Jack in the Box Inc (JACK) 2015 Q4 法說會逐字稿

Good day, everyone, and welcome to the Jack in the Box Incorporated fourth-quarter FY15 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, ma'am.

Thank you, Carlos, and good morning, everyone. Joining me on the call today are Chairman and CEO, Lenny Comma; and Executive Vice President and CFO, Jerry Rebel. During this morning's session, we'll review the Company's operating results for the fourth quarter of FY15, as well as some of the guidance we issued yesterday for the first quarter and FY16.

In our comments this morning, per share amounts refer to diluted earnings per share, and operating earnings per share is defined as diluted EPS from continuing operations on a GAAP basis, excluding restructuring charges and gains or losses from refranchising. 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 related 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 attending Barclays Gaming, Lodging, Leisure and Restaurant Conference in New York, on December 8, and the KeyBanc Capital Markets Consumer Conference also in New York on December 9. Our first quarter ends on January 17, and we tentatively plan to announce results on Wednesday, February 17, after market close. Our conference call is tentatively scheduled to be held at 8:30 AM Pacific Time on Thursday, February 18.

We'll be hosting an investor and analyst meeting on May 24 and 25 in Kansas City where we've recently opened our first Qdoba restaurant and have several Jack in the Box restaurants. During his remarks, Lenny will provide a little more color on what you can expect us to discuss at that event. We'll provide more information as the date nears, but please mark your calendars.

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

Thank you, Carol, and good morning, everyone. We wrapped up the fourth quarter with solid results which capped yet another year of terrific performance for the Company. We're proud to report that both our Qdoba and Jack in the Box brands exceeded just about every target we set at the beginning of the year.

In addition, our level of confidence in our ability to compete over the long term was bolstered by the fact that both brands drove these results by successfully introducing more craveable food and without relying on aggressive discounting. Our franchisees also experienced the benefits of higher sales and margins on their profitability, which is a critical factor in driving their desire to grow and make investments in each brand.

This morning we'd like to review some of the strategic initiatives that drove these results and take a look ahead at what you can expect from us in 2016. First, let's take a look at our Jack in the Box brand. As I shared just about a year ago, we conducted a round of consumer research in 2014 that gave us confidence that our consumers would reward us for quality improvements across our line of burgers, fries, and drinks. I further shared that we would foreshadow these product improvements throughout 2015 with the introduction of several LTOs and permanent new items.

As promised, we introduced a number of higher-quality burgers in 2015, including our popular Buttery Jack platform, which was one of the most successful product launches ever when it debuted in February. In addition to these new products, we are improving the quality of our entire core burger menu and we'll introduce those across our system at the beginning of quarter two.

On the beverage front, our guests clearly told us that they wanted more choices and more consistency. So, in Q3, we began rolling out the Coca-Cola Freestyle platform which offers more than 100 choices, including sparkling beverages, flavored waters, sports drinks, and lemonades that can be customized however the guest wants. We completed the installation of Freestyle machines in Company restaurants in Q4 and expect to complete installation across more than 90% of our system by the end of February. We intend to highlight these improvements with television and digital advertising, POP, packaging, uniforms, and new menu boards that will be much easier for our guests to navigate. Stay tuned for what we expect to be a big step in the right direction for our brand.

Now, let's take a look at you how we're repositioning the Qdoba brand. Over the last two years, we've been transitioning away from some of the more value- and discount-oriented deals that we featured in the past to promotions more focused on freedom of choice and mouth-watering flavors. We began in 2014 by capitalizing on one of our biggest equities, our three-cheese queso with line extensions including Queso Diablo. And then, in 2015, we rolled out a new pricing structure and became the only major fast-casual Mexican brand that doesn't nickel and dime its guests by charging extra for things like our hand-smashed guacamole or queso. In 2016, we expect to drive sales and transactions with a combination of great new products and enhanced communication.

To that end, we launched Knockout Tacos in late October, featuring six different chef-inspired recipes which are unlike anything you'll find on most competitors' menus. For example, the Gladiator has steak, bacon, lettuce, pico de gallo, lettuce, Mexican caesar dressing, cilantro, and cotija cheese. Or the Two-Timer, which features pulled pork, salsa roja, shredded cheese, lettuce, pico de gallo, cotija cheese, and a crispy taco wrapped in a flour tortilla spread with three-cheese queso. Importantly, the Knockout Tacos represent the first of several craveable items coming from our menu innovation pipeline in 2016 and beyond.

In addition to our traditional channels of advertising, we're redirecting some marketing dollars to test television for the first time in select markets where we have higher levels of penetration. As part of the new Choose Flavor campaign developed by our new ad agency, we're currently showcasing our Knockout Tacos in TV spots in six Company markets. You can link to the commercial on the home page of Qdoba's website at Qdoba.com.

We'll also begin testing a digital platform in quarter two that includes a robust loyalty program that will incentivize our guests with rewards that are significantly more creative and meaningful than a buy 10, get one free offer. As we evolve the brand, we're changing one word in the descriptor of the name, from Mexican Grill to Mexican Eats, to better reflect the flavors and variety that we offer. We're very proud of our distinctive Qdoba name and that will not change, but you can expect to see the Qdoba Mexican feed, name, and logo in our marketing as well as on signage at all of our new locations and remodels going forward.

In addition to the updated name and logo, in 2015, we began testing various design elements at new Company restaurants. The new building design, fixtures, furnishings, and bold new graphics have generated quite a buzz. You may have seen a comal that we use at some of the locations to cook tortillas as well as other experiential elements. And our franchisees have been eager to jump in and join us in these tests.

We've also begun testing remodels that feature various components of the redesign. We expect to finalize the restaurant design for both newbuilds and remodels in quarter two. And then we would expect Company and franchise growth to ramp up in 2017. All of these initiatives are designed to increase sales, traffic, and new unit growth as we drive brand awareness.

Through the first seven weeks of the first quarter, we're pleased to report that both our brands are posting positive same-store sales in what several others in the industry have called a choppy environment. Quarter to date, Qdoba sales are positive, including flat transactions at Company restaurants, even as we're lapping mid-teens comparisons, with momentum gaining since the launch of Knockout Tacos in week five. We're encouraged by these trends after limited promotional activities during the first four weeks of the quarter as our restaurant teams focused on training and prep for the taco launch.

Jack in the Box sales are also positive despite essentially no discounting activity in the first five weeks of the quarter. Sales have been stronger as we've returned to normal levels of promotional activity within the last two weeks.

Over the past few years, we have generated significant value for shareholders by transforming our business model through refranchising of the Jack in the Box brand, restructuring the Company's G&A, evolving our capital structure, and revitalizing our brand. Our Management Team is currently evaluating levers to drive the next chapter of value creation and we intend to share our conclusions at our investor meeting in May, which will be our first in more than four years.

To give you a sneak peek, specific areas we're evaluating include the following: how we will plan to drive sales for both brands through brand positioning, digital strategies, menu innovations, new prototypes, and remodels; opportunities to grow both brands more quickly and the implications this has for both franchise and Company growth rates; the optimal level of franchise and Company ownership, considering our strategies for growth and overall value creation; implications to our structure and resulting G&A targets; and, development and design of our capital structure and the amount of cash we intend to return to shareholders.

On that note, I'll turn the call over to Jerry for a more detailed look at the fourth-quarter and full-year results, and our outlook for 2016. Jerry?

Thank you, Lenny, and good morning, everyone. Before taking a closer look at some of our fourth-quarter results, I wanted to take a few minutes to review some highlights for FY15. Our operating EPS for the year reached $3, an increase of 22% on top of three consecutive years of growth in excess of 30%. System-wide, same-store sales grew 9.3% at Qdoba, and Jack in the Box exceeded the NPD sandwich category by 490 basis points, with same-store sales growth of 6.5%.

Consolidated restaurant operating margin rose 190 basis points to 20.4% of sales, with margins increasing nicely at both brands. Franchise margin improved 190 basis points to 51.5% and EBITDA from our revenue stream of approximately $90 million represented over 30% of our consolidated EBITDA. Given the annuity-like cash flows our business model generates, we returned more than $350 million in cash to shareholders during the year, including $317 million in share buybacks while increasing the dividend by 50% in May. The share buybacks resulted in a 9% reduction in weighted-average shares outstanding for the year, which will continue to contribute to our future EPS growth. We currently have $200 million available until November of 2017 for stock repurchases.

Let's take a closer look at the fourth quarter. Operating EPS grew 15% in Q4, driven by solid same-store sales growth and margin expansion at both brands. With system same-store sales growth of 6.2% in Q4, Jack in the Box outperformed the QSR segment by 350 basis points. These results also exceeded those of each of our major competitors. Sales were positive across all day parts, with breakfast, dinner, and late night generating the strongest growth. For Jack in the Box, the 4.1% increase in Company same-store sales was comprised of mix benefits of 2.6% and pricing of approximately 2.4%, offset in part by a 0.9% decline in transactions as we reduced the level of discounting versus last year. For Qdoba, Q4 same-store sales increased 6.6% system-wide. The 6.1% increase in Company same-store sales included a 5.4% increase in the average check, which was driven primarily by the new, simplified menu-pricing structure; catering growth of 1%; and a decline in transactions of 0.3%. We've now had seven consecutive quarters of double-digit growth in catering sales. We plan to grow catering in 2016 with menu enhancements, an increased online presence, and more in-restaurant messaging to drive guest awareness.

Before I review our guidance for FY16, let's talk about our commodity cost outlook for the upcoming year. We currently expect a relatively benign commodity cost environment, with inflation of approximately 1% at Jack in the Box and deflation of approximately 3% at Qdoba.

Turning to our Q1 guidance, brand initiatives at Jack in the Box and Qdoba will add some non-repetitive costs to the quarter. These include, for Qdoba, a general manager conference, which was held in early October to align both Company and franchise operators on our brand positioning efforts and to prepare for the launch of our Knockout Tacos, as well as new uniforms. For Jack in the Box, training and other related costs to the launch of a significant number of core menu improvements at Jack in the Box at the beginning of the second quarter. In total, these costs are expected to negatively impact first-quarter operating EPS by approximately $0.05 a share.

Here's our current thinking on other key items of our FY16 guidance: same-store sales growth of approximately 2% to 4% at Jack in the Box Company restaurants on top of 5.1% growth in 2015; same-store sales growth of approximately 2% to 4% at Qdoba Company restaurants on top of 8.3% growth in 2015; restaurant operating margin of approximately 20% to 20.5%, which reflects the impact of ACA costs and higher minimum-wage rates, which we expect to be mitigated by the favorable commodity cost outlook and sales leverage.

We are currently estimating the impact of higher minimum wages -- including the increase in California's minimum wage to $10 an hour beginning January 1 -- to be about 75 basis points on the Jack in the Box brand for the full year or roughly 50 basis points on a consolidated basis. SG&A as a percent of revenue of approximately 13% to 13.5% compared to 14.4% in FY15. The decrease reflects a $5.3 million reduction in pension expense in FY16. The decrease in pension expense is due primarily to the sunsetting of the plan on December 31, 2015, after which time we will no longer have service costs as part of our ongoing pension expense.

We expect capital expenditures to be in the $100 million to $120 million range. The increase from 2015 relates primarily to a greater number of planned openings and remodels for Qdoba and higher IT spending as we implement new technology systems across both brands. Interest expense is expected to be higher due to increased leverage and an estimated 60 basis points increase in the effective interest rate in 2016. We expect operating earnings per share to range from $3.55 to $3.70 in FY16 compared to $3 in FY15. This includes an estimated benefit of approximately $0.08 per share for the 53rd week in FY16.

We plan on providing updated long-term goals at the May investor and analyst meeting. This concludes our prepared remarks. I'd now like to turn the call over to the operator to open it up for questions. Carlos?

Thank you, sir.

(Operator Instructions)

Our first question will be coming from the line of Brian Bittner. Sir, your line is now open.

Thank you.

Brian?

I think most investors are probably wondering how comps at Jack in the Box are going to get better after the first quarter as comparisons get tougher. And maybe you can really dive into why that is and get people comfortable with it. I think clearly it has to do with the menu upgrades that you have starting in the second quarter. But is there anything you can say around that -- what you saw in the tests from those that are driving the confidence that you can really accelerate comps in the tougher compares?

Brian, we're -- this is Lenny, Brian. I think the balance here is how much detail we want to put out in the marketplace at this point in time. Here's what I can tell you. When you look at the cumulative effect of all of the LTOs and new products that we introduced in 2015, what we'll do, starting Q1, will be significantly more than that -- all in one fell swoop -- because of the impact to our core burger menu.

So, a lot's going on there that we think will be accepted very favorably by the guests and we anticipate that it's going to generate the sales. And if you look at the cadence of activity last year, it was just at the beginning of quarter two where we really got aggressive with the Super Bowl promotion and started to see the sales lift. So we see very similar activity this year, but significantly more of it. And that's what gives us the confidence that we can not only roll over the sale well but we can see a higher level of guest loyalty based on the research that we did on what these products would do.

Okay. And, the second question, Jerry, on the Jack in the Box commodities, I think last call you said that they would be a little less than 1% and that was back in August. Now you're saying about 1%. But you have some real major commodities down over 20% since that August call, like your beef trimmings and eggs. So why is the commodity outlook relatively the same? Is there some conservatism baked in there? Or were you already locking back then before a lot of these fell?

Brian, great question. Most of our major commodities are locked in for a good portion of the fiscal year, particularly on the Qdoba side, but also on many items on the Jack in the Box side. We're currently tracking a little higher than our initial outlook on items such as produce and pork, but we are trending lower on beef. What I will say is if the beef prices continue this low, then we would expect our commodity forecast for Jack would be conservative. But we will revisit that on the February call.

Okay, great. Thank you.

Thank you. Our next question will be coming from the line of Mr. Alex Slagle. Sir, your line is now open.

Thanks. Question on the Jack in the Box traffic in the fourth quarter being impacted by less discounting. Could you remind us of the nature of the discounting that took place last year? Was it basically the $4.99 Spicy Chicken Club Combo? Or was there something else?

Alex, just to clarify, you're looking to get fourth-quarter comparisons, not information on first quarter this year?

Yes, just on the discounting difference.

So, for Jack in the Box, it's really $1 drink impact is the major deal. And then, promotionally, it was our $4.99 Chipotle Chicken Combo that we're doing -- Chipotle Chicken Club. That was the real impacts of the quarter, at least promotionally.

Got it. And then, a clarification on the guidance. What share repurchase is assumed in the earnings guidance for 2016? Is it only what's already been completed? Or does that also include some level of additional repurchase?

Alex, it does assume some level of share repurchases in 2016.

Okay, thank you.

Thank you. Our next question will be coming from the line of Mr. David Tarantino. Sir, your line is now open.

Hi, good morning. Lenny, just a clarification on what you're seeing so far in the first quarter for Jack in the Box. I think you mentioned that the comps are positive. Are they running inside the range you've given? And I think last year you mentioned that comps accelerated pretty meaningfully as the quarter went on. How should we frame up Q1 in the context of the guidance you've given?

The way to look at Q1, first off, our guidance is within the range, so answering that part of the question first. Secondly, the way to look at the quarter, in simple terms, is that last year at the beginning of the quarter we had some aggressive promotions going on. We had a two-for-$3.50 breakfast croissant promotion, which is probably one of our most successful value-oriented things that we do.

We did not do anything this year. So not only did we not have something out there that wasn't as aggressive, we weren't out there with anything. And then, this year, in the second half of the quarter is when we will be out there. And we'll be out there with breakfast as well as burger promotions that we think will roll over last year's momentum. So, it's really just a flip-flop of the timing of the promotional activity from one year to the next, and that's how we arrive at the guidance.

Got it, that's very helpful. And then, just a question, there's been a lot of buzz in the industry about McDonald's launching all-day breakfast and you've had all-day breakfast for a long time. Could you offer some perspective on whether that initiative by the competitors are impacting your business in a positive or negative way?

Yes, let me first make a broad statement. I think what we see in the industry is a significant amount of discounting going on and we think that is having the largest overall impact on the industry. Then when we narrow it down to one of our major competitors doing the breakfast all day, certainly it's going to impact everybody in the industry.

But what we've been able to do is focus on hamburgers and drive sales by really sticking to our own game. And, at the same time that we're doing that, we are not seeing that the breakfast all day launch from McDonald's is overall killing our business. We know there's going to be some impact there, but the biggest impact that we see in the first half of the quarter is really related to the fact that we're rolling over two-for-$3.50 croissants.

When we focus on breakfast discounting, we're going to get all the traffic we need. When we lay off of it and go to burgers, we're going to get the traffic in that area. So, as we talk to our franchisees about the impact, essentially there's not a big level of concern out there about McDonald's competing with us in this way.

Great, thank you very much.

Thank you. Our next question will be coming from the line of Mr. Joe Buckley. Sir, your line is now open.

Hi, thank you. Wanted to ask a couple of questions on sales as well. Can you talk about the level of pricing? You gave us the fourth-quarter pricing level. Does that carry through the first quarter when you start lapping price?

And talk a little about your decisions on the timing of discounting. Because you mentioned a lack of discounting in the fourth quarter or a lack of discounting early here in the first quarter, but then plans to pick it up. So talk about the cadence of that and the plans, what drove that decision.

Joe, this is Lenny. Why don't I talk about the timing of the discounting first. I'll let Carol and Jerry handle the pricing question. When we look at the timing of discounting and promotional activities in general, it really is just part of the overall activity that we're planning for either the quarter or the year. We were able to successfully go through last year without having to do a significant amount of discounting.

Keep in mind in fourth quarter, although Company [out]traffic was slightly negative, system traffic was positive -- and 82% of our system is franchise. So from the standpoint of brand health and what we've been able to do, without the discounting we're not having a major transaction erosion through 2015. So I think that handles the 2015 question.

When we get into 2016, we've had a significant amount of energy going into our quarter two launch and a lot of our focus has been there. So we've wanted to remain quiet in the first part of this quarter to give our teams an opportunity to prepare for all that we're going to do in quarter two. We didn't want to lob a bunch of things on their plates while at the same time we're asking them to do pretty big job in prepping. Now that we've gotten the vast majority of that work done, we're able to start doubling down on some of the promotional activity, knowing that it's not going to have a negative impact in our restaurants.

Joe, on the pricing, we had 2.4% in Q4. The question is how much of that will carry over. We're estimating we'll have something a little lower than the 2.4% pricing in the quarter.

Okay, and then can I --

Pulling also some pricing from the last year.

And then a broader question. What are you seeing in the overall QSR sandwich category with McDonald's up? Is there a little bit more growth in the category because McDonald's is back? Or is it just market share shifting around?

Joe, unfortunately, we can't disclose the QSR sandwich numbers beyond what our quarter was with our agreement with NPD. I think you heard McDonald's say that they're outpacing the category but I can't tell what you the category looks like right you now. The numbers we see always include McDonald's.

Okay, thank you.

Thank you. Our next question will be coming from the line of Mr. Chris O'Cull. Sir, your line is now open.

This is Dave Carlson on for Chris this morning. Jerry, quick question for you on the G&A. It came in at 14.4% of revenue during FY15. I think that was about 40 basis points above the guidance you guys provided in the fiscal third-quarter report. Can you talk about what expenses surprised you during the fourth quarter? And I have a follow-up question.

Okay. I'd say there's really three components to the fourth-quarter G&A percent of sales miss. One, we did have higher costs related to mark to market. They're always a surprise, whether they're positive, whether they're negative. That was $1.1 million negative impact to us within the quarter. [Capital] represented about $0.02 a share. We also had higher pre-opening costs for Qdoba new locations, not just those that were opened in the fourth quarter but also those that are opening up during Q1. So those were a little higher than what we had anticipated.

The other thing that I'll mention is the revenue -- total revenue numbers that we had in our models were a little lower due to a couple things. One was you noticed that the Jack in the Box Company same-store sales, while very strong and well ahead of where the industry was, was below the midpoint of the range that we had guided. Then also some of the Qdoba new locations opened up later in the quarter as opposed to around the midpoint of the quarter.

All of that came to reduce the denominator portion of that calculation -- higher expenses, slightly lower revenues, which is what created that. I think going forward, though, with the lower pension expense and with that being a structural and ongoing change to our pension expense, we're seeing a much lower outlook on our overall G&A costs for 2016.

Great. And then, you guys talked about the $100 million to $120 million in CapEx planned for FY16, a little bit higher than we had expected. And I know you talked about IT, Qdoba openings, remodels, et cetera. Can you give a little bit more detail, can you put this in buckets for us? How much are we talking about new store, remodel, investments in support services, et cetera?

We generally don't give that information. Let me give you some -- I'll give you order of magnitude, and I'll give you some numbers around the number of new stores and remodels that we're assuming. Order of magnitude, the number of new restaurants -- and I'm going to take you to the midpoint of the range guided.

The Qdoba new stores, at the midpoint we're anticipating about 10 or so more new Company restaurants in 2016 versus 2015, if you look at our guidance of 50 to 60 new stores, half of them being Company. And then we have 25 to 30 Qdoba remodels in the numbers.

And then, right along with that we have IT initiatives. We've been talking for a while about normalizing our IT systems between both brands. What you'll see us spend money on for IT next year is the common POS platform, primarily with the Qdoba brand, as they're going to go to the same system as the Jack in the Box brand has.

We'll begin the normalizing of the back-office systems in the restaurants with a new back-office system across both brands. And then Lenny mentioned the digital strategy for Qdoba launching in 2016, so that is in there, too. So a little higher IT spend than what you would normally expect us to have for those reasons.

That's great. And just to clarify. On the 25 to 30 Qdoba remodels, and also the new units as well, I would assume that those would all come fiscal third quarter and later, after you guys have completed the analysis. I think you said in fiscal second quarter you guys would have figured out exactly which design you want to go with and then ramp development.

No, I would say the new stores and the remodels are ongoing now. We did have some remodels in 2015 that we are analyzing what those elements are, which ones work, which ones don't work. And then we're working on the value engineering part of that. And also the restaurants that we opened late in 2015 had that same kind of features associated with the new prototype.

Perfect.

You'll see it throughout the year, not just third and fourth quarter.

Thank you, guys.

Thank you. Our next question will be coming from the line of Mr. Jeffrey Bernstein. Sir, your line is now open.

Great, thank you very much. Two questions. One on the Qdoba side for looking at FY16, you're talking about a 2% to 4% comp. I know your prior long-term guidance was more mid-single digits. I'm wondering if you could talk about why Qdoba might be running below.

I'm guessing that's going to tie in, if you can give some color in terms of how you think about the lapping of that simplified menu-pricing structure. How we should think about the cadence or the components of the comp as we look through 2016, being that was such a big initiative you guys implemented in 2015. Then I had one follow-up.

I think the simple answer is, we're guiding 2% to 4% this year as compared to guidance of 6% to 8% last year. But we actually were 8.3% last year, so some of the guidance is really just reflective of the roll-over and I think that's probably the meat of it there. You had asked a subpart to that question, how we should think about something and I didn't catch it. I just want to make sure I answered everything you wanted in that first part.

Just because FY15 was such a big year for the Qdoba brand in terms of the simplified menu-pricing structure, no nickeling-and-diming thing, I'm wondering how we should think about the components of the comp in 2016. As you now lap what was obviously a very high average check component in 2015, how we should think about that for full-year FY16.

Got it. At the end of the day, we're looking to generate traffic this year and it's going to be through new products that we have actually just started launching and we'll launch throughout the rest of the year. Also, catering is a big component for us. And then enhanced communications. So a lot of things that we're testing now and then also the digital strategy that we'll be able to utilize later. Those are the major drivers. But it really is primarily on traffic building.

Got it. Then on the restaurant margin in 2016, Jerry, I think you said 20% to 20.5% which it fell right in the middle of that for FY15. So I'm wondering if you could talk about the puts and takes. I think your prior long-term guidance was for 20% flat. You're already running a little bit ahead of that.

Maybe that's something we'll hear more about at the Analyst Day, but whether or not you could talk specifically about the puts and takes in FY16 or how the FY16 guidance relates to the long term. I think you gave some color on pricing and sounds like commodity's going to be benign but labor's up. How we should think about FY16 relative to the long-term guidance.

I think what we had on the long-term guidance previously was 19% to 20%. We've blown past that. You can definitely expect us to update that with the long-term guidance in the May meeting.

The 2016 though, specifically to 2016, we have -- in the total, between minimum wage and the Affordable Care Act, we have at least 75 basis points of impact to margin for the year on a consolidated basis. That is mitigating the benign commodity outlook, as well as any sales leverage that we would get from the 2% to 4% sales guidance.

As I mentioned on one of the questions earlier, if there's any conservatism in the number it would be related to what beef costs turn out to be versus what we currently have them expected at. So, if beef costs continue to be where they are now, we would expect lower food and packaging costs. Again, we'll update that on the February call.

Great, thank you.

Thank you. Our next question will be coming from the line of Mr. Keith Siegner. Sir, your line is now open.

Thank you. Lenny, you mentioned a 2016 digital launch for Qdoba. Could you talk a little bit more about what that means, what you're envisioning, what kind of features you think will be part of that?

And, similarly, as we think about Jack in the Box, similar updates as to the strategy there. We've seen some big announcements and updates from much of the rest of the quick-service industry, so just a little more detail on digital strategies for both brands. Thanks.

So I think both brands have been using the strategic plan and the research that we conducted to figure out the go-forward strategy and cadence. I would say that the Qdoba brand is more ready to launch a digital platform than the Jack in the Box brand at this point.

If you think about the comparison between the two brands, the Jack in the Box brand is focusing on getting its core menu items right. The last thing we'd want to do is to launch a digital platform that's inviting guests to come in and eat food that the consumer told us we needed to improve. So we need to get the timing of this right.

What you're going to see Frances and the team do is make the improvements to the food first, which will be the focus this year. And then they'll be able to come on the heels of Qdoba's work and really get into the digital platform area.

And for us, more broadly -- and this gets to the Qdoba question, but it also answers and foreshadows what you can expect from Jack in the Box on the digital front, too -- we don't want the digital program to simply be a way to communicate discounts to consumers because they purchased food. We want to be able to segment the consumers based on their specific behavior and then give them the types of offerings that they would actually want.

So, you've seen things like this in the industry but, for example, there are folks out there who would be more turned on by an opportunity to gift something to a friend than they would to receive the benefits themselves through a loyalty program that they have, which they consider to just be a way of managing their relationship that they have with the Company. So, we want to make sure that those folks that are our biggest advocates are rewarded in ways that they're actually going to find valuable.

We don't want to give too much away, but those types of distinctions will be made in the program so that, as we segment those guests, we're treating them appropriately. Today, our program is really one size fits all. It's a buy-a-bunch-of-stuff-and-get-something-free program. And so, those aren't going to be the most beneficial programs going forward. We're going to need a lot more data and to be smarter about the way we do that. That's what this platform enables us to do.

As a follow-up to that, then, thinking about Qdoba, aside from loyalty, mobile order and pay is an option here. Is the POS and other back-of-the-house system in place? Could this be part of this program?

It seems like that brand is very nicely positioned to hit that right now and that the customers would respond very favorably. Maybe, even, you could even get there ahead of some competition. How does mobile order and pay fit in, keeping loyalty out of the equation for a second?

I think one way to look at this is from an IT perspective. All of these things do actually need to tie together. So the way you can think about this is that, as we're designing, testing, and then rolling out this platform, it will actually be inclusive of all the things that you mentioned. What we can't tell you is the sequence in which we will activate each of those things because a lot of that's going to depend on what we learn in the testing phase.

Okay. Thank you.

You got it.

Thank you. Our next question will be coming from the line of Mr. Jeff Farmer. Sir, your line is now open.

Thank you. Following up on an earlier menu-pricing question, some of your peers have been taking at least a modestly more conservative view on their pricing opportunities heading out into calendar 2016. With that said, what is your view on menu-pricing power for both of these concepts, both at Jack and Qdoba, as we get into 2016, especially in this increasingly dynamic environment out there on the competitive front?

This is Lenny, Jeff. Let me first say, one of the things that we pay attention to -- even before looking at the industry -- is the comparison of food at home and food away from home. We want to make sure that we don't move faster than the pace that essentially supermarkets are moving, because that is the thing that really negatively impacts us immediately. That is one of the things that we start with, the foundation of pricing decisions.

Then we go into the marketplace to see, based on competitive activity, how much can the market bear. We're going to be very cautious going into 2016 with the level of discounting that's hitting the entire industry. There isn't one segment of the restaurant industry that isn't heavily discounting at this time.

So, we'll be cautious but, at the same time, one of the things that we bank on is that the improvements in our food will give us some pricing power. I think what you can see -- what you can expect is that we'll strategically take price where we know the consumer appreciates the quality of the food and will allow us to take that price.

That's helpful. One more, again a lot of questions today about Jack same-store sales in FY16, some of the components. But I'll just look at what happened in 2015, mix was a nice contribution. I think it was close to 2%, some obvious reasons for that. But, as you look forward to 2016, is there a circumstance in terms of new product which you've talked about a little bit earlier on the call? Is there a new product or collection of new products that you think will allow you to hold onto something close to a 2% mix, at Jack, in 2016?

We don't really forecast that, but here's what I can say. Last year, if you look at what drove the mix, it was consumers' attraction to the quality of the items that we put out there, that also happened to be premium items and we could have much higher price on those items. If I look at our intentions this year and where we've put in a lot of time, the arsenal is really very much the same. It's improvements across -- high quality improvements across the menu that should give us an opportunity to look at generating mix the same way, but not something we necessarily can forecast for you at this time.

All right, thank you.

Thank you. Our next question will be coming from the line of Mr. Bob Derrington. Sir, your line is now open.

Yes, thank you. Lenny, 12 months ago you provided us with a little bit of color on the long-term expectation for development, particularly for Qdoba. And, in that long-term growth, this year's development certainly appears to be at a lower level for new stores.

I'm wondering, given the dramatic -- what seems like a dramatic remodel of the Qdoba business, is that one of the things that came into play in slowing down the development? And then, I've got a follow-up on that.

Let me broadly answer your question and see if I've given you enough detail. And if not, just check in with me. But the thing that's really happening, first off, from a capital perspective we have enough capital to build more restaurants than we're currently scheduled to build, and to do the remodel test, and to do new image-related testing. So, any impact to the guidance on the spend there is really just associated with what we think is the right thing to do right now.

We think the right thing to do is to move at a pace that allows our franchisees to participate in the testing. We need them to have hammer and nails in hand and test out how these things come to fruition. Because if they're going to believe in this going forward and if they're going to feel confident in the returns that could be generated, what we've found is that their participation is crucial. So, the pace of change is really just being managed to bring everybody along.

And then, when you look at -- it will be Q2 before we have done enough of these to really start to read some results and then go back in and make tweaks. So we just don't want to get too far ahead of it. But as I mentioned in my prepared comments, we would expect, in 2017, that since those decisions would be finalized that we'd be able to ramp up the growth at that time.

Okay. And then follow-up, curious on Jack in the Box. Will Jack ever speak again?

(laughter) That's a really good question. He may. Let me say that -- and I mentioned this either in a prior call or a conference where we spoke publicly -- the tone of the Jack in the Box advertising is changing.

The way to think about it is, we spent a lot of time in our ads having this punch line and the big joke, and that brought a lot of attention to the brand. But it sometimes outweighed the focus on the product and it didn't necessarily get the consumer focused on what it was we were offering. Certainly, we don't want to be in a position where, at the end of an ad, they can remember the joke but they can't remember the product.

So, we've changed the tone of the Jack advertising to be more focused on the quality of the product, still to be fun-loving and interesting, but not necessarily as sarcastic. And so one of the ways that we're making that transition is toning down the use of Jack's voice right now. And then, over time, we'll continue to evolve the campaign -- and if we need to bring back the voice, we can bring it back. But we're going to see the consumer's reaction to what we're doing and that will tell us what the next steps are.

Got you. Terrific. Thank you.

Thank you. Our next question will be coming from the line of Mr. Matthew DiFrisco. Sir, your line is now open.

Thank you. I've got just two questions. One question with respect to the guidance. I'm trying to look at the cadence of 2016. Taking into account the accelerating same-store sales in the back half, it implied the mentioning of testing advertising for Qdoba as well as returning to a little bit more promotional activity for Jack.

I'm wondering, I guess, we should conclude then that, aside from the extra operating week in the fourth quarter but just the operating earnings on a comparable basis also, seem to be more back-end weighted in the first half of the year, would imply a deceleration of the EPS growth than what we just saw in the fourth quarter?

I think I lost you on that one, Matt. So I think Jerry gave the factors that we believe would impact our Q1 guidance. But in terms of EPS by quarter, we're not going to give that level of detail at this point.

Okay. I guess the unknown part is the G&A savings and the cadence of that, how fast does that flow through. Is that balanced or is that somewhat more skewed in first half that could offset some of the other headwinds that obviously are going to weigh on the first half of the year?

Okay, understand. The G&A savings are going to be throughout the year.

Okay. So balanced, okay.

Yes, spread pretty evenly.

Okay. On previous calls there's been a lot of mention about the two brands and one's a growth brand, one seems to be migrating more towards franchising and a cash flow brand. Your response has been they co-exist well together and you felt like the market was giving you the valuation for both of the brands.

At the current levels, though, you're trading at a discount to your fast-food peers as well as your quick-casual peers. I was curious, has that stance changed? Is that something that possibly we could see an update on as well as far as perhaps entertaining some greater value creation from the separation of the brands?

I think the way to think about that is that we'll have an opportunity at our Investor Day in May to spend a lot of time addressing all those types of interests that our shareholders have. And that's probably the best time to have that conversation.

Okay.

Thank you. Our next question will be coming from the line of Mr. Nick Setyan. Sir, your line is now open.

Hi. A question on Knockout Tacos and looking forward to all the other stuff you guys said are coming up, which is as big as the Knockout Tacos. Are you guys seeing an acceleration in transactions in the quarter as you guys have rolled out those tacos?

Keep in mind, we've only been at it for two weeks, but, yes, we do see an acceleration. The nice thing about the tacos is, it is completely different than the items we currently sell on the menu. The goal is that those give our loyal burrito customers one more reason to come back, and that customers that aren't currently with us that were looking for something different now have a differentiated offering.

I could tell you that the tacos, if you read anything that's in social media on the Knockout Tacos, people absolutely love the flavors that are being presented in these tacos. It's a pretty insane product and it's got -- I mentioned some of the flavors but this isn't a typical taco. We've got bacon in some of the tacos and obviously various cheeses and what have you. So, people are really enjoying this.

And we would really think -- look forward to any kind of product development creating this type of buzz. We don't -- for this brand that's going to focus on flavor -- want to put out things that don't really have this ingredient lineup and flavor profile that people would want to rave about.

Got it. So we are seeing an acceleration in transactions and it's also got a $9.99 price point in the market that I've looked at. It sounds like it could also potentially be an average check driver, comping over some of those big mix numbers that we saw in the first half of last year. Are we going to be able to keep the mix flattish? Or should we still think about maybe positive transactions and negative mix?

First, just a clarification. The retail that you see out there is a three-for-$9 price point. And then, if they're a la carte, they're a little bit over $3 each, right about $3.50. So that's how you should look at the retail.

As far as an opportunity to increase average check, it really does come down to whether or not this is incremental. If we're drawing in additional visits, new consumers, and we're not getting trades away from burritos, then this could be a nice trade-up and could positively impact the average check. But I think, with a couple weeks under our belt, too soon to tell. But that's obviously the goal.

Okay. And again on Qdoba, on the newer stores, are we entering any new markets this year? How many remodels are we thinking about doing this year? How are the AUVs on the new stores trending? Any color on the new units and the strategy there.

Keep in mind, we're going to host the May meeting in Kansas City because that is a new market that we've entered into which means it's going to have the new design elements and that's what we'd like you to see. It will be reflective of also what you'd see in remodels. So, yes, we're entering into some new markets. There are 25 to 30 remodels you can expect this year. So we'll get a good read on impact and then also be able to start predicting the pace of that change going forward.

Thank you.

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

Sure thing, ma'am. Our last question will be coming from the line of Joe Buckley. Sir, your line is open.

Thank you. I just wanted to go back to the pension expense and what that is likely to look like after FY16. Does that ratchet down again in 2017? What would be your expectations beyond this year?

Joe, let me just tell you that this year we're seeing -- in 2016 we'll have three months' worth of service costs in our pension and then after January of 2016 we'll no longer be accruing any service-related costs to that. So, in 2017 and forward, you wouldn't have any service costs for the entire year. Everything else being equal, you would expect lower pension costs in 2017 and forward versus what you're seeing in 2016.

The other thing that I'll mention is with the sunset of the pension plan, the volatility should be lower in 2017 and forward than what we've currently seen, as we would expect a significantly lower impact from a discount rate change than what we have in the past. Again, related to the sunsetting of the plan and there not being any service-related costs in there. Does that answer your question?

Can you quantify the service costs this year, Jerry?

Well, the $5.2 million number and lower pension expense is due entirely to the service cost. We actually had some increase in pension related to mortality tables and things such as that. But, if you looked at this and you said we're generating about $5.2 million over nine months, you might expect a pro rata lower number for the three months in FY17, so in the $1.7 million range. But don't hold me to that, it's just an estimate at this point, but you will see it lower.

That's very helpful, thank you.

I think that's all the time we have for today. We look forward to seeing you at a couple upcoming conferences and our May Analyst Day. Look for details to come out on that, and we'll see you in December.

Thank you. That concludes today's conference call. Thank you all for participating. You may now disconnect.