Jack In The Box Inc.

Good day and thank you for standing by. Welcome to the second quarter 2022 Jack in the Box earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to our first speaker for today, Mr. Chris Brandon, the Vice President of Investor Relations for Jack and Bob. Please go ahead, sir.

Thanks, Operator, and good morning, everyone. We appreciate you joining today's conference call highlighting our second quarter 2022 results. With me today are Chief Executive Officer Darren Harris and Chief Financial Officer Tim Mullady. Following their prepared remarks, we will be happy to take some questions from our covering Southside analysts. Note that during both our discussion and the Q&A portion of the call, we may refer to non-GAAP items. Please refer to the non-GAAP reconciliations provided in today's earnings release, which is available on the investor relations website at jackinthebox.com. In addition, we may make forward-looking statements based on current information and judgments that reflect management's outlook for the future. However, actual results may differ materially from these expectations because of risks to our business. We therefore consider the safe harbor statement in today's earnings release and the cautionary statements in our most recent 10-K to be part of our discussion. 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 which are also available on the IR section of our website. Two brief housekeeping items before we get started. First, you have likely already reviewed our consolidated pro forma financials, which were issued earlier this week as an 8K filing and can be found on our IR site under SEC filings. Hopefully, this serves as a helpful guide for modeling the remainder of 2022 and beyond for our new company. And second, I am happy to let you know that we will soon be debuting an investor presentation, which may be particularly interesting for those of you looking to become more familiar with our company's story. Look for this on our IR website over the next few days, ahead of our active participation at investor conferences next month. And now, I would like to turn the call over to our Chief Executive Officer, Darren Harris.

Thank you, Chris, and good morning, everyone. Before I get started today, we operate at Jack in the Box in Uvalde, Texas, and I would just like to sincerely say on behalf of all of us at Jack in the Box in Del Taco, our thoughts and prayers are with that entire community following the tragic events that took place earlier this week. We are here to support the people of Uvalde in any small way we can during this difficult time. Now shifting to our earnings discussion. I want to start by recognizing the work of our operators, teams, and franchisees. While we continue to face a tough and volatile operating environment, our talented teams remain focused on upholding the JAK standard of service for our guests and help generate progress across all four pillars of our strategy. This morning, I will utilize these four pillars to communicate the actions we are taking to drive the business in this current environment and for the long term. I'd like to give a warm welcome to the Del Taco family, which officially joined us on March 8th. With our common geography, guest profiles, and operating models, we are confident we have the people envisioned to be a force as a multi-brand QSR organization. Our integration process has already begun, and we are starting to realize the benefit of joining forces with a challenger brand that shares a similar culture, values, and a passion for serving guests. Over the last month, I've had the opportunity to meet with many of our Del Taco colleagues and franchisees to discuss how we can support them and grow together. I've been overwhelmed by the positive interaction, engagement, and shared enthusiasm for opportunities to unlock value by being together. While we are not looking to change what makes Del Taco a beloved brand and leader in its markets, our simple goal is to combine our resources, talent and knowledge to advance the capabilities and growth of both brands. This process is off to a great start, and I would like to thank our teams at both Jack and Del Taco for their hard work during this initial integration phase. Let's move on to our performance. Both brands had strong two-year same-store sales performance. Jack up 19.8% and Del Taco up 22.3% for the quarter. However, sales were impacted by the final weeks of Omicron, the lapping of heavy stimulus and issues with staffing and hours of operation. Additionally, margins were pressured across the board due to inflation. These are common themes within the industry. So what I would like to spend our time focusing on today is what we are doing about it and how we are navigating these elements in the short term while ensuring we are positioned for sustainable long-term growth. Starting off with our building brand loyalty pillar, our craved marketing strategy continues to resonate with guests as we focus on improving their experience. Beyond food, this includes everything from ad imagery to new in-store uniforms, menu panels, new packaging, and restaurant designs, all of which you will start seeing in our restaurants soon. We took meaningful steps in quarter two to refine and amplify our brand positioning, highlighted by the hiring of a new advertising agency, Chiat Day out of Los Angeles, which returns to Jack after working on the brand in the 90s, has a proven record raising the profile of some of the most well-known brands in the world. We are excited to be working together again, and we don't need a revolution of Jack or the Jack brand. but we do want to ensure our evolution that keeps things unique and relevant as we enter this new chapter of our company. In Q2, Jack continued doing what Jack does best, innovating. During the quarter, we launched our nacho tiny tacos while bringing back some existing fan favorites, including popcorn chicken and our sauce and loaded fries. We also had some fun with the launch of brand new shapes, our mint Oreo shake in March, And more recently, the debut of our pineapple express shake on 420. It was an active quarter that helped our top line performance during challenging comparisons. Looking forward, I'm excited to share that we have more new menu items on our testing calendar than we have seen since this new management team started. Our two-year product pipeline calendar includes enhancements to core offerings, packaging, and some game-changing innovation that we're excited to reveal in due time. There was a notable initiative within our late-night menu in Q2 as we launched a new late-night munchy meal platform test, which not only simplifies operations during a day part where simplification and speed are critical, but also offers increased pricing opportunity for our franchisees compared to our previous late-night menu platforms. We also debuted our new brand colors, which include our late-night color scheme, a nice shade of purple, to our everyday brand look and feel, which will fold into everything from marketing and digital to store design as part of our overall craze strategy. While we aren't in a normalized environment yet where we can fully execute late night across our entire business, we are aggressively pursuing a day part that we feel we can dominate. I am thrilled with our digital progress. By combining the resources of the two brands into a digital center of excellence, I'm even more enthusiastic for the tremendous upside that we can achieve in this business channel. Jack had a key milestone in Q2, exceeding 10% of overall sales coming from digital channels. Considering a couple years ago this number was near zero, this is a great accomplishment for our brand and only the beginning of what we believe is a critical platform for future sales growth. We expanded our Jack Pack Rewards loyalty program to our drive-thru and in-store guests outside of just the mobile app, which resulted in a 25% increase in users of the loyalty program during Q2 alone. We aren't slowing down in the back half of 2022, which will be highlighted by the launch of web ordering, including a completely new e-commerce experience for guests across all digital channels. We're excited about this rollout later in the summer, and we believe this will unlock a new base of digital customers while driving frequency of existing guests. I am proud of the work our marketing team has accomplished in quarter two to help drive our business now and into the future. From loyalty expansion, product innovation, to having some fun with the debut of Jack on the Street web series and our Jack Loves Trees short video on 420. Now shifting to our second pillar, driving operational excellence. During a challenging staffing environment, we must be able to recruit the best people and train them effectively. To jumpstart this, we implemented a new staffing initiative in our two largest company-owned markets during Q2 with notably strong results. Beyond focusing on culture and surveying our team members to help us understand what they value in their employee experience, other methods included contract recruiters, direct mail campaigns, an improved employee referral program, premium pay, particularly at the late night, and more. We have seen a dramatic increase in interviews, hires, and improved retention in these markets, including a 7% increase in total employee count in LA versus where we started on January 1st. More broadly, our current base of company-owned stores removing the evolving market is now at 98% of pre-pandemic staffing levels. These trends will benefit us as we continue to work toward normalized hours of operation and dining room openings throughout the back half of 2022. As staffing goes, also goes our focus on opening more dining rooms. While we still have over half of these yet to reopen, mostly due to labor, we are seeing a nice lift in sales upon reopening. I anticipate this figure will continue to improve throughout the back half of the year. We are already sharing these best practices for staffing with our franchise partners, as everything we have achieved in these markets is translatable and scalable to others in our system. While hiring and retaining team members is critical, we are just as focused on training and retention. One measure of success is our store team member certification program, executed through our new online learning system which used to be for managers only. When we first started implementing and tracking it nine months ago, we were at 2% completion of these training modules. Today, we have expanded this to all store team members beyond just managers and have hit 70% certification. This revised effort on staffing and online learning helps position our restaurant team members for immediate success and operational excellence. Our commitment to helping our restaurant team members and managers break out of the box and reach their full potential, whether that might entail becoming a manager, a franchisee, or Just having a great experience as part of one of our in-store teams has been a part of the Jack culture for a long time, and we want to keep it that way. These initiatives will help us raise the standard in all restaurants, but most notably, it will help propel evolving markets to improve performance. As we've communicated in the past, we are committed to improving the operations of these restaurants with the intent to re-franchise and put them back in the hands of franchisees who can grow these markets successfully. Tim will touch on this further in his remarks. Our third pillar, growing restaurant profits, is certainly one that is at the forefront of everything we do in all operating environments, particularly the current one. As part of our long-term strategy, we invested in our operations services team with a focus on improving restaurant-level margin through a program called Financial Fundamentals. This team is innovating Jack's operating systems by using new processes, equipment and technology to remove costs from the P&L and drive top-line performance with improved speed. In addition to this team, we have also established a margin task force made up of team members and franchisees with the objective of identifying multiple short-term expedient opportunities to save costs and labor without jeopardizing the guest experience. Many of these tactics were already planned, but in response to the current environment, testing and implementation plans have now been accelerated. Helped by some of these initiatives, we see an opportunity for 200 basis points of margin improvement per store on average. Cheese pumps, build simplification, automated shake machine cleaning, and munchy mill revisions are all examples of ways we can improve costs in the short term while continuing to work on our longer-term strategies. Another example you likely heard about recently is our automation test with MISO within our Friar and Dream stations, which should lead to margin improvement and key learnings for the long term. As part of growing restaurant profits, we will be utilizing price in as aggressive of a manner as our data, guest insights, and the competitive landscape will allow. Between our unique guest loyalty, multiple day parts, highlighted by the late night, and our wide menu that allows us to be surgical in our approach, We believe we have pricing power, and this allows us and our franchisees to apply pricing strategies to value platforms, premium items, and everything in between. We must also be looking beyond just price to grow average ticket while preserving traffic. Our hook and build approach, helped by our menu variety containing upsell items and innovative new add-on items, has been an effective strategy over the last year and a half. This approach will continue to be part of our plan to deliver solid top line performance as Jack has achieved reliably over time. Improving profitability is certainly a pillar where the Del Taco acquisition and its immediate synergy opportunities come into play, particularly related to supply chain. With our overlapping footprint, access to more vendors, and shared supply partner which both brands utilize, Much of the near-term savings will certainly come from executing on these synergies. And this process is already underway. And lastly, our fourth pillar, expanding Jack's reach, one that will clearly help us unlock value. Let's start with the re-image program that officially launched in Q2. This is a big part of truly expanding our reach and offering guests the best experience possible. Whether they are long-time fans in an existing territory, or yet to be fans in an untapped territory, it is imperative we get our current base of restaurants to a new image, which not only helps restaurant performance, but also attracts franchisees to grow the brand in the future. We are putting skin in the game and capital to work on improving the image of our restaurants, both franchise and company-owned, through our re-image and tenant improvement program. We have 12 company-owned restaurants already in the design and permitting phase, and I'm thrilled that 136 franchise restaurants have already been approved for upcoming reimage projects. We look forward to updating you on our progress as franchisees continue the journey of modernizing our brand and remodeling restaurants. We have a fantastic example of a recent successful company-owned reimage in Yuma, Arizona. At this location, we doubled the size of the parking area, reconfigured the layout to optimize traffic circulation, and added both a Y-Line double drive-thru and a fully remodeled dining area. While still early in only one location, the early results during the first month indicated 25% lift in same-store sales, while exceeding over $100,000 per week in sales, driven mostly by transactions. We will continue to create more re-image case studies like this one, which will influence our franchisees to take further advantage of the new program and its capital support leading to significant progress on re-imaging our restaurant base and ultimately sales growth, something we are enthusiastic about working to accomplish and is tremendously important to our future. Regarding JAK unit growth, as of Q2, we are now at 53 development agreements for 218 restaurants since the program launched last summer. Under these agreements, 12 restaurants have already opened, leaving 206 remaining for future development. This reflects meaningful progress, and in due time will go from commitments on paper to shovels in the ground. We continue to not only see our pipeline of commitments grow, but also the number of sites we have approved for development. We are still well on pace to accomplish our long-term goals, including 4% net unit growth by 2025, and look forward to showcasing traction within our results sooner than later. Lastly, I'd like to quickly circle back to Del Taco. Part of the learning process for me and my team about this outstanding brand of business has been to assess its competitive advantages and initiatives in place to help manage during this period of time. Here are a few things I have learned at this early stage. Much like Jack in the Box, Del Taco has highly relevant brand positioning with strength in its barbell mini strategy. This strategy was recently highlighted by the new 20 under $2 platform and will continue to provide the compelling value offerings guests have come to expect, while offering premium items and promotions for other guests. The industry winners will find ways to maintain traffic while raising price in other areas of the menu, and I believe this value initiative hits the mark, particularly in quarter two where, regardless of the price taken across the platform, we saw increased mix for these items. The new FreshFlex prototype is not only a great experience for guests, but also has provided excitement and momentum around franchise growth. Del Taco signed 10 development agreements in Q2, and new franchisees have signed up for 74 units across 11 states since 2021. This is a terrific catalyst for future system growth. Similar to Jack, I believe Del Taco's ability to innovate is key. whether it be new products like the recent release of chicken cheddar rollers and recurring fan favorites like the tamale menu and crispy jumbo shrimp, or within digital, where the team has innovated successfully on everything from the Dale Yow Rewards Program, now at 675,000 members, to the Stuffed Quesadilla Tacos Tour live on Twitch. Their emphasis on thinking ahead and pushing the boundaries is something we certainly have in common. As mentioned in this morning's release, we are finalizing a go-to market plan for Del Taco re-franchising and we'll have more details to share in the very near future. Even more important than the advantages of an asset-light model or using re-franchising proceeds as a capital source is the importance we place on taking care of great people running these restaurants while creating opportunities for them in the future. This is something we did at Jack with our people during a long re-franchising campaign and something Del Taco has accomplished in previous re-franchising efforts. We know Jack franchisees are thrilled to have a brand like Del Taco to add to their portfolio and enterprise. And in combination with adding new franchisees, we are confident we can grow both brands faster together than as one. While these are just a few highlights I have observed within our first six weeks together, I am convinced Del Taco is doing the right thing to take share within the Mexican QSR category. and I'm convinced their challenging spirit is the perfect fit for our future together. To close, I'm proud of this team and the tremendous efforts we've made with our strategic plan while focusing on our fundamentals for growth. Looking through the near-term industry headwinds, we see a clear path to maximizing our ability to compete and achieve our long-term objectives. With the addition of Del Taco, we are now a bigger, stronger company well positioned to take share and drive significant innovation, growth, and shareholder value. Thank you again for joining the call today, and now I'll turn it over to Tim.