing play out is exactly what we expect, and I think franchise, or franchisee, relationships work well when you have a Company base that can prove it out and then give the opportunity to the franchisees to follow. So that's the way we're playing this thing out. We continue to see, in every measure, whether it be guest service, speed of service, any of the details associated with initiatives, the pace at which they're rolled out, they continue to close the gap over time once we've proven to them that it actually works.

Great. Thanks.

John Glass, Morgan Stanley.

Thanks. On the Jack same-store sales, first I missed, I think Linda, you mentioned traffic versus Jack, or pricing. If you could repeat that. And then more broadly, particularly in the context of the environment where McDonald's has seen their sales just slide pretty rapidly, can you talk about what specifically you thought drove sales in this current period?

Lenny, you've talked about speed of service, and there's a big opportunity there, and you talked about a 30-second improvement. I know this has come up in the past, I don't remember if you actually said it, but what is the actual speed of service versus the peers. And what do you think the right speed of service is for your brand, given there's some differences, obviously, in what you do versus peers?

Why don't I jump in and give you the speed of service feedback first? This is Lenny, obviously.

We haven't given you an absolute time for the speed of service. What we have shared, and we shared this at our Investor Day, we gave the speed of service numbers for our major competitors. And we shared even with a one minute increase, we still be slower than the competitors that were listed.

And we also spoke about the fact that the way we're going to approach the speed of service improvements is to do it slowly so that we don't break any of the other parts of the business like friendliness, accuracy, and the other things that we need our folks to focus on. So we're not going after the number for number's sake.

We're actually looking at it as holistically, as part of the guest service experience. So we're continuing to see improvement every period, every quarter. We expect that, really over the next couple of years, we'll continue to see improvement in speed of service.

And obviously as we get to the tail end of our target, you'll see the amount of improvement sort of contract a little bit, and we shouldn't have these big jumps that maybe you've seen early on. Essentially we think that it's a key opportunity for us to grow our business, because we can get more people through the drive-through, especially during time-starved day parts like breakfast and lunch. So we have a long way to go, but want to just continue to share our progress so that all of you know that what we sort of signed up for is actually happening in reality.

So let me address your question, John, on the breakdown of sales. So I had mentioned traffic was up 1.2%, check was up 2.2.%, and we had pricing of 3.1%. So a mix, a negative mix, of about 0.9% in the quarter.

And I would say, in terms of what is driving our sales, it's really going back to that comprehensive plan that we have implemented several quarters ago. So when you think about, the re-images are now completed, so we're seeing more dine-in business. Lenny talked about the improvements on all of our service initiatives, including speed of service, accuracy, friendliness, cleanliness. We're seeing that in our research, we're hearing that anecdotally. Late night staffing, so late night business.

And then on the food side it's the quality improvements we had rolled out, the improved burgers, and we're seeing higher sales of our core burgers as a result. And then it's innovative products. So in the third quarter, we had the Chipotle Chicken Club Combo that was a very good product for us, great mix, good consumer reaction to that, and a good value at $4.99.

We also had introduced the Value Deal, which was --included chicken nuggets was a new product for us that's really rounded out our value menu. We added a value fry and a value drink, and we've bundled that all together to introduce customers to that value, that new value-enhanced offering at $3.49.

Then you add the Java Cookie Shake, and it's all working in concert to really grow the business. So it's everything. Then you throw great advertising on top of that, that really breaks through the clutter and it's sort of a winning combination. That help?

That does. Jerry, if I could just, my follow-up is just looking at your guidance for the year of 15% restaurant margins, I believe that's what you said. And you're ahead of that, or at least you're trending ahead of it in the last couple of quarters. If I look at a full year, you would actually have to see restaurant margins decline in the fourth quarter relative to the second and third. I'm wondering why that is.

In the past, you've actually seen, at least last two years, seen better fourth quarter restaurant margins than the second and third. So is there something unique about this fourth quarter?

Yes. What I would say about that is -- I guess I would emphasize the words approximately 15% in the margin for the full year. And then I'll just say the rest of it is really math. So in order to be significantly better than the approximately 15% range, we'd have to be meaningfully ahead of a 16% restaurant operating margin in the fourth quarter.

What I can tell you is that, and that's only a 12-week quarter by the way. So what I can tell you, though, is we did not forecast a 150 basis point reduction in our Q4 margins. So I wouldn't look at the 15% for the full year and assume -- that's what the quarter is.

Okay, great. Thank you.

Howard Penney, Hedgeye.

When you benchmark your Company against your peer group, it screens a little bit lower on a return and margin standpoint. Obviously you've accomplished a lot in re-franchising, but one of the pieces of that puzzle, and I may have been mistaken, was the distribution business and some of the legacy businesses that you have, which are asset-heavy and lower returns and lower margins.

So I guess I was somewhat expecting a little more enthusiastic response to the sale of this business, as to what it does to your margins and returns, I guess, and I didn't hear that. I was wondering if I'm, one, mistaken or two, it's that you're just not conveying what is actually going to happen to the P&L and the returns and margins of the business as you exit these legacy businesses? Thanks.

I can tell you we're excited about it. So I think it's absolutely a perfect decision for us. We're going to get the price stability going forward, we get to free up $60 million worth of working capital we can deploy in shareholder return orientation.

We're going to have a much more, what you would view as a pure play restaurant business by having the distribution activities collapsed into discontinued operations. So you're going to see just restaurant sales and restaurant revenues going forward on the top line.

So we're very excited about it, and it does improve the overall EBIT returns. And it will reduce any need whatsoever going forward for CapEx investment in distribution activity, software related to distribution. We won't have to worry about getting facilities leased or anything of that nature. And I can tell you our franchisees are very excited about it.

So if I could maybe dream a little bit, or if you could dream with me a little bit, what do you think, when you're completed if it's a year, two years, three years down the road, what do you think EBIT margins of this business will look like?

Yes, what I can tell you is on a year-to-date basis, it improves it about, by just stripping out the distribution revenues, on a year-to-date for the year, it increases it by about 200 basis points on the EBIT margin and about 240 basis points when you also X out the restructuring charge. Again, our ROIC target is to return to the mid-teens, in terms of the long-term goal, we said that by 2015. So this helps us in all of those metrics.

Is there another big -- sorry, Linda. Go ahead.

I was just going to ditto that this is great. There's great upside for us on this. This is nothing but positive.

Were exiting a non-core business that was zero profit, if not just a little bit of a loss sometimes. And we're entering into a long-term contract with a very reputable, large company that we can take advantage and leverage the scale that they bring to the business. So this is all positive.

No, I assume that. I just, for some reason, I just didn't get the impression that there was a level of enthusiasm for what it does for the overall margin structure of the business. Now, just one last question along the same lines.

Is there another piece of the puzzle? Is there another big transaction, or a big legacy business that you could get rid of, that will take it exponentially up another couple hundred basis points? That's it for me. Thank you.

Yes. What we're doing right now is really continuing with this comprehensive review. So it's really around outsourcing in some of the functional areas is what we're looking at. But there's real -- nothing as significant as the distribution business.

Larry Miller, RBC.

Just wanted to follow up on the distribution business as well. How long will you get that price visibility for? And you said, I thought you said, Jerry, that it's not based, the increase is not based on CPI. So can you give us a sense of what the rate of increases are that are built into this long-term contract?

Larry, I would tell you that it is a 10-year contract. And we would view the scheduled price increases to be lower than what you would expect a normal rate of inflationary costs to be. And of course, the rest of the terms, any more details than that would be confidential.

Okay. Is there any trend, I don't know if you guys own any distribution centers. Would there be any selling or leasing of these distribution centers to MBM? What are the plan for that?

Yes. The current plan is that they would assume four out of the six distribution centers, they'd either assume the leases or we will sublease them from us. They will assume most of the contracts that were associated with vendors in those facilities.

And the charges that we would then incur would primarily be for the software write-offs, some asset write-offs, all of that's non-cash, with a minor amount of cash on the ongoing lease obligation for the two facilities that they do not intend to take from us. And those are going to be -- the cash-related charges here would be fairly insignificant in total.

Okay, thanks. Last thing from me, I think you said that you guys had acquired about 65 Qdobas over the last 12 months. Can you give us a sense of now where the major Company-owned markets are for Qdoba? And where you plan on focusing your Company unit development going forward?

Yes. Larry, let me, that was 69 over the last 24 months. I almost misspoke again. So it's 69 over the last 24 months, and 45 thus far this year.

I really don't want to comment about the where the Company-owned markets are versus franchise market for competitive reasons. But I would expect when we give you our guidance for 2013, we can give you a breakout of what we would expect the growth to be in the new markets that we acquired versus just brand-new markets, but not by market.

Okay. All right. Thanks a lot.

Alex Slagle, Jefferies & Company.

Just a follow-up question on the Qdoba same-store sales lagging the Company same-store sales in the quarter. And get a sense of how much of this was a function of acquiring franchise units with the stronger sales and same-store sales potentially, versus the promotional activity, and anything else that might be impacting this?

Yes. I'd say it's more the promotional activity than the acquisition.

Are there any pricing differences, or anything else?

Don't know that. We know the Company pricing, don't know specifically the franchise pricing by market.

Right, and is there any chance you could provide a little bit of a breakout on the guidance for the same-store sales between Company and franchise to get a sense, is that same gap continuing?

Yes. We're not providing that for this next quarter, but we will next year be looking at guiding Company Qdoba sales.

Right.

Because that's really where the profits are, if you look at the business. It's getting the leverage on the Company sales and driving profits through Company sales. Obviously it's important to have the franchisees participate in the promotions, but to Lenny's point, we've got to prove that they're worth the investment.

Great. Great, thanks.

Matthew DiFrisco, Lazard Capital Markets.

A couple questions I want to clarify, and then a follow-up. I didn't hear the price on Qdoba. Did you mention that in the quarter, and what's implied in the fourth quarter, fiscal 4Q?

We did not mention that. Quarter was $3.2 million. Qdoba price in the quarter was $3.2 million, and we did not guide going forward.

Does anything roll off in the fourth quarter?

Yes, some. Yes.

Okay. You don't want to -- can we know what that number would be? What rolls off, or when you took it?

We don't provide that level of detail on the Qdoba pricing, the forward pricing.

Okay. Can you tell us, or I might have missed this, the franchising cost, how much of the drain was that in the re-imaging associated with assistance to the franchisee cost in this quarter? I guess, in your implied guidance in the fourth quarter, is it correct to assume you have less re-imaging cost on a year-over-year basis weighing on the fourth quarter this year?

Yes, it will be less in the fourth quarter. We're just pulling those numbers.

Yes. It was $189,000 in the quarter. And it was higher in last year's third quarter, and is a $6.7 million year-to-date, and we're still comfortable with the overall $0.10 to $0.11 in the guidance.

Does that trend continue the fourth quarter, it's less on a year-over-year basis, as well?

Yes, it'll be less on a -- yes, indeed.

We're already at $0.10 year-to-date, Matt, so.

Got it. Thank you. Thank you for helping me. I'm a little slow there, sorry.

Then the last question, I guess. Just looking at the development pipeline, it looks like you're still committed to 60 Qdobas, of which 25 to 30 are targeted to be the Company-owned. That would imply 11 to 16 maybe opening in the fourth quarter. How should we view that as far as, I know in the Analyst Day you detailed how much those margins, takes about a year or so for them to ramp up. Should we be somewhat, I mean, does that, those 11 to 16 opening in the fourth quarter, does that have an impact, a meaningful impact on the way you might start FY 2013 on the Qdoba margin side?

Shouldn't have a significant impact in the fourth quarter. They are back-end loaded, so we wouldn't expect to see a significant impact in the fourth quarter.

But I guess just as far as what you're seeing as new store volumes and new store margins, will it have a historical impact, or have we corrected some of those where they're getting up to speed faster? Or should we still be somewhat cautious on those first years productivity for them?

They generally, their margins are lower than the system, but as we've continue to grow the base of Company restaurants, it has a less marginal impact, because they're a smaller percentage of the base.

Matt, what I might add here is, I think it'll be important for all of you to remember that the seasonality for Qdoba margins are generally lower in the first quarter. And I would expect that it would be lower in the first quarter, but higher than last year's first quarter. So I think when you look at the leverage that we get on the same-store sales, as well as the purchase of those high AUV, high restaurant operating margin units, that we will see seasonality, yes, but we would not expect it to go to what was this year's first quarter.

Okay, excellent. That's very helpful. Thank you.

Joe Buckley, Bank of America.

I've got a short laundry list of questions as well. On speed of service, you mentioned 30 seconds year-over-year improvement, and I think you said six quarters of consecutive improvements. Sequentially, was it much different third quarter versus second quarter? Are you continuing to chip away at that minute-plus variance to your peers?

Yes. So sequentially it was better, and we do continue to chip away at it. We're looking at it market-by-market, and actually restaurant-by-restaurant. So if you think about the complexity of running these kitchens, it's not the same answer for each location as to why they potentially have a gap in performance.

The way we've approached it has allowed each of the markets to have clear line of sight on what their targets are, and how they're doing versus their peers, and then work together to make those improvements. So some markets are clearly the bright spots, and they're actually well ahead of the average. Others are slightly lagging, but moving at a good pace.

So we feel very confident, and I think what helps to build that confidence is that the Company locations are performing better than the franchise locations. And it's allowing the franchisees a great role model and the place to learn. So we're confident we can get them to where we are, and then continue to make the improvement as an entire chain.

Okay, and then a couple questions on the cost side, Jerry, probably more for you. On the relief in food costs, it sounds like you expect it to continue, at least at this point, expect it to continue through fiscal 2013. And I guess I'm curious, with beef 20% of your mix, what's the beef assumption in that overall 2% inflation rate? I realize that may change by, again by the time we speak in November.

Yes. I'd say, Joe, what I had mentioned earlier is that we do expect beef to be sequentially higher next year versus what it is today, primarily because of the 50s, and also some spike in the 90s. I think it's important to note that we'll be rolling off 15% inflation in Q1 2012 on beef, and then 3% up on Q2 2012 in beef. So the comparisons get much easier, and beef 50s were above $1 a pound at that time, which is kind of historic high levels back at that point in time. So I think primarily it's that the compares get a little easier for us.

Okay, and then another one on the cost side. Will SG&A be down in absolute dollars next year as a result of the restructuring move?

That would be yes. Now, I mentioned that we had a $10 million annualized rate. Some of the early retirees will be leaving in the first quarter, so I would look at that $10 million on annualized basis.

The only wildcard that I would indicate would be pension expense, which is, it's a non-cash item which is driven by primarily discount rates. So I would expect some increase in the pension expense that would offset that, but it won't offset all of that by any stretch of the imagination. So $10 million on an annualized run rate with some increase in pension costs for next year. Again, the pension costs being non-cash.

Okay, and then last one, I promise. Just on capital deployment, obviously a decision not to buy shares. Seems like the primary use of capital is buying the Qdoba businesses. Just talk about how you weigh the two, and how do you measure one versus the other?

Joe, I think generally speaking, we would rather invest in EBITDA-generating activities versus share repurchases. It doesn't mean that one excludes the other. We actually like both of them quite a bit. But this year we have been focused on taking advantage of opportunities to buy EBITDA from high-performing Qdoba franchise markets. We've seen that benefit in the Qdoba performance, as well as the Qdoba restaurant operating margins and averaging of volumes.

So we like that a lot, but also I think it's important to remember that we had $193 million worth of share repurchases last year, which effectively accelerated what our normal pace of share repurchases would have been in fiscal 2012. We took advantage of what we saw were some extraordinarily good buying opportunities with where the stock price was at that time and made a decision to go ahead and accelerate that. So hope that helps.

Okay. Thank you.

Operator, I think we have time for one more question.

Brian Bittner, Oppenheimer and Company.

Just want to drill a little bit deeper into this Jack In The Box comp acceleration that you've seen thus far in the fourth quarter. Now, I do understand that comparisons get much tougher as the quarter moves on. But can you just please shed some light on why this acceleration has happened since quarter end? Are you just facing much easier comparisons right off the bat in the fourth quarter, or is this kind of a continuation of accelerating trends that maybe you saw throughout the third quarter? Anything that you can say about it would be helpful.

Sure. I think consistent with what you've heard from the industry, we did see actually a slowing after April. So a little bit of a slowing in May and June across both brands.

Jack In The Box accelerated -- began to accelerate the sales in July, and again, I think it's related to our ability to steal shares. And we have rolled out two very strong products, product promotions. So we rolled out on July 5 the All American Combo at $4.99, a very compelling product offering, and then we introduced the Waffle Breakfast Sandwich, also on July 5, also very strong response from that product.

So we're really driving the sales. We began to see an acceleration of sales. We are rolling over currently a little lower comps, and we'll begin to roll over those very tough comps at the end of the fourth quarter, rolling over that introduction of the Breakfast Platter last year.

Okay.

Go ahead, Jerry.

No, I just need to make another comment here. It's really not specific to your question, but I think it's important to go ahead and note.

So one of the things that we're seeing with the improving same-store sales and cost structure at the Jack In The Box restaurants with the improving restaurant operating margins, is when you look at the operating performance of the Jack In The Box Company-operated restaurants this year's quarter versus last year, we operated 149 fewer Company restaurants at the end of this year's quarter versus last year. But we generated 29% higher restaurant-level profit, including the advertising charge associated with that. So 149 fewer restaurants generated 29% higher dollar level profits, which I think is important to note, both from what Lenny and Linda have been talking about on the same-store sales improvement. And the other initiatives that we had within the restaurants, as well as the accretive nature of some of those re-franchising transactions that we had been talking about over the past couple of years.

Thanks. That's good color. The last question is really for Lenny on speed of service.

I understand that each unit's going to have its own reasons for being below the average, or having its own shortfalls. But can you just talk to us a little bit more about when you go in and you're working to improve the speed of service. I mean, what are usually kind of your top three initiatives to get those times better? Again, I know that it's not going to be easy to answer, but just trying to get a better sense of what type of initiatives it is that you're really working on here.

Yes. So I wouldn't say that it is drastically different than what we would see from some of our faster competitors, but I'd say it hadn't been as much of a focus of ours years ago as compared to what it is today. It's basic things. It's things like making sure you have the right employees in the right positions for rush. It's things like making sure you have enough food prepped before the beginning of the day part, whatever specific day part that is, and the items you think you're going to sell.

And then it's also, keep in mind, we assemble to order. So we don't prepare the food and put the order together until after the person's actually place the order. But in order to have a great speed of service with a system like that, we've got to be in the process of continually cooking food based on estimated demand for each hour.

We've put a lot of time and energy into the information that we provide to each location, such that they can have the appropriate build-tos. Or another way of saying it, they can have enough food prepared before the guests shows up, such that they can then assemble the order and get it out the window in a reasonable time. With an assemble-to-order type situation, we think that provides better quality food.

So we're not looking to move away from that, which is why we've also stated we don't want to be the fastest in the industry. We think that the quality that we're able to offer is something that will build loyalty with the guests. So we're going to continue to go after this opportunity, but we're going to do it in the way that we have been, which is sort of slow and smart.

And ultimately, we're not trying to win this race versus the fastest competitors, but we do understand where our guests service scores are the highest, and there's a sweet spot that we can attack. That's going to allow us to have higher loyalty and better repeat visits. So that's sort of what we look at in determining how far we go with this.

Great. Thank you.

Great. Thanks, everyone, for joining us on the call, and we'll look forward to speaking to you in November.

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