Jack In The Box Inc.

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jack fourth quarter and full year 2022 earnings webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. It's now my pleasure to turn today's call over to Chris Brandon, Vice President of Investor Relations.

Thanks, Operator, and good morning, everyone. We appreciate you joining today's conference call highlighting results from our fourth quarter and fiscal year 2022. With me today are Chief Executive Officer Darren Harris and Chief Financial Officer Tim Mullaney. Following their prepared remarks, we will be happy to take questions from our covering sell-side analysts. Note that during both our discussion and Q&A, we may refer to non-GAAP items. Please refer to the non-GAAP reconciliations provided in today's earnings release, which is available on our investor relations website at jackinthebox.com. We will also be making 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 business risks. 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 and are available on our investor relations website. And with that, I'd like to turn it over to our Chief Executive Officer, Darren Harris.

Thanks, Chris, and good morning, everyone. Before I recap our fourth quarter and full year, I want to take a moment during the season of Thanksgiving to say how thankful I am to our restaurant operators, franchisees, and team members across both Jack in the Box and Del Taco. For the last couple of years, they have put their energy, passion, and heart into doing what they do every day in our restaurants, which is serve others. And for this, I'm extremely grateful. Our people and culture is what creates momentum for Jack in the Box and Del Taco. And despite the challenges everyone in the industry is facing with staffing and inflation, they come to work wanting to make a difference for others and our future. Their dedication and tenacity in executing against our four strategic pillars has allowed us to finish 2022 on a high note. I am extremely proud of our team and have great confidence as we move into 2023. And my confidence primarily relates to four key areas where, regardless of the challenging margin environment, we are delivering. First, the reliability and consistency of our top-line performance. and fundamental strength in place to carry this momentum forward. Both brands delivered excellent one- and two-year same-store sales and showed very encouraging trends thus far in Q1. We are also encouraged by our ongoing ability to balance the value equation. Given the strength of our loyal fan base along with product innovation, our wide menu offering, and an ability to communicate our brand differences effectively to our guests, We believe there is potential to take additional price while driving transactions. Second, we have been doing the tough work over the last couple years of preparing for growth, optimizing our portfolio, and building a pipeline of new restaurants. This included closing select underperforming restaurants and the re-franchising of two of our four evolving markets, which puts them in the hands of experienced operators, adds incremental development agreements, and removes them from our restaurant level margin. This effort puts us in a position for positive net unit growth next year, which has been a high priority for this team and we are poised to deliver in 2023. This plus our exciting future with Del Taco and the entry of two brand new markets next year is a milestone achievement for our company and our franchisees, one that we will build upon over the next several years. And third, We have made tremendous progress evolving into a more innovative and relevant digital-focused business. We are now a formidable competitor within the digital landscape with enhanced data capturing capabilities via our growing multi-platform and our newly updated e-commerce app and new mobile website. These new capabilities will bring a more personalized, seamless experience to guests while improving upsell and targeted offers. But the guest experience opportunities goes beyond just e-commerce, and we are committed to making restaurant level tech investments for 2023, including a new point of sale system. These investments will be the foundation to modernize Jack in the Box for years to come. POS is the heart of any technology investment, enabling us to set the stage for future applications, software, and tools like digital menu boards, AI, and personalized in-store ordering. All of this supports enhanced operational capabilities such as automation to drive a more consistent guest experience and higher store-level margins. And lastly, 2022 was a big year of progress related to operations. We have a line of sight into removing 200 basis points from our store-level model through financial fundamentals, equipment, and training. And all metrics related to training, alerts, speed of service, they're all trending in the right direction and directly supporting a better guest experience and top line performance. And we will discuss this in further detail within the operations and restaurant profits pillars. All of these initiatives and investments are critical to building momentum for growth and our desire to create returns so strong that current and potential franchisees can't wait to build new restaurants. Let me take a moment to level set. The inflationary environment from 2022 and into 2023 remains challenging. Just like our peers, we're not able to fully overcome the last two years of inflation on food, paper, labor and electricity with just price alone. But make no mistake, our core business is strong and we're executing on our strategy despite the headwinds. The investments we are making in digital technology transformation re-images and new restaurants are critical for us to accomplish our long-term goals, compete and grow. As we shift towards becoming a growth-oriented company, we understand there have been an abundance of moving parts within the business and the operating model since new management began the process of transforming the business. The overhaul of our strategy plus an acquisition along the way has likely made it difficult to model the business precisely and consistently. And we understand that. Please know that part of our objective, in addition to driving the unit growth and top line results, is progress towards simplifying our business and streamlining the various elements that shape our earnings model. This will be a priority for us in the coming quarters as we continue to gain traction with our strategy. Until we reach that stage, we will communicate as specifically and detailed as we are able, as we did in this morning's release. which we believe will be helpful. In summary, the investments we are making and what this team has executed to advance our business is taking shape. It will be a big year for our new company and the two growth-minded challenger brands that represent it. Turning to the fourth quarter, we benefited greatly from improvement in operating hours, dining room openings, promotional and day park performance, and a continued focus on product innovation and digital. Of course, double digit commodity and labor inflation, aggressive competition around promotions and value, and a challenging staffing environment have made these some of the most challenging operating conditions we have ever seen. But times like this are when our people and culture, experience, and the relationships we have within the organization enable us to excel. Let's now review our Q4 and full year performance, as well as our ongoing execution plans within the framework of our four strategic pillars. Beginning with brand loyalty, the guiding force behind our marketing is our crave strategy, making the brand more cultural, relevant, authentic, visible, easy, and distinctive. During the fourth quarter, we debuted our first creative work with our new advertising agency, Chaya Day. which featured Mark Hamill, a former Jack employee back in the 70s. This inaugural campaign generated national buzz for our brand. And campaigns like this drive results, but also demonstrate our focus on Jack being fun and culturally relevant, whether it be bringing back our aptly named Monster Tacos during Halloween or launching our Pineapple Express on 420. Seeking out these moments is something you can expect us to continue in 2023. We've made big strides in updating guest touchpoints with a more modern Jack Spin, including our new web and app ordering experience, updated menu boards, team member uniforms, packaging, and of course, our new restaurant design for the future. In fact, a drive-thru and walk-up only prototype debuted in Tulsa, Oklahoma during quarter four. 2022 was also another notable year for Jack doing what it does best. rolling out craveable, innovative menu items. Highlights included the debut of new shakes, a focus on group snacking, and actions around our hook and build strategy, which is working. We continue to see upsell and higher average check beyond just price, and close the year with sequential improvement in traffic trends. Innovation, upsell, and add-on items continue to be a focus for us to deliver steady top-line performance and store-level profitability. We refocused on breakfast in Q4, promoting our French toast sticks as both a standalone item and as part of our breakfast platters. This significantly boosted our breakfast day part and gives me confidence that by continuing to communicate and innovate, we can take breakfast share as customers return to their more typical workday routines. We also brought back our fan-favorite spicy chicken strips which contributed to average check through premium pricing and upsell opportunities. We are fortunate to have an extensive product heritage spanning many decades that we can leverage, which energizes our fan base and encourages frequency. You saw this in 2022 with French toast sticks, popcorn chicken, and more recently, Monster Tacos and our Bonus Jack burgers. Expect this strategy to remain a part of our promotional calendars in 2023 and beyond. Of course, we are not only looking backward for product ideas, we have over 500 items in our innovation pipeline that we are developing, testing, and when ready, planning for future launches. I'd like to wrap this pillar by focusing further on our digital progress and efforts to optimize direct commerce channels while driving our customer loyalty and frequency. We are making considerable headway, highlighted by the recent launch of our newly designed ordering app, as well as web ordering, a first for the brand. We believe this platform will help us not only attract incremental e-commerce guests, but also help us create a more seamless personalized relationship with our loyal guests while optimizing our capability to retarget lapsed users. These platforms are simple and easy to use and allow our guests to save payment methods, favorite locations, orders, and earn loyalty points toward the simple redemption of free menu favorites. The ability to view and interact with our variety-filled menu makes digital a great fit for Jack, creating an ideal avenue for incremental upsell through hook and build. Digital sales grew over 32% in 2022, achieving over $400 million for the year, and now represents over 10% of our business. While the Jack Pack Rewards program, still in its infancy, continues to grow membership, particularly after we recently rolled the program out to our drive-thru and in-store guests in quarter three. With Jack and Del Taco Digital now representing over $500 million in sales, we will continue to invest in our digital technology capability, plus benefit from the scale and resources of two brands, and ultimately enable us to move faster and use more data effectively to drive sales at both brands. Shifting to our second pillar, driving operational excellence, We continue to stay focused on three core areas, building the capability of our people, simplifying the guest and team member journey, and protecting full margins within our restaurants. Our staffing initiatives have proved highly effective at company-owned restaurants, which are now at pre-COVID staffing and operating levels and have been a key driver of our top-line results. We also continue to work daily with franchisees to implement these same best practices And as a system, we are making great progress. The new training platform we rolled out a year ago has proven to result in improved operations. Our manager and team member training certifications are at record levels, easily surpassing the goals we laid out at the beginning of the year. This is translating directly to the guest experience. Our service alerts are lower than they've been in over five years. And for the first time in several quarters, we saw year-over-year improvement in speed of service sequentially improving by eight seconds versus Q3. We believe this service level improvement correlated directly to our top line results, with plenty of continued upside across our system. Lastly, we are using technology more than ever before to simplify the experience for both our guests and team members. We are testing initiatives that we believe will have a realistic and positive long-term impact on our business at the store level. We're seeing encouraging results from our fully up and running automated fryer station in partnership with Miso Robotics. And Del Taco is also testing automated voice AI ordering with an improved upsell rate. Opportunities like this have brought to life our need to invest in upgraded and updated point of sale and store-level technology platforms system-wide to ensure initiatives that can improve labor, service levels, or profitability can be achieved. And that's exactly what we are doing. And at another Southern California restaurant, we've installed food lockers for third-party delivery and takeout. We believe this will enhance speed and the guest experience related to digital orders, particularly at late night when our dining rooms are often closed. The operations team is doing a tremendous job making progress on opportunities to be more efficient at the restaurant level while providing a better guest experience. and we look forward to giving more updates throughout 2023. Our third pillar, growing restaurant profits, is predicated upon executing financial fundamentals to constantly improve our four-wall economic model, something we are highly focused on in today's inflationary environment. Restaurant-level EBITDA is and always will be a top focus for our management team. I am very pleased to see the progress being made by our margin task force, particularly collaboration between franchisees, company operators, and leadership. We have made progress on the more immediate opportunities that could help increase company margins by 200 basis points, which can easily translate into our franchise locations. The opportunities are derived from efficiencies in process, equipment, and technology. By the end of fiscal 2023, many of our financial fundamentals initiatives will take hold and will assist in reducing complexity and drive efficiencies against cost pressures. A few examples include standardized product builds, resulting in $2,900 in savings per restaurant and making it easier for our team members to execute. Cheese pumps, it results in $7,500 in savings per restaurant due to less intensive prep and reduced waste. Hydro rents, an example that results in $5,000 savings per restaurant due to reduced labor and waste. while also benefiting from significantly lower downtime of our shake machines. A three-in-one toaster, which will improve speed of service due to faster times. Plus, we have made a few specification changes that enhance product quality while reducing cost. These are just a few of the initiatives the team is working on to make our systems more efficient while improving restaurant-level profitability. Pricing. is obviously a key part of mitigating inflationary impacts. And we have leveraged our pricing power across key categories and core items effectively. We have created a pricing discipline internally that didn't exist in the past, where we use more sophisticated analytical tools, competitive benchmarking, and provide best practices to our franchisees. This discipline identifies pricing opportunities by store, channel, and market while also keeping value at the center. We have numerous margin-driving initiatives in our arsenal and have a commitment toward a discipline of finding innovative ways to improve restaurant-level margin in the long term. And by creating an even more robust restaurant-level ROI, our franchisees will want to open more restaurants, which segues nicely to our fourth and final pillar, expanding Jack's reach. Beginning with our re-image program, which is garnering solid participation from our franchisees since the official launch this past summer. There are currently 366 re-image forms submitted by franchise owners, and 13 have been approved to begin construction of the program. Within these, we will be testing our brand new image, which we are calling Craved. Thus far, we are pleased to see traffic-led sales gains at re-image locations. The team has spent the past two years building a foundation for positive net unit growth, which we anticipate reaching in fiscal 2023. Development agreements and restaurant commitments are now beginning to translate into openings, of which we expect 25 to 30 in 2023, and this is only the beginning. As of fiscal year end 2022, we have 68 signed development agreements for a total of 267 restaurants. of which 22 have already opened, leaving 245 remaining for future development. Site approvals are higher in the past 18 months than were in the previous 30 months combined, and we approved nine sites in Q4 alone. Between franchise development and a solid new company-owned restaurant pipeline, we are now delivering results against this all-important unit growth strategy. We are thrilled to be entering two new markets in 2023, Salt Lake City and Louisville. Franchisees will open in Salt Lake City during the January, February timeframe and company owned restaurants will follow shortly thereafter. This is a wagon wheel territory with proximity to core markets and very high demand for the brand. I am encouraged by the blend of company and franchise resources hard at work to ensure a successful market opening. Later in the fiscal year, we will enter Louisville, a true white space territory as part of our new approach to new market openings, which will help us maximize field and support resources. Our intention in these new markets is to cultivate significant brand awareness from day one and make a positive, lasting first impression of the Jack experience. Brand acceptance early on sets the stage for further market penetration over time, and we look forward to providing updates along the way after we cut the ribbon on these restaurants. fiscal 2023 will be a pivotal year for this all-important pillar between our outlook on gross openings two very exciting new market entries and the expectation of positive net unit growth for full year 2023 it's fair to say the hard work preparing for growth is coming to fruition shifting gears to del taco which has now been operating in our new company for two full quarters and had another excellent quarter q4 again demonstrated highly relevant brand positioning and execution of the barbell menu strategy, highlighted by the category-leading $20-under-$2 value platform, a focus on our signature Del Taco, and the launch of Epic Tortoise, a premium sandwich platform with three flavors. We were also pleased to see an increased level of combo meal offerings, helping beverage sales, which we believe to be a key store-level profitability opportunity for the brand. These all help deliver quality and relative value to meet guest demand. On Unigrowth, The attractive new FreshFlex prototype is providing a catalyst for future system growth and helped drive 11 new development agreements with new franchisees committing to 79 units across 12 states. After Q4, on October 14th, we also signed a five-store agreement for Tampa, Florida. The first FreshFlex restaurant opened about a year ago in Orlando and is performing extremely well, with the second recently opening in Tampa. This will be the first Del Taco in the Tampa market, and we are obviously excited about this next step of expansion in Florida. Finally, the Del Y'all Rewards program just launched last year and continues to grow, giving Del Taco the ability to better target guests and drive average spend and frequency. We are pleased with the growth in awareness and members in year one, and we will provide more details around the program throughout 2023. Before turning the call to Tim, I'd like to touch briefly on the California Fast Act, as we've worked with our franchise, restaurant, and retail association partners in the fight against this onerous regulation. We are supportive of the current referendum effort and hope to see it come to realization shortly. Our intention is to remain competitive on wage rates and pay our people competitively, as we have for years. However, we hope to see this on the ballot in 2024. leading to revisions of the law to ease the pressure it puts on small business franchisees and the California restaurant industry, or see it get defeated altogether. We will keep you posted on these efforts, and we thank our California National Restaurant Association, as well as our Franchise and Retail Association partners for their continued efforts. Let me conclude by reiterating how pleased I am with our support center team members and franchisees. who navigated through macroeconomic pressures in 2022, controlled what they could, and helped prime us for top-line results and a unit growth outlook that is tremendously encouraging. I am confident that, even in the face of continued margin pressures, we can build on this momentum greatly in 2023 and improve upon it in 2024. This is an exciting time for us. and I'm looking forward to a transformative year for both Jack in the Box and Del Taco. Thank you again for joining the call today, and now we'll turn it over to Tim.