Jack In The Box Inc.

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jack's second quarter 2023 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 during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Chris Brandon, Vice President of Investor Relations. You may begin the conference.

Thanks, Operator, and good morning, everyone. We appreciate you joining today's conference call, highlighting results from our second quarter 2023. With me today are Chief Executive Officer Darren Harris and our Interim Chief Financial Officer, Don Hooper. 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. I'd like to provide our conference and event schedule for the next few weeks. We will be attending the Collin Future of the Consumer Conference on Tuesday, June 6th, the Baird Global Consumer Tech and Services Conference on Wednesday, June 7th, and the RBC Capital Markets Consumer Conference on Thursday, June 8th. all in person and all taking place in New York City. The week following, we will attend the Oppenheimer Conference on Wednesday, June 14th, which is being held virtually. We look forward to participating and seeing many of you there. Lastly, we'd like to apologize in advance for any background noise. Our headquarters are five miles from Miramar. and the Naval Base decided to go ahead with their training exercises this morning, regardless of the jack-in-the-box earnings call. While fun to watch out the window, it is not ideal for a conference call, so please forgive us for any aviation or top gun sounding noises throughout our remarks. And with that, I would like to turn the call over to our Chief Executive Officer, Darren Harris.

Thanks, Chris. We are very pleased to report strong quarter two performance. as we are seeing momentum from our strategy execution and the results prove it out. Our performance can be best characterized by a sharp increase in same-store sales, improvements in restaurant and franchise-level margin, growth in adjusted EBITDA and operating EPS, combined with continued confidence in reaching positive net unit growth for the year. This progress, on top of our results from the first quarter, have given us the confidence to raise annual guidance across key metrics. In doing so, we want to thank our franchisees, dedicated center staff, and our restaurant-level team members who are working together to successfully execute our strategy and put wins on the scoreboard. They are a talented team that makes it possible to achieve our objective of creating value for our shareholders. I will keep utilizing our four strategic pillars as a guide in discussing the progress and outcomes of many actions supporting our strategy, before turning it over to Don to review our financial results and updated guidance in greater detail. We start with building brand loyalty and our efforts to grow sales and accelerate transactions through our creative marketing strategy and positioning. We exhibited strong calendar execution in quarter two by balancing value with premium offerings, beginning the quarter focused on the debut of the $5 Jack Pack combo. This new value platform can be revisited throughout the year and was particularly effective in driving incremental transactions. In January, we launched a new beverage layer through our partnership with Red Bull, reviewing our premium Red Bull Infusion ice beverages. These products expanded our variety and drove incremental sales in our beverage category by providing customers with a new use occasion. We also enhanced our core by rolling out a new and improved grilled chicken sandwich for guests looking for a great-tasting, healthier option to start off the year. In early March, we featured the return of classic and spicy popcorn chicken, a fan favorite that has proved itself as a strong performance driver for the brand. We then celebrated a cultural moment with our distinctive St. Patrick's promotion, the Myth Mobile Shake, which was supported by a fun and edgy campaign featuring one of the sexiest men alive, Jack Fox. Oh, and of course, Ryan Reynolds. This one-of-a-kind activation created a unique partnership between the popular actor and his Myth Mobile investment, along with the Jack brand. We saw strong social engagement and positive brand sentiment. helping average tech growth, mobile and app sales, while setting a new benchmark for future shape promotions. Continuing to develop these unique brand partnerships is a priority, and is one more lever in making Jack even more crazed in 2023. Over the past two years, Brian Ostrom and team have optimized our marketing spend by focusing on reach over frequency, while using digital channels to keep an active dialogue with core users. When hand-in-hand with effective creative and the right offer, this adds a meaningful layer of sales performance. By investing in our MarTech stack, it has enabled us to become a more formidable digital competitor and assisted in driving same-store sales and brand loyalty. We have gone from 1% digital sales pre-COVID, and we are now approaching 12%. Last quarter, we rolled out a new app plus a new web ordering platform. which now allows guests to order when they want and from whichever device they choose, all while we get to capture important data on our guests. We're now sufficient to drive incremental upsell and add-ons to our order, while offering safe payment methods, favorite locations, previous orders, and the ability to easily earn and redeem loyalty points through jack-packed rewards. This has all led to higher average check, greater transactions, and a 30% increase in web and app sales during quarter two. Third-party delivery continues to perform well with room to grow, and we continue to focus on the operational initiatives that assist further in optimizing this channel. While we have only scratched the surface of our overall digital potential, we have clear next steps, including personalization, driving loyalty and frequency with our biggest fans, and that ability to retarget last users while growing our CRM and loyalty database. In fact, Jack Pack Rewards membership grew 45% during the second quarter, driven by our in-app promotions of the Mint Mobile Shake and our famous tacos. We are well equipped to realize this big opportunity and see realistic potential to do so by leveraging our scale and resources to capture and better utilize data to yield incremental sales for both brands. Lastly, on this pillar, I will touch on the early progress of our re-image program, which is garnering solid interest from our franchisees. On the franchise side, there are currently 405 re-image forms that have been submitted and already 71 of these in the design and programming stage. We expect about five industrial image remodels to be completed by the end of the fiscal year. For company-owned, we have approved 28 restaurants set to be updated in the new crave to image with 10 restaurants in the design and permitting phase, with five of these to be completed by the end of the fiscal year. We are targeting and expecting sales lifts at these restaurants, and we'll update you on this regularly as the program continues to gain meaningful traction going forward. Let's move on to our second pillar, driving operational excellence and the three key items within, building our people capability through training and staffing, elevating the execution of standards across the system, and simplifying operations. In terms of executing standards, we continue to see significant progress overall. We began by focusing on training, resulting in lower turnover and better staffing, which has directly driven improvements related to speed, alerts, and guest satisfaction. Our drive-thrus were 11 seconds faster year-over-year in the second quarter, even as we rolled over improvements the previous year. After implementing our guest experience standards a year ago, we have seen over a 20% improvement in our standards execution from third-party assessments. All in all, due to these many efforts, we are operating at higher levels and giving our guests a better experience. I'd like to touch on hours of operation and the reopening of dining rooms, which are both having a positive impact on transactions. We have been particularly focused on owning late night by increasing hours, specifically on the franchise side, and did so again compared to Q1. While we are still about 30 minutes behind average hours open versus 2019, our franchisees are taking action and understand that late night represents a day part where we believe we can take share. In terms of dining room reopenings, we have now increased the number of dining rooms open greater than five hours a day to 98% system-wide. On average, dining rooms across the system were open just over 13 hours a day, an improvement from last quarter. We continue to share the playbook and work with our franchisees and are pleased with this progress. Lastly, touching on our point-of-sale selection process, we have narrowed the field to two POS providers and plan to finalize our decision during Q3. Restaurant implementation, funded by franchisees, will begin in fiscal year 2024, and we anticipate being near system completion by the end of fiscal year 2025. The new POS will allow us to drive costs out of the system and improve the guest experience with advanced tools like automation and AI. But we won't wait for the POS rollout to innovate on other automation initiatives. In fact, we will be expanding our current MECO Robotics Automatic Friar Test to a second location. And Del Taco is successfully testing voice ordering with Presto, which is providing us insight that could benefit both brands. Success across these operational focus areas should lead to growing restaurant profits, which is our third strategic pillar. We see profitability going in the right direction after a tough inflationary environment in 2022. We're starting to see progress on the 200 basis point restaurant level margin opportunity. We identified potential savings of about $55,000 per restaurant on an annualized basis. As of today, 50% of the system has installed both cheese pumps and hydro-rent equipment. These two initiatives represent almost 30% of the annualized savings possible. We will continue to roll out other equipment, process, and technology programs that will assist us in achieving the 200 basis point goal and maintain the momentum displayed within our While inflation is showing signs of easing, we continue to be strategic with each pricing action, using a more data-driven and surgical approach. With the assistance of machine learning and more sophisticated analytical tools, we are identifying pricing opportunities by store, channel, and market, while enabling us to benchmark competitively. We are regularly sharing these best practices with franchisees so that they can make more educated pricing decisions. The profitability initiatives we just mentioned, along with synergy savings and focus on maximizing store-level ROI, further encourages franchisees to build and open new restaurants, which brings us to our fourth and all-important final pillar, expanding our reach. Our growth plan has led to more development commitments and site approvals in the last year alone, than we had in the previous three years. We are slated to have a very active back half the year and remain positive in our ability to meet our annual guidance for gross openings. We now have 61 restaurants currently in the permitting design or construction phases, which is the most we have seen in at least a decade. Naturally, we will still experience some closures, but we remain confident in our ability to reach net positive unit growth in 2023 for the first time in four years. Next month, we will open the first Jack restaurants in Salt Lake City with the new Crave image. We plan to open three stores in 2023 and at least seven in 2024, both company and franchise locations. With this being a combined market, all resources and efforts are activated in hopes of making this our strongest new market opening in history. Later in the summer, we will open restaurants in Louisville, beginning with company restaurants. And speaking of strong early performance, I'd like to provide the latest on our newest Jack drive-thru only prototype in Tulsa, Oklahoma. Through the end of Q2, this restaurant is still outperforming expectations, generating average weekly sales of approximately $43,000. We're also seeing about 15% of sales coming through digital, aided by food lockers for speed and convenience. The restaurant has been open for about nine months. has all of our latest equipment, and we have seen a much higher level of sustained outperformance in terms of AUV and sales. Particularly compared to the honeymoon curve we typically see in newly opened locations. This is very encouraging as our franchisees look to expand with this lower-cost prototype. Since launching our Jack development program in mid-2021, we have signed a total of 76 new agreements for a total of 335 restaurants. with 69 commitments in fiscal 2023. Highlights within these commitments include our first new Jack franchisees in over a decade, brand-new market commitments including Florida and Arkansas, and incremental development agreements via Del Taco re-franchising, including commitments from a Del Taco franchisee to build both Jack and Del Taco restaurants for the first time in new markets in Montana and Wyoming. I would also like to make special mention of our branches agreement for 22 restaurants in Mexico. It is a monumental step for the brand to be returning after 30 years. And we know that many citizens of Mexico are familiar with our brand due to the proximity to many of our US restaurants. We're excited to work with this experienced multi-brand franchise operator in this new territory centered on the border states of Mexico. We believe he and his family have the right operations and development experience, personal values and culture of kids, and an established distribution network to be successful right from the start. To be clear, we are not pursuing an aggressive international growth strategy at this time. We chose to enter the Mexico border states due to the strategic partner we identified, their distribution capability, the brand affinity due to adjacent jack-in-the-box markets, and the ease to which we can assist with nearby restaurant and franchise support. Turning to Del Taco, which continues to be a value driving addition to our company that I'm excited about. The brand is well positioned to meet varied customer needs with a strong value proposition and barbell mini strategy. Despite the elevated market pricing model to protect margins hindered from inflation. We started the quarter with a promotional focus on the $20 under $2 menu platform and an epic fresh guacamole burrito. $20 under $2 continues to be well-received, mixing at approximately 16% during non-promotional periods and over 18% when on primary message. Promoting a premium epic burrito simultaneously was designed to enhance check and did so nicely by mixing at over 8%. We then shifted primary methods to premium crispy jumbo shrimp, with an added beer-battered fish focus during Lent. In the last week of Q2, we introduced $5 Dell's Deals, which added another value layer beyond $20 under $2. The Dell Yell Rewards Program launched about 18 months ago, and is currently up to 1.3 million members compared to 1.2 million members out of Q1. Throughout Q2, we also tested a variety of additional offers in our mobile app to drive incremental visits and frequency, where we have seen an uptick in app engagement and use. As membership continues to grow, Del Taco will also gain the ability to target guests to help drive average spend and reorder trends. Turning to operations, there is a continued focus on recruiting and the expansion of operating hours to help drive same-store sales. Thankfully, we are seeing labor availability increase in most of the branch's geographical footprint and have invested additional wages in order to increase staffing for late nights. We are getting closer to pre-COVID levels for operating hours and are now well above 2022 average hours per store. We have started the process of implementing the same operational focus as we have at Jack, including training and standards execution. This has led to an improvement-related restaurant-level turnover in Q2, which is actually the lowest it's been in over a year. Alerts per store are also showing early signs of being helped by these initiatives, with Q2 seeing the lowest number the brand has seen in well over a year. Since the Dell Development Program launched in 2021, Del Taco has signed 14 agreements for a total of 101 restaurants. Within these agreements, two restaurants have opened, leaving 99 remaining for future development. We opened three franchise restaurants in Q2, and there are currently 17 restaurants in the permitting, design, or construction phases. This includes our first drive-thru-only Fresh Flex restaurant, which opens next month in New Mexico. We are feeling optimistic about the opportunity to increase the development pipeline at Del Taco, while continuing the progress made at Jack. we are making progress on the three major benefits to shareholders of re-franchising Del Taco restaurants. First, getting closer to a company-wide asset-like model. Second, capturing incremental development agreements involving both existing and new franchisees, as well as existing and new markets for both brands. And third, accretion via share buybacks from re-franchising proceeds, evidenced by, again, raising our share repurchase output to at least $70 million for fiscal year 2023. We completed a 17-unit agreement subsequent to the second quarter and continue to see demand with several more agreements in process. But including the 32 restaurants completed year to date, we expect to re-franchise 65 to 85 restaurants in this fiscal year, all of which will contain at least a one-to-one ratio of restaurants purchased to restaurants developed. In fact, As part of the development agreements within the most recent transaction, both Jack and Del Taco will enter Montana and Wyoming for the first time in each brand's history. We will continue to update regularly on our continued progress. And finally, as we noted at ICR last January, our groundwork for synergies is in its early phases, but we have made steady progress in three areas of note thus far in 2023. Media buying consolidation. providing both brands with better rates and further reach, second, supply chain and integration, and third, the completion of the initial phase of headcount and shared service consolidation, resulting in $3.8 million of EBITDA benefits with an additional $2.3 million benefiting the full system, which is an ongoing process and assessment. Opportunities for the future include a company-wide approach to technology and digital scale benefits, as well as continued supply chain and procurement projects. To conclude, we will remain focused on delivering results from the significant progress made executing our strategy to create value. Whether it be digital and the steps we have made to become a formidable player in this competitive area, unit economics and restaurant-level profitability moving in the right direction, and the beginning stages of real progress against our 200 basis points RLM-projected Staffing initiatives, when coupled with our top-line fundamentals, is driving sales, traffic, and faster service levels. Refranchising and synergies, both of which are helping make our new company more efficient while driving shareholder value. And lastly, unit growth performance that is going beyond development agreements and starting to reflect in openings. Thank you again for your time today, and I will now turn the call over to Don.