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 presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your first speaker for today, Mr. Chris Brandon, Vice President of Investor Relations for Jack in the Box. 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, Darin Harris; and Chief Financial Officer, Tim Mullany. Following their prepared remarks, we will be happy to take some questions from our covering sell-side analysts. Note that during both our discussion in 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 statement 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 8-K 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, Darin Harris.

Thank you, Chris, and good morning, everyone. Before I get started today, we operated 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 and 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 Jack 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 8. With our common geography, guest profiles and operating models, we are confident we have the people and vision to be a force as a multibrand 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 have 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 have been overwhelmed by the positive interaction, engagement and shared enthusiasm for opportunities to unlock value by being together. While we are not looking…

Thanks, Darin, and good morning, everyone. Before I begin my review of the quarter, I would like to note that my commentary will be primarily focused on the Jack in the Box segment due to the recent completion of the Del Taco acquisition, except where noted. Looking at our results for the quarter. On a company-wide basis, including both brands, system-wide sales were up 12.2%, driven primarily by the acquisition of Del Taco. Jack in the Box systemwide sales were up 10 basis points, while same-store sales declined 80 basis points in the quarter. The differential between Jack systemwide sales and same-store sales is due to a one-week shift affecting the calculation of same-store sales related to the 53rd week in 2021. This negatively impacted the same-store sales calculation by including more of the stimulus benefit when comparing to the prior year fiscal quarter. The decline in same-store sales was largely attributable to staffing challenges, resulting in lost operating hours, headwinds from the final weeks of Omicron and lapping stimulus benefits within the comparable period of the prior year. However, we were pleased to see improvements in both quality and speed of service, something that has steadily improved throughout the fiscal year. A meaningful number of our restaurants continue to operate at reduced operating hours during the quarter, many would close dining rooms. With that said, compared to the prior quarter, the impact from lost operating hours has notably reduced, and we expect this to be an opportunity during the back half of 2022. During the quarter, the burger and sides categories had the greatest contribution to sales, while the breakfast category faced pressure lapping successful prior year promotions. We had positive results across the majority of the burger category with Bacon Ultimate Cheeseburger and the Ultimate Cheeseburger as particular…

Thank you. [Operator Instructions] Our first question is from Brian Bittner with Oppenheimer. Your question please.

Thanks, good morning, And thank you for all the details today. I wanted to ask first about just your perception of this evolving consumer environment. You're Jack in the Box same-store sales guidance for the year does imply really stable trends for the second half, and this is despite some insights from others that the lower-end consumers potentially pulling back particularly in California. So can you just comment on the health of your core customer? And what is bolstering your confidence in the sales targets that you laid out today?

Yeah. Thanks, Brian, for the question. And as we think about what we've been executing against our Crave strategy with our upsells and add-ons, we have confidence that, that is working holistically. We've seen with digital growth, online ordering, we continue to see the higher income consumers purchase more frequently and add-on as we've expected. We didn't see kind of the transition back to pre-pandemic. We also believe that what we're doing with staffing is working. And if we in the back half of the year, enabling cascade to our franchisees, we can continue to improve the back half of the year as we had weaker comps to roll over than we did in this quarter. And so we also know that what we've seen in our open dining rooms that when we open dining rooms, they're performing better, so we have opportunity to open dining rooms. And so we think we have a lot of levers to pull to continue to grow same-store sales. We anticipated this quarter to be lighter because of the heavy comps last year, but also with what occurred during Omicron. That was the only thing that was unanticipated. And then we also - we knew going into the situation with stimulus that, that would be a tough rollover. So that was not a surprise. I think the surprise was we all still had Omicron in this quarter. As far as to your consumer, definitely, I think the industry as a whole in the category, QSR has seen the lower income consumer be a little bit less frequent to our business. And so what we're doing is making sure that we have value items that can still attract that consumer and keep them coming back to Jack in the Box. And what we've seen is we've been able to hold on to the consumer. What we haven't seen the frequency increase of that lower income consumer.

Thank you for all those thoughts. And just my follow-up, more strategic question as it relates to a potential refranchising strategy, can you help us understand maybe what type of franchise mix you're potentially targeting for the pro forma enterprise? Is it similar to what Jack in the Box was before the acquisition? And I know it's really early, but any way you're thinking about proceeds and EBITDA dilution from a refranchising strategy? Thanks.

Yeah. We have - yes, part of our thesis when we purchased Del Taco was to implement a refranchising strategy. And we have internally set a target for where we think we become asset light. We're not prepared to provide that guidance today. But what I would say is that we think there's tremendous opportunity to refranchise Del Taco. We're prepared. We've identified markets and how we would cut it up with development opportunities and we've been working with a third party that will help us launch into this refranchising initiative. So we'll provide more details to come. But we think this is a really exciting opportunity for not only Del Taco, but for Jack in the Box to transition to an asset-light model to enable us to continue to focus on growth as a result of refranchising. And as we said earlier, part of the thought was we were going to access Jack in the Box franchisees in some of our existing markets. They've shown a tremendous amount of interest, but we've also seen outside of Jack in the Box interest in refranchising.

Great. Thank you.

You want to take the question about earnings....

Question is from Brian Mullan with Deutsche Bank. Your line is open.

Hey, thank you. My question is on the current operating environment. As it pertains to development, does this environment present challenges in terms of getting new agreements signed? Or does it make it such that agreements have already been signed that those franchisees want to pause or slow down a bit. I'm just trying to get a sense if the expense inflation, if that has any kind of read through to development in any way?

Yeah. I mean, naturally, I think that's the - we would all surmise that, that is a possibility. The positive here is we've had a lot of our existing franchisees that we focused on signing development agreements with. And so we have 54 development agreements for 218 restaurants. And those franchisees have shown a commitment. We've got more sites in process and in our pipeline than we've had since this management team has joined. And so we believe we will be able to continue to get to that pace of 4% as we go forward. The bigger challenge is really just as it relates to some of the access to equipment as we go forward. But most of our franchisees are committed to growth, and we'll continue to access new franchisees.

Thank you. And then just as a follow-up to kind of bringing back the capital allocation, there was a mention resumed share repurchase potentially during the back half of this year. Just looking for clarification, does that - is that dependent on completing either refranchising or sale leasebacks? Or do you view those decisions independently at this point? Just any color on that? And any leverage guideposts you'll be using as you move forward would be helpful to understand.

Yeah. So we view those as two independent initiatives. So our resumption of share repurchase in the back half of the year is really through organic free cash flow and cash on hand as we embark on refranchising and garnering proceeds from that initiative as well as the sale-leaseback process.

Thank you.

Thank you. Next, we have the line of Andrew Charles with Cowen. Your question please.

Great. Can you clarify how much pricing did both the company and the system run versus the industry at 7%? And just looking forward, what are you monitoring within your data to determine if more pricing is needed while recognizing they need to emphasize value given the evolving consumer that's rapidly evolving this backdrop?

Yeah. So from a system point of view, we are negative 80 basis points. And then on the company side, for same-store sales, we were positive 1.7%. We think that's reflective of the fact that we were much quicker and more deliberate in taking pricing at the company side. We took 8.2% in company stores, which really drove that attractive positive same-store sales in our portfolio of company units. As you look at their performance and how that breaks down, we were slightly negative on transactions, negative 2%, which is actually a positive trend from that perspective. And our average check actually grew 3.7%. So in addition to price, our product mix on the company side was relatively flat, down just 90 basis points. There were some movements across categories there with our breakfast daypart units per transactions was slightly negative as well as - on the daypart side, our lunch saw some slight losses in Uniper's [ph] transactions. But overall, when you look at product shifting going around, we saw some trade out of our Jack Spicy Chicken into our new clock sandwich option. So it was a fairly lateral move in the consumer behavior aspect there. And then similarly, with our Buttery Jack, we saw that going to our jumbo jet platform as well. So really sort of lateral moves on the product shifting side.

We've also seen that on the franchise side, they took less price quarter-over-quarter compared to the company. Company is outperforming at this point in time. We do anticipate continuing to take price throughout the year. And we've done a lot of studies around each menu item across our system, and we realized where we have items that could be resistant to price changes. And we also understand specifically the value items. And then we also know where we have opportunity within price across our core. And so we think there's plenty of opportunity for us in pricing power based upon the analysis and data that we've generated for our pricing strategy through the back half of the year.

And ultimately, we're guiding to high single digits for price throughout the rest of the year.

Thank you. Next, we have Alex Slagle [Jefferies] Your line is open.

Hey, thanks. Good morning, Just first, I wanted to follow up on some of the previous questions on the development agreements, whether your current negotiations are now starting to contemplate tying in the taco refranchising opportunities into the agreements already? Or if this is something to expect further down the road?

Yeah, that's something to expect further down the road. We have not tied those together at this point. They will absolutely be tied to refranchising transactions, but we've also had others within our system who are just interested in developing. They'll talk on their own.

Thank you. Next, we have John Glass lass with Morgan Stanley. Your line is open.

Hi, guys. This is Brian on for John. Maybe just a follow-up on the one thing you just mentioned where franchisees took a less pricing versus the company. Was there a reason for that? Like are they seeing something different? Or do you think that they'll eventually catch up to you? I'm just curious about that dynamic.

Yeah. They took more price in Q1. So I think they were just slower to take price in Q2, which they started to do in period seven as we saw the spike in commodities in the back half of the quarter.

Thank you. Next, we have Jared Garber with Goldman Sachs. Your line is open.

Hi. Thanks for taking the question. I wanted to switch to the Del Taco synergies now that the business has fully been sort of integrated and maybe not integrated, but at least incorporated into your financials. And I think at the time of the announcement, you had highlighted $15 million in synergies. And I think a time frame on that likely in 2023. And I think more recently, we've heard some commentary that there may be upside to that synergy calc. So I just wanted to get a sense of how we should be thinking about the synergies and the time line of achieving them? And then maybe where exactly your thinking may come from? Is it more on the G&A side? I also heard about some potential margin savings on the restaurant side, given the larger store base that you're now purchasing for. So just any incremental color there would be great. Thanks.

Thanks, Jerry. Great question. So we recently wrapped up an engagement with a large national management consulting firm to help us with post-merger integration. We've concluded that a very successful phase of that. We've identified the synergy target levers. They've been quantified. They've been assigned inside business unit owners and leaders to execute upon that. And we've embarked on achieving those milestones. Obviously, it's going to take some time for us to fully realize that. As you suggested, we feel incredibly confident in the target that we set out for realizing those synergies of the $15 million. And of course, we're aspirational to exceed that as well. We think that will come in various buckets. As you mentioned, there's obviously some G&A synergies, but also supply chain procurement and technology synergies as well that are meaningful. So overall, there's nothing but optimism and brightness for what we've seen and uncovered and the work that we've done since the acquisition, and we're excited to get moving and achieve on those.

Thank you. Next, we have Eric Gonzalez with KeyBanc. Your line is open.

Hey, thanks. My question is similar to the last one. Perhaps you can help us think about the contribution from Del Taco in this year's guidance. I think the original guidance when you first made the acquisition was for a mid-single digit EPS accretion and maybe a more meaningful accretion in 2023. So how should we think about that today in light of your current EPS range and what we're seeing in terms of inflation? And then I have a follow-up.

Sure. Yes, Eric. So we're guiding on Del Taco on top line same-store sales this quarter at the moment and leaving it there. So we're guiding positive 3% to positive 4% same-store sales guidance for Del Taco stand-alone with a 2-year stack of positive 10.5% to positive 11.5%. So they performed incredibly well, as you see in the results for the second quarter. They had a positive 2.5% same-store sales Q2. And for company stores in the Del Taco portfolio, which, as you'll recall, is about half of their portfolio. It's a positive 1.6%. So with the performance that we saw in the second quarter, in line with our annualized guidance, we think that Del Taco a very strong start as a bottom line contributor.

Thank you. Next, we have Jeffrey Bernstein with Barclays. Your question please.

Thank you very much. Two related questions on development and remodels. On the development side, it does seem like there was a modest uptick in terms of the agreements and the openings expected. I'm just wondering whether you expect that to accelerate in the second half or maybe you've kind of run its course with the existing franchisees and now you're considering opening up to new. And the other question was just on the remodels. I know you mentioned you have skin in the game and putting capital to work. I'm just wondering if there's any color you can share in terms of potential corporate contribution. Obviously, if you can get that 25% sales lift that would seem like a no-brainer. So just trying to get order of magnitude on that? Thank you.

Yeah. Great question. And as it relates to the development agreements, we still have - we've signed about 30% of our existing Jack in the Box franchisees a little over 30%. We still think there's plenty of opportunity within our existing franchisees that have expressed interest that we're still working through territories and aligning on where those opportunities exist. So our estimation is that about 50% of our system will assign development agreements by this time next year. So we do believe within the existing base of franchisees at Jack in the Box, they're still interested in expressed interest in growing with us. So we continue to see that progress. And then the second part related to reimages. We've seen a really nice progress from our existing franchise base and showing interest. We launched this in quarter two and shown that we have an incentive for that growth through providing some capital incentive. And we've already seen 136 approvals for franchisees that have shown interest in actually moving forward with the program. So there's a ton of interest. We like what we've accomplished so far in some of our reimages, and we'll continue to update regularly on the progress of we're doing. The last thing I would say is we've committed to 12 company-owned remodels that are in process with some of the new designs and we see most of those opening or reopening in the early part of '23.

Thank you. Next, we have Chris O'Cull with Stifel. Your line is open.

Yes. I had two questions. One, can you provide a bit more color on your level of confidence around your commodity outlook? And then, Tim, I was hoping you could quantify what you expect in terms of the magnitude of any sale-leaseback proceeds and maybe elaborate on what are some of the restrictions you have in using those proceeds under the securitization.

Sure. Yes. So our commodity guidance was 12% to 14% for the year. So you've obviously seen that go up fairly meaningfully, as we mentioned in the second quarter for company commodity increase, it was a 16.4% inflation. So that was up versus 10.5% in the first quarter. So that was a meaningful jump. So our anticipation is that we see that pressure continuing to some degree throughout the rest of the year. Relative to sale leasebacks, there's really two components to this strategy, right? So you have sort of the core traditional sale leaseback where we have our company-owned assets that we can look to monetize and take advantage of some arbitrage valuation opportunities. But then the second piece of that is, obviously, we're a wholly securitized business here, and we have to be nimble and nuanced in how we are able to utilize those proceeds. So that's something we have advisers currently working on with us. But this is - as we mentioned in our early commentary, this is a significant opportunity for us. We're acutely aware of the benefits of returning value to our shareholders and what that does for us and our investors. So that's something again that this is a meaningfully sized program for the company, and we are keeping it as a high priority for us over the next few quarters here.

Thank you. Next, we have Chris Carril [ph] with RBC Capital Markets. Your line is open.

Thanks, good morning. David, you mentioned a task force to identify potential short-term margin opportunities. And I think you noted 200 basis points of potential expansion opportunities. So can you talk about maybe the timing around how soon some of these strategies can be implemented?

Yes, we want it yesterday, to be honest with you. So we are aggressively pushing with our existing franchisees to realize some of those within the next quarter. I don't think we can get all of the 200 basis points just within the next quarter, but we would hope by three quarters from today, we would have realized a substantial portion of these. And it comes through a combination of some things we've already been working on with equipment, with technology and with process. And so some of the examples I gave from - with the equipment on our cheese pumps and other things like our automation, we think there's 200 basis points of margin improvement. Our shake machine, we've already rolled that out. So we think that could be captured pretty quickly.

Thank you. Next, we have Dennis Geiger with UBS. Your line is open,

Thank you. Could you talk a bit more about how the brand is positioned on value currently, Daren, perhaps many relative to historical. You've done a solid job with value and promo bundles in recent years. But I'm just curious how you sort of view value promotional activity as a key lever, particularly in a more challenged consumer spending environment and how much you can kind of push on those from where you're at now? Thank you.

Yeah. We've done a lot of menu innovation, and we're really excited about what's coming in our pipeline into three - in the meantime, we will continue to leverage value. And you saw in this quarter in the back half of the quarter, we shifted to our patty melt as the primary versus the [indiscernible] and we use that in tandem to what we've done all along in our creative strategy, which was what we call hook and build. We want an aggressive price point for the promotion and then build that ticket as guests see the rest of the menu or come through the drive-through. And we've consistently executed on that over the last 1.5 years. And so a lot of our innovation is built around those add-on platforms, those upsell items, and we'll continue to do that. So the value comes with the initial offer and then the build comes through giving guests what they want.

Thank you. Next, we have Drew North [ph] with Baird. Your line is open.

Thanks for taking the question. I was hoping you could provide some color on the franchisees run rate on profitability today given the current inflationary environment? And then I have one follow-up question on development.

Yes. So the franchisees have continued to have consistently strong average unit volumes. I mean, obviously, they are experiencing the same pressures that our company stores are as well as our peer set across the industry are related to inflation on both commodity and wage. And then thirdly, the challenge that they're facing as well is ensuring that they can get labor into their stores. So the optimism here is that the company portfolio is sort of the leader in demonstrating success with getting that in, in the second quarter. So we cut our impact of lost labor hours from Q1 to Q2, almost by half in the company store portfolio. The franchisees have seen that. Our ops team is working with them to implement similar programs. So that should assist them with their margin improvements in the next quarter as well in the quarter that we're currently in, in Q3. So outside of that, I would say, again, just to summarize, strong, consistent top line average unit volumes, initiatives underway to help alleviate inflationary pressures and return back to the attractive margins that the ad in the prior fiscal year.

Yes. I would add to that is we've aggressively been working with our franchise partners. And as I mentioned, this task force, so that we're watching their margins. We're working together on improvement - we do that through a process that we call our balanced score card protocol consultation we're out in the field. So we're watching their numbers closely. We're working with them. I would say, based upon the feedback we're getting from franchisees, they have not seen as much degradation in margin because of their closeness to the stores and they're in there managing the numbers a lot more aggressively. They also were less aggressive on wage than what we were. So we think that's something where as they staff accordingly, revenue will grow and they'll continue to drop more dollars to the bottom line in the back half of the year.

Thank you. Next, we have Nick Setyan [ph] with Wide Securities. Your line is open.

Thank you. Just kind of beyond the near term, how are you thinking about company-owned margins? I mean is going back to 27% company online on Jack and [indiscernible] over, say, the next year or 2 years? Is it in the low 20s, better target that you can maybe talk about and some strategies to get there?

Well, I think we've talked about a lot of the strategy that we've been working on to get there, but I'll mention a few more. And that is as we think about growing restaurant profits, the financial fundamentals plan that we have, we think 200 basis points is the first start, we don't want to stop there. We're also working on things like build simplification that improve speed -- so not necessarily cutting a lot of items from the menu but a lot of ways in which they're built that we know that's a bottleneck in our business model that we can improve and enhance and put more throughput through. So between that and pricing, we think we have the levers to continue to improve margin and get closer to where we've been performing historically. As long as commodity -- the commodity markets right now that are so volatile, work with us in conjunction, which we don't control. But as a whole, we think we have a pretty good outlook at the moment in our annual guidance.

And just to add, our evolving markets have been a significant piece of that as well. So that was about 300 basis points of impact. So we came in at a 15% restaurant level margin in the second quarter. Excluding those turnaround markets, it would have been an 18.3%. So as Darren mentioned, wage inflation, commodity inflation, given where they are at these sort of unprecedented highs in combination with these evolving markets are really the main delta that would get us back to our historical rates.

Thank you. Next, we have Gregory Francfort with Guggenheim. Your line is open.

Thanks for the question. Maybe the way to frame, I think the last question is how many stores we are running EBITDA or EBITDAR negative however you look at it? And the stock has been under a lot of pressure, obviously, from the highs. I think it's down 43%. Darren, I'm curious what do you think is maybe misunderstood about the story by the investment community and kind of how you can go about addressing some of that. Thanks.

So Tim will take the second component of that, and I'll take the first.

Yes. I mean, as we look at - obviously, from an investor point of view, the stock is attractively priced right now. We're excited to capitalize on that opportunity with this unlocking proceeds, as we mentioned, with sale leasebacks. We think there's an arbitrage opportunity for sure. as well as utilizing proceeds from the Del Taco side refranchising initiative. Again, at these share prices, we think that this is a great opportunity for us to return that degree of capital back to shareholders and have an impact. As far as what may be missing there, I think it's - we've been very vocal about our growth story. We're well on our way of developing a pipeline at the fastest rate in a decade. We're on track to achieving our 4% net annual new unit growth by 2025. So that at some point should start to resonate, we believe, with our investors. And we're also going to, as we mentioned, continue returning capital back to those shareholders. So we think with those two things, in addition to the fact that we're operating this business, we feel very efficiently we think that, that will become reflected properly in the share price fairly shortly.

Yeah. I mean I'll add to what Tim said. I think the unlock that we've all talked about is growth. In the meantime, there's noise going on in the marketplace related to commodity inflation related to all the things happening around us that are impacting the full story. I fully believe the things we're doing to execute on our long-term strategy around building brand loyalty, the things we're doing around operations, with our training programs, the focus we have on growing profits for franchisees and this expansion initiative are all the right levers over the long term to drive our business. And we still have plenty of upside just on same-store sales through pricing and through what we're doing with our menu and innovation strategy and then digital. So we think the long term, we're in good shape for performing in the marketplace. I think the true unlock, as we all know, is growth.

Thank you. Next, we have Jake Bartlett with Truist Securities. Your question please

Great. My first is just, I guess, building on that last question. I think there's probably some also some concern about potential weakness of the consumer, specifically at the low end and investors can look back to the -- great Recession and see that the JAK had some of the most underperformed some of the most within QSR. So my question is how do you view your value platform? And how do you view it now versus then? Should investors have more confidence that you will not lose as much share as you did back then just because of any changes to the value platform? And then I had a follow-up.

Yes. I mean I think some of that was part of a change in our direction within our marketing strategy compared to where we were back when that occurred in the last recession. With our digital programs, with what we've done with our add-on menus and what we have coming in innovation, we feel very comfortable to compete on the value level. And we think with what we've been doing with currently maintaining the value guest that we feel very comfortable with some of the things that we have coming from an innovation standpoint that we can meet the needs going forward...

Thank you. And this concludes the Q&A session. I will now hand the call over to Darin Harris, CEO, for closing remarks.

Thank you, everyone, and we look forward to speaking next in August for our Q3 results.

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect. Have a great day.