Good morning. And welcome to the Q3 2022 Jack in the Box Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Chris Brandon, Vice President, Investor Relation, you may begin.

Thanks operator, and good morning, everyone. We appreciate you joining today's conference call highlighting our third 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 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 Web site 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 Web site. And with that, I would like to turn the call over to our Chief Executive Officer, Darin Harris.

Thank you, Chris and good morning, everyone. I want to start by recognizing the hard work of our operators, team members and franchisees. Despite a tough environment, our strategy is continuing to take hold and prepare us for growth. We look forward to closing out 2022 with the energy and passion that helps make both the Jack and Dell Taco brand so special. Now let's begin with our Q3 performance. Our first full quarter with Del Taco as part of the Jack family and a solid quarter for top line results across the entire company. Both brands delivered excellent two year same store sales performance, rolling over strong comps, record setting AUVs and the remaining lift provided by stimulus from a year ago. With the steady improvement of operating hours, open dining rooms and continued to focus on marketing and product innovation, we saw a ramp up of sales performance exiting Q3, which gives us a favorable sales trajectory heading into the fourth quarter. Of course, we faced challenges too, including the hefty inflation headwinds, battling for share of customers dining out and the risk of recession. But since these macro issues affect the entire industry what truly matters is how we are addressing these headwinds, which I will review as part of our strategic four pillars and our people foundation. Turning to flow through in margins. Inflation, staffing and operating hours continued operating hours continue to create pressure on our restaurant level performance. However, increased pricing, improved training and focused restaurant level execution is helping franchisees deliver a better guest experience and assisting with financial fundamentals. All in all, I am encouraged that the progress against our strategy over the last two years is being reflected in our sales performance, and that momentum is continuing. With that, let's review…

Thanks, Darin, and good morning, everyone. My quarterly review will begin with financial results for both of our brands before closing with remarks on guidance and capital allocation. Note that Q3 marked the first full quarter of Del Taco within our consolidated results. Starting with Jack in the Box, system wide sales fell 1.4% while same store sales declined 0.6% in the quarter, consisting of positive company wide same store sales up 3.5% and a franchise same store sales decline of 1%. When removing the impact of our four evolving markets, our company same store sales would have been approximately 200 basis points higher. During the quarter, system wide sales declined relative to same store sales due to a one week shift affecting the calculation of same store sales related to the 53rd week in 2021. This one week shift had a more positive impact on same store sales due to lapping less of the stimulus benefit in its calculation when compared to the fiscal quarter comparison. The decline in system same store sales was largely attributable to fewer transactions and reduced operating attributable to fewer transactions and reduced operating attributable to fewer transactions and reduced operating compared to last year. These were mostly offset by price increases. The Jack in the Box brand continue to experience staffing challenges that resulted in lost operating hours compared to the prior year period. Although we showed consistent improvement within the company portfolio, helping mitigate its impact on third quarter sales performance. Furthermore, we experienced improvements in speed of service trends, which Darin touched on earlier as the quarter progressed. And for the first time in several quarters, we were pleased to not experience any meaningful product supply disruptions or shortages during Q3. The quarter began with negative same store sales trends as…

[Operator Instructions] Your first question comes from Brian Bittner from Oppenheimer & Company.

Just a clarification and then a question. Just a clarification -- just overall on the same page, the EPS guidance and the brand level same store sales guidance that was given last quarter, that simply remains unchanged and intact, correct?

Yes, that's correct, Brian.

And just, Darin, the sales trends for the third quarter, they outperformed our expectations. They accelerated on a three year basis. And on this call, you're saying you're seeing a continued ramp-up in sales exiting 3Q. So I just think generally speaking, investors are somewhat worried about Jack's exposure to the lower end consumer. So based on these updated trends, is it safe to say you're not seeing a degradation in consumer spending patterns. And there's just a lot of mixed messages out there. So would love your thoughts there. And what just makes you incrementally confident that these two brands are better positioned in an environment where your core customer is feeling more pressure than normal.

Yes, we're really confident with both brands and what we're seeing with our strategy working. We've been very careful in the pricing process that we've taken and how we've promoted our items, and as we look forward, we'll continue in our hook and build strategy that continues to work. I think what gives me the most confidence beyond the execution of our strategy and our innovation strategy is that we still have upside from a standpoint of improving our staffing, continuing to open dining rooms. And then what I'm seeing across both brands is this really strong execution at the restaurant level, that gives me a lot of confidence that the marketing approach that we're taking is resonating, the execution is happening. And then the last piece, both brands continue to build on is digital. And so Jack, as an example, we're rolling out e-commerce and now we're starting to take advantage of the database we're building on loyalty to continue to grow same store sales. So we feel good about executing on our current strategy, but also some of the other new things we have in the works. As far as the income -- the different income levels of the consumer, I think the whole industry is facing headwinds as it relates to the lower income consumer. What's interesting about our approach is as we went into our strategy, we did some segmentation work and really understood that the higher income consumer is one that we could reach at Jack, and we did a good job of communicating our message to them and growing sales there. Where we saw little bit of the weakness just like the industry is on the lower end consumer below 50,000. But what's interesting about that is as you go further down on that decile of even further income levels, we actually grew during the quarter at the lowest income level. So we definitely see the opportunity in the middle band of our income deciles, and we'll continue to find ways to drive value and how that value equates to the consumer and can mean a lot of different things. And I'll say one more thing about value. The way we think about it is our pricing team has done a lot of work looking at where we have opportunity or where there's sensitivity. We look at what is value. And value means a lot of things currently. Is it in the promo offer, is it in pricing, do we package it in combos, family packs, ala-carte, how are we communicating, is it through a different channel, whether it's digital app and dine-in. And then we also get a segment by guest or income level. So there's a lot of different ways for us to approach this and we've done a lot of work and research with pricing and understanding how do we get better at communicating to our consumer.

Your next question comes from Lauren Silberman from Credit Suisse.

Just a quick follow-up. Are you seeing any differences across regions as it relates to comp performance? And then my question is actually on value. How are you thinking about everyday value, balancing elevated costs, and sort of what's the franchisee appetite for value in a more challenging environment? Are you starting to see the industry more broadly get more aggressive on that front?

Let's start with the value question. We definitely are seeing the industry get more aggressive across promoting value. And as I mentioned in the last statement, value is going to mean different things for different income levels and product types and channels. And so that's where we see the opportunity, both for Jack and Del Taco is looking for those opportunities, both with our premium items and value items. And I'll use the example from Del Taco. Within their 20 under $2 menu, which has been very successful, they were able to drive substantial price increase and still be seen as a value product. And we have opportunities like that at Jack as well that we've pushed. At the same time, during the quarter, they promoted the Del Taco, which is more of their premium line of tacos and it did extremely well. So it's really dependent upon the consumer. It's depending on how we communicate it and it's depending on what means value for each individual segment of the consumer base. As far as regionally, on the Jack in the Box side of the business, we definitely saw strength in California and Texas, our largest markets. And we definitely saw some challenges in the Northwest and the Midwest as far as on our sales side. And a lot of that goes back to that key challenge that we've all been faced with is staffing. Those are the areas that have been most impacted by staffing. And so if we get our dining rooms open, we see about a 0.8% improvement in sales. And so we know that those markets are -- could perform even better if they could staff and get their dining rooms open.

Just to underscore Darin's point, a lot of that Midwest market is our evolving market basket. Excluding those markets, our same store sales on the company portfolio would have been roughly 200 basis points higher or somewhere around 5.5%.

Your next question comes from Brian Mullan from Deutshe Bank.

Just a question on the potential to refranchise company owned Del Taco units over time. Just talking about this high level, it would be helpful to hear what you hope to look like on the Del Taco side when that process is fully behind you -- sort of how long it takes, how many transactions take place? Are you hoping close to a 5% franchise mix there similar to how you looked at Jack prior to COVID, or is there some reason that we should be considering where you would maybe look to retain more Del Taco units over the long term?

We'll continue to give further guidance there when we come to an Investor Day and investor conference related to the specifics on Del Taco. But what I can say is we want this business to be asset light and to look very familiar to the Jack footprint eventually. In that time, what we're going to do is we're going to do it in the right way, we're going to get the right partners. And so whether that's 12 months or 24 months, we think it's a relatively short period to move to asset light. And as we've shared all along, not only did we know going into this acquisition that we had Jack franchisees in existing markets that we're interested in buying Del Taco, we knew there was already some pent-up demand from when Del Taco executed a couple of transactions 12 or 18 months ago. And so we felt very confident that refranchising is a part of our strategy and that we can execute against it. And just to provide solid substantiation of that. We've already had two offers on two markets with Del Taco that we’re still considering those offers and whether we accept them. And we are just about ready to launch a full scale refranchising effort for Del Taco.

Your next question comes from Gregory Francfort from Guggenheim Securities.

I think last quarter, your system pricing was 1 point lower than the company stores. So I guess just confirming, are you guys running like 9% pricing for the system? And as you talk with franchisees, obviously, you can't dictate where their pricing is, but what's your advice to them? And kind of are you comfortable with that level of pricing right now running through the system?

Our pricing is high single digits for the system. As we mentioned, company price is [9.7]. We caught up as a company port basket to the franchisees, which have historically been higher. So we've sort of leveled out there as an overall system. So high single digits and the 9s is a good target.

Your next question comes from Dennis Geiger.

So some encouraging development updates continue as it relates to the unit growth side of things. Darin or -- just kind of wondering as it relates to latest thoughts on the environment, cost pressures, rates, et cetera. If any of that is impacting anything with respect to the cadence and the pace of signing agreements or opens, I think, in past quarters it’s not really. So just kind of wanted to get the latest update on that front, if you could, please.

And the way I would categorize it as this is we are making substantial progress with the Jack base of franchisees against our development. As an example, we've approved more sites in the last six quarters than we have in the prior three years. So we're building our pipeline. We feel good about that. We're signing development agreements still mostly with our existing base. And yet we also see interest from new franchisees. Now what I would say on the other side of that is with this economic backdrop, we definitely see new franchisees taking their time evaluating the opportunity, which I think is just natural with this and the backdrop in the environment we're in, but we continue to see a lot of interest, especially on the refranchising deals. As we mentioned on the call, we have a couple of other evolving markets where we've had LOIs that we are deep in the process of finalizing that are both with new franchisees that also want to develop and grow these markets. So we feel really confident about the strides we've made related to development. The one other thing I would add is that, as you've heard from many of my peers in the industry, we are definitely facing headwinds as it relates to cost of development, we're definitely facing headwinds on availability of equipment to local market conditions, whether it's labor. And we've done our best to set ourselves up to execute against our growth strategy by expanding our vendor base, going out and using our balance sheet to make sure we have equipment available to us and then working hand-in-hand with franchisees to make sure that, that pipeline stays intact. And lastly, I would just say our franchisees have continued to show excitement for growth, because they know this current environment is temporary.

Your next question comes from Jon Tower from Citi.

So a quick question for you on -- or actually two related to kind of macro in California. First, there's the stimulus heading this fall. I'm curious to know how the company is planning to capture more than its fair share of stimulus dollars as it hits the consumers' wallets this fall, particularly plans in place to have that carry forward? Are you going to do things through the app state to capture people into the loyalty programs? And then the second question is on the FAST Act, I'm curious to get your take on what you think, whether or not that bill ends up making its way through the legislature in California and into law and then potentially what it means for your business?

Let's take that last question first, and it's hard to speculate what will happen. Obviously, we're paying a lot of attention to it to make sure that we're prepared. And so both us and our franchisees hope that the Senate and the governor see that have passed that this -- as it's currently written, that it will do more harm than good. But whatever happens, Jack and our franchisees, we will be prepared to handle it accordingly, and so we understand that. As far as the stimulus, look, we think the strategy we've been employing our hook and build innovation is what differentiates Jack. And a great example is we went back to Spicy Strips, Breakfast LTO with our French Toast Sticks, and then we've also prepared innovation into the next calendar year. So we think there's definitely an opportunity for us to take advantage of the stimulus through what's been working, but also through innovation and then also what I talk about innovation, I'm talking about digital, as we roll out our e-commerce platform. We think we've seen a lot of good progress as our digital business is up 30% year-over-year just in Q3 to take advantage of the stimulus checks.

Your next question comes from David Tarantino from Baird.

I had a clarification question or a couple of clarification questions on your comments on the recent sales trends for Jack in the Box. And I think, Darin, you mentioned that the growth improved a the quarter progressed. But I wanted to ask, were you referring to growth versus last year or growth versus 2019 or both?

Sales as the quarter continued. So as the quarter continued, we saw improved sales year-over-year and as the quarter continued, sequentially.

In addition to that, so you look at year-over-year, so we began the quarter with negative same-store sales trends. And then as we lap the stimulus checks and they fell off, the trend turned positive as we exited and gives us optimism going into this existing quarter.

So I just want to make sure I understand it. So you're talking relative to last year, not necessarily relative to kind of the pre-pandemic level. And I guess related to that, I mean, I guess, how does the trend look exiting the quarter relative to 2019 levels, if you're well in this year. Is it similar to what you did in the quarter or is it better or worse?

So same store sales has continued to increase sequentially on a three year stack basis, if you look at it that way by about 70 basis points. We're pleased to see that performance. And then on the company side, same store sales were also 70 basis points higher versus that 2019 pre-pandemic period.

And which -- I'm sorry to keep asking about this, but which period are you referring to? Is that the quarter or is that the exit rate for the quarter, I guess?

We're looking on a three year basis. So the company portfolio is performing 70 basis points higher than our 2019 performance for that same portfolio on a quarterly basis.

Your next question comes from Jared Garber from Goldman Sachs.

This is Ben on for Jared. A question on Del Taco, I guess, with a full quarter plus in the books. What have been some of the key early learnings from the brand along with any realized or potential further synergies?

So far, since we've acquired Del Taco, mostly what we've been impressed with is the management team that we have in place and the people within the Del Taco business. It's definitely a tight net family that's clear on how they execute and how they go to business and work every day, and a very similar mindset to Jack, which is a challenge put in front of them. It's accepted and they get excited about how we're going to solve the problem and make this business work. And so I've been really encouraged by the team. I was up there a week ago where we had a town hall and had everybody back into the office. So it was good to connect with all the team members face-to-face and just see their level of camaraderie and how they work well together. I also like what I've seen is how our teams are working together and sharing ideas back and forth. And more than just synergies where I see the real opportunities, how do they share information and share knowledge to create momentum. And I'm definitely seeing that take place, and some examples of that are some of the things they're doing with automation, some of the things we're doing with automation versus both brands having to test it separately. The groups on their own decided, hey, we'll take something in the kitchen at Jack, and they're going to take something on the drive-through with some AI technology and test it, and they're sharing that information back and forth. So we both create momentum. And then the last thing is, I think, overall, from a synergy standpoint, we are on target with what we expected to meet the $15 million and that we're furthest along in the merging of our supply chain, working together and working with the Del Taco business and their franchisees.

And just to add to that, we also get share experiences and knowledge sharing on how they're approaching the value consumer as an example, which was brought up earlier on this call. So Del Taco had a very successful quarter in their sales, the same store sales were up 3.5%. And we saw that they were able to penetrate to that value consumer very successfully, particularly with their Q4 quick combo meal platform, which was incredibly successful along with their 20 under $2 menu, which is also successful. So we're able to share those learnings on how to approach product development and communication to the consumer with these LTIs as well.

Your next question comes from Alex Slagle from Jefferies.

The question on the Taco franchise development, and you mentioned the building pipeline here, but it also seems like the pace of development has paused. Not sure if that's timing or related to the integration and pending actions following the acquisition or if it's macro or equipment or whatnot. But any thoughts as it relates to that, why that slowed? And then a little bit of a pickup on the closures, perhaps some optimization efforts? But if you could comment, I’d appreciate it.

If I understood the question correctly, it was related to Del Taco and their openings and more than anything, it's just delayed timing wise from where they were in previous quarters. So they still have -- they have signed some additional development agreements this year. They've increased their sites in process. So it's mostly timing.

On the closures, we feel Del Taco had fairly mild closures. There were five, two of those were companies that we felt more comfortable closing and then the remaining three were franchise. So we don't see that there's any -- we don't see that as a sizable issue inside that brand.

Lastly, we'll provide additional guidance on Del Taco in November.

Your next question comes from Chris Carril from RBC Capital Markets.

On the updated CapEx guidance, which is now $25 million lower than before. Is that more of a timing shift or does it, in any way, represent a change to reimage incentive strategy? Ultimately, just trying to understand what normalized CapEx can look like following this year.

Yes, that is primarily a timing shift relative to remodels, refreshes or reimage programs. The guidance that we gave out, the $50 million to $55 million is fairly consistent with what we've historically done. So having said that and as we mentioned earlier, we've got very robust interest in this remodel reimage program. We have 373 applications that came in from our franchise system for that program. We've internally approved 172 of those. So it's a matter of getting through that process, the formality of it and then getting the cash out the door. So that will come at some point fairly shortly here. But relatively to our guidance, there was a little bit of a mismatch there. We have seen so far with those units that have done this program so far, very attractive traffic-led sales in those units, which we're very encouraged by.

The only thing I'll add to what Tim had to say on that piece is just like we're building a franchise real estate pipeline, get the incentives in place, getting franchisees, negotiations with their landlords and moving the process forward with kind of some of the delays that we see at the city level of permitting. It takes a little bit of time for this to ramp up. But the good news, we have a lot of franchisees that have expressed interest. And as Tim just said, we've approved 172 for the incentives.

Your next question comes from Nick Setyan from Wedbush Securities.

Darin, the value menu approach on the part of Jack in the Box, or I guess the lack of one for the past decade or so has been one of the main topics of the day. Is there a -- do you think there's a need for a systemic approach to value at Jack in the Box, particularly now that you have the learnings from arguably one of the better brands out there in terms of their approach to value?

Yes, I think in the past, Jack was a little bit slow to approach everyday value, and if you think back to 2016 and the massive value wars. What's a little bit different about our approach this time is we do have Del Taco that's done a lot of research around that with this new team in place as we've done our segmentation work and understood our guest base better. We've done a lot of work behind the scenes on how do you create value with our guests. And as I mentioned earlier, there's a lot of different ways for value at Jack, both to the premium product and to what we consider our value products. It also comes in how we price it, how we promote it, what channel, whether it's digital, app, dine-in, whether it's a different daypart, whether it's a ala carte or family pack. So we have a lot of thoughts and an approach that we plan on taking to reach and be prepared to compete from a value standpoint.

Your next question comes from Jeffrey Bernstein from Barclays.

Just a question on inflation and the related pricing. I think you said commodity inflation was up 17% this quarter and labor up 13%. Wondering if you can share your outlook for that as we look, I guess, through the current fourth quarter or any initial thoughts on '23? It does seem like there's potentially some easing on both fronts. So trying to get your sentiment on that. And in response to that, I know you're running 10% price. Just wondering what would that pricing be if there was no incremental pricing taken, just trying to assess the health of the franchisee and their profitability as we look ahead with hopefully inflation easing and the pricing outsized.

For the full year, we expect to be at the high end of our guidance. It's a little higher than the second quarter, it was a little higher than that in the third quarter, and we expect to see some moderation in the fourth quarter. So as expected, it affected company operated margins from that significant commodity and wage inflation, as well as the rising cost. But we expect some of these pressures will continue to impact margins for the remainder of the year, but ease.

Your next question comes from Jim Sanderson from Northcoast Research.

Just wanted to talk a little bit more about the SG&A. It seems to me Del Taco's numbers were a little bit higher than I had expected relative to system sales. How should we look at that as an opportunity to see some improvement in that budget as you consolidate operations going forward.

I mean, clearly, we have some synergies as part of this acquisition, which we're just at the early stages of realizing. However, in our view of the quarter, we saw the G&A relatively in line. There's some onetime costs that we don't foresee it as being run rate that occurred in the quarter. But generally speaking, from a G&A point of view, we felt we came in, in a very disciplined controlled manner for the quarter.

And just a quick follow-up on the evolving markets. Could you run through the actual number of stores in those markets? Because it seems to me there could be a nice step up in store margin as you go through that refranchising process in the next couple of quarters. Just like to make sure I have the detail.

So as we mentioned in our remarks, we have four markets inside of evolving markets -- around 30 units in aggregate, we have an LOI that we just announced. Darin mentioned that we're very close on two more of those markets. So in the near term here, we anticipate having three of the four markets resolved and refranchised. So we know that, that's obviously been a drag on our restaurant level margin in recent quarters and we're looking to have that come to a close fairly soon.

And that would only leave one market that you have to work with…

That's correct.

And your last question for today comes from John Glass from Morgan Stanley.

I wanted to ask about breakfast. Once upon a time, I think breakfast was like 20% of your sales. I don't know if you can just level set where that daypart is today? And maybe talk a little bit about trends. You did talk about reemphasizing it, so I don't know maybe if that's not gotten the attention some of the other dayparts have gotten. So besides product innovation, you mentioned, what other things are you doing at the breakfast daypart. So if you can just talk about the product innovation, percentage of sales, particularly as there's a lot of competitive pressure, obviously, in that daypart. Where do you think that opportunity is if you think there is a significant increase and opportunity there?

We haven't broken out or disclosed precision around the composition of dayparts. I will know that it's -- there isn't vast disparity amongst our large dayparts where breakfast is meaningful. Also, breakfast is a product category in addition to a daypart for us. So it's clearly important to the business. Darin mentioned earlier in his remarks as well, we're going to come in fairly aggressive in Q4 with a breakfast promo with Mark Hamill, that's got some national attention, introducing our French Toast Sticks, which has been a historical favorite for the brand. So we're excited about the upside opportunity we have in that daypart.

The other thing I would say is when we did some research on why our breakfast daypart had slowed slightly in this quarter, and we had some key learnings that we are applying in Q4, and we're already seeing the benefit. One is we stopped promoting it on a tertiary message through media. We've reengaged that and it's absolutely helping and we came back out with a really good offer with our French Sticks that are loved. And immediately, we're seeing our breakfast daypart bounce back. So that's part of our approach is to aggressively communicate the right message around breakfast at the right time, and we're going back to some tried and true methods.

And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

We appreciate the time you’ve taken today. We’re excited about where Jack in the Box is in our evolution of our strategy, and all the different things that we're doing to do to execute against our four pillars of building brand loyalty, driving ops excellence, growing restaurant profits and ultimately expanding Jack's reach. We also will look forward to seeing you for quarter four in November and giving you a further update. Thank you.

Thank you.

This concludes today's conference call. You may now disconnect.