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 speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] 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, Darin Harris; and Chief Financial Officer, Tim Mullany. 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, Darin 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 hard into doing what they do every day in our restaurants, which is serve others, and for this, I am 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 and 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 topline performance and fundamental strength and place to carry this momentum forward. Both brands delivered excellent one-year 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 of years of preparing for growth, optimizing our portfolio and building a pipeline of…

Thanks, Darin. I will begin with a quarterly review for both of our brands, followed by some commentary on our consolidated results and capital allocation. I will then close with details on our annual guidance for fiscal 2023, which is also detailed in this morning’s earnings release. Starting with Jack in the Box. System-wide sales, when excluding the 53rd week in prior year, increased 4.1%. Quarterly same-store sales growth was 4%, consisting of positive company-owned comps of 11.4% and franchise comps of 3.2%, helped by sequentially improving trends in both average check and traffic. We are seeing this positive momentum continue into the first few weeks of Q1 2023. All product categories and dayparts demonstrated positive sales, with dinner and late night showing notable growth as we improved operating hours and build traction with our redesigned munching meal platform. We view the munching meal platform as a real differentiator, helping simplify operations and guests ordering during a daypart we believe Jack can dominate in a normalized environment. As Darin mentioned, we also experienced significant improvement in the breakfast daypart led by our French Toast Sticks promotion. While price increases of 10.4% in the quarter and just over 8% for the full year certainly played a role in our comp performance, there were other favorable trends within the quarter. These included sequential improvements in system transactions and mix improvement. This success was an encouraging sign that our hook-and-build and barbell strategies are proving to be highly effective tools in driving mix and transaction growth in an inflationary environment. We also saw transaction frequency increase sequentially during Q4, a positive sign that we are earning increased loyalty and trial within our customer base. And we were able to hold on to our value consumers with transactions under $7 remaining flat versus Q3…

[Operator Instructions] Your first question comes from the line of Brian Bittner with Oppenheimer & Company. Your line is open.

Thank you. And thanks for all the details and disclosures that you have included in the forward outlook. It is certainly appreciated on our side. I am going to sneak in two questions. Just first on the sales, the comps showcase strong momentum in the fourth quarter kind of sustaining the -- their trend from the third quarter and you said that that momentum has sustained into 1Q. Does that just mean that the one year trends have sustained from what you saw in 3Q and 1Q. So that’s my question on sales. And my question -- second question is on the earnings guidance, and I think, the shortfall in the headline EPS guidance that you guys have provided relative to the analyst community and hence the pressure on the stock today, I think, it’s primarily driven by corporate expenses, not really core fundamentals, those look really strong, but corporate spend within the SG&A line, as well as the tech spend in that franchise line. So can you just unpack what’s going on in the corporate expense side a little bit better, so we can understand the drivers of these accelerating expenses and we can better digest what’s going on there and the stickiness around them past 2023? Thank you.

Brian, I love the question and I appreciate it. Let me start with fundamentals and same-store sales, because I think that will set us up into the discussion around SG&A. So, first and foremost, our same-store sales and what we are doing to drive it, it’s working. Traffic is improving sequentially, and as we said, moving into Q1, same-store sales of Jack is running in the mid-single digits and we are having good success at Del Taco. So we feel really good about the things that we are doing to drive sales, our hook-and-build, our innovation, our digital, what we are doing with value and our marketing messaging is helping improve traffic sequentially and drive same-store sales. So fundamentally, our same-store sales are moving forward. Operationally, what we have been doing over the last two years, focusing on implementing a new training system along with our guest experience review, which drive standards. What’s happening is our ops metrics are all improving substantially. So we have seen through our -- the most certified employees and managers that we have had in history, that’s led to speed improvements, staffing and turnover improvements, alerts are at their lowest levels since I have joined the company. So all those metrics are leading to same-store sales as well. Del is doing a good job of managing labor. Our LM part, our LM is improving. And then the last fundamental I will talk about that’s also improving that we highlighted was development. If you look at DAs, our development agreements are increasing, the sites in process we have approved are increasing, net unit growth and having growth across both brands and then reimages and people participating. So the fundamental underlying business is performing extremely well, but we have some things that are creating some challenges. And I think the question was around SG&A and I will touch on three areas. Margins, as you know, all of our peers are going to be experiencing this situation where our 40 year high inflation is impacting margins and it’s carrying over from 2022 and 2023, and we just can’t take enough price to cover all of it. So we have to execute in different ways and improve, and do things across the menu to try to improve those margins. Next is, we are making a clear investment in technology for future growth and efficiency in G&A and that’s whether it be POS, whether it be enterprise, whether it be digital technology to drive topline, those things will pay off in future years. And then the last thing is this SG&A question, and we believe as we walk you through SG&A tech and margins, it’s going be explainable. Most -- if you think about Del Taco, we have only had them now for two quarters, a lot of the synergies that we expected in ongoing expenses in SG&A will start to improve as we move into 2024. And I will let Tim unpack that for you.

Yeah. Brian, absolutely. Great question. So as we noted in our comments, we are guiding 2023 SG&A at $160 million to $170 million. When you look at fiscal year 2022 consolidated SG&A, excluding our pre-opening expense, we are roughly $130 million. The walk between that $130 million to our guide of $160 million to $170 comprises a few things. One, roughly of the unique and one-time items that we mentioned. Those represent roughly 25% of the non-Del Taco item drivers. Those would be things like primarily two items, so favorable insurance adjustments that we had in FY 2022 that are not recurring in 2023 and similarly we added Chicken settlement in the prior fiscal year that benefited us that we won’t have that benefit as we go into FY 2023. The remaining non-Del Taco items are wage and incentive comp increases and share-based compensation. Outside of that, the primary driver of the increase is the incremental Del Taco SG&A component, as Darin mentioned, we had seven-and-a-half months or so of Del Taco consolidated into our FY 2022 results. This guide obviously includes a full year of the Del Taco G&A inside of it. So it’s a fairly clean walk of items, we have two unique items, as I mentioned, insurance cost increases, legal settlements that are not recurring and then the remaining outside consolidating just Del Taco and Jack in the Box G&A, the remaining items are related to wage and incentive comp and share comp -- compensation.

And as you think about share compensation, as we hired a new management team in Del Taco over, it took some time for those shares to begin vesting and so that -- the growth of that expense will not grows meaningfully in future years.

Great. Thanks. I must -- oh, sorry. Go ahead.

Yeah. Brian, if we could -- I will just add one more point to this. We do anticipate further savings in active reduction of this G&A figure, so we want to post that for the investment community here. A lot of this will be as a direct result of the acquisition of Del Taco. The synergies that we are anticipating and the G&A cost reductions aren’t taking hold meaningfully yet in 2023. We do expect to achieve meaningful G&A reductions in 2024. It’s just -- the integration process is stretching mostly beyond FY 2023.

Thank you. Thank you for the details on the sales and the EPS guidance. Appreciate it.

Your next question is from the line of Lauren Silberman with Credit Suisse. Your line is open.

Thank you guys for the question. I wanted to ask about unit growth, returning to positive growth for Jack in 2023. Great to see the growth in the pipeline. Just first with respect to 2023. To what extent are delays impacting gross opens and as we think about closures in 2023, should we start to see those normalize, are you still working through optimization efforts. And then, secondly, looking ahead, can you just talk about your visibility and confidence in stepping up the unit growth to the long-term 4% target? Thank you.

Yeah. Hi, Lauren. Yeah. Related to growth, I mean, we have been building the pipeline. We have approved more sites than we have in the prior 18 months just in 2023 or 2022 alone. As you know, we have signed substantial number of development agreements with 68 for 267 stores. So we have -- the pipeline is filling and that’s the biggest thing for us to be able to generate net unit growth. And so as we keep filling up the top of the pipeline, we are also filling up the site pipeline that enables us to look into visibility for future growth and we are seeing that. It also allows us to mitigate some of the things that move, whether it’s permitting, whether it’s equipment, all those things that happen within a pipeline naturally, it enables us to get in front of that and start to mitigate that challenge. And so as we have seen we have changed our process, so from the minute someone approved the site, they are already starting to order their equipment. So we are getting way out in front of it versus typically that handles in the later part of the process. So that’s one thing. And then from a closure standpoint, part of the work that we did over the last couple of years and in 2022 was closing and accelerating some closures that needed to close, because they were underperforming units. So we don’t anticipate closings at the same rate that we have had over the last three years.

Your next question is from the line of Dennis Geiger with UBS. Your line is open.

Great. Thank you. I am wondering if you guys could talk a little bit more about some of the opportunities you have at Jack on the restaurant margin expansion. Darin, I think you spoke to good progress against some of the more immediate opportunities to drive some of the 200 bps of improvement, which then I believe will kind of filter on the franchisees for an opportunity there. Just if there’s anything more on kind of the timeline there or maybe what inning we are in on that opportunity. Just kind of framing up some of the expansion opportunities that, if you could add a little bit more there? Thank you.

Yeah. We worked in the last half of 2022 with our margin task force to identify and invested in some resources related to this margin task force internally to really focus on equipment, training and process, and technology to drive out cost. We now have a clear line of sight and math to get there. A lot of these investments and cost savings will start to take hold in the last half of the year, really the fourth quarter and on. And it involves things like I mentioned cheese pumps, which reduced waste and Hydro-Rents in our shake machines. Some of those are just not, by the time, we get the equipment installed it’s later in the year. A simple things as reducing our receipt that saves almost $400,000 for the system. So we are looking at every little line item to try to find where can we improve and a lot of those will take hold and it’s a clear plan that we had to execute that will take hold. Well, we don’t want to do is, not improve the guest experience. We want to make sure that we do improve the guest experience or upgrade quality as we make any of these changes. And so, I mentioned that, because we also have made some spec changes and the size of our chicken product and some other products that have overall improved the quality for our guests. And then the last is our pricing discipline. We have improved our pricing discipline with additional technology and tools, from a competitive set, where we can start to be more intelligent about how we price every unit, every market, by franchisee and give them guidance around a range of pricing, where we think there’s opportunities.

And one more thing to add, which is nothing notable. So we have been very successful thus far in the fourth quarter of shedding our evolving markets that have been a drag on restaurant level margin. In Q4, it was a 330-basis-point anchor on restaurant level margin. As we look forward into FY 2023 guidance, you will note that we are forecasting that to reduced 225-basis-point impact. So meaningful progress.

Thank you, guys.

Your next question is from the line of Brian Mullan with Deutsche Bank. Your line is open.

Hey. Thank you. Just a question on the balance sheet, capital allocation, as you navigate this refranchising initiative, is there a leverage target that you are trying to get to our comfortable operating at during this transition period that investors should be aware and I am just asking because release mentioned possibly repurchasing up to $50 million of stock, but there’s also mentioned is paying down debt. So just wondering if you could speak to the strategy of the playbook as fiscal 2023 progresses?

Yeah. Brian, we would -- our target and objective here is to get to a targeted 5.5 leverage ratio. So we will be actively looking to work our way down to that target.

Thank you.

Yeah.

Your next question is from Andrew Charles with Cowen. Your line is open.

Great. Thanks. Two questions for you. One quick one, one a little bit longer quick. First one is quick, what’s the tax rate that’s embedded in 2023 guidance? And then my real question is that, I recognize the guidance excludes the impact of Del Taco refranchising just given uncertain cadence of how this process unfolds recognizing you are approaching this in a very thorough manner. Is there a way to think about the impact this will have on next year’s EBITDA and EPS, as you will naturally deleverage on store level EBITDA, would you expect EPS accretion from G&A reduction and potentially using this cash proceeds for purchases, obviously, it give some cash inflows. You mentioned obviously want to stay around 5.5 -- or getting to 5.5 times net debt-to-EBITDA, but just your thoughts on kind of the way there should unfold from an impact EPS and EBITDA?

Sure. The first question effective tax rate. We are assuming somewhere around at 27.5…

Yeah.

…in our modeling at this point. Relative to refranchising we are going to take a very methodical patient approach to this. We understand the sensitivity of EPS dilution and we are very focused on mitigating impact any impact associated with that. So as we go through this, like I said, very methodical, we are going to be evaluated in G&A efficiencies that we can achieve to ensure that we reduce that as much as possible. But a big point of this is also signing meaningful development agreements that we wouldn’t otherwise be able to achieve without refranchising. So this is really a key critical components of fueling our unit level growth for the business. And relative to the proceeds, yes, this is the -- that’s one of the things we are certainly focused on in the process is, utilizing proceeds for share repurchases, as well as deleveraging to achieve that 5.5 times target.

Thank you.

Yeah.

Your next question is from the line of Gregory Francfort with Guggenheim Securities. Your line is open.

Hey. Thanks for the question. You just started RFPC last week, the appetite for development and maybe even more for 2024 among franchisees seems to be declining a lot just the credit environment and the margin environment, can you maybe talk about like, just update us on where the return profile looks like of a Jack unit or in terms of the development agreements are there Ts in those agreements that you can exercise. Just anything around that to kind of help us understand kind of the acceleration in unit growth? Thanks.

Yeah. I think the way to think about it is, because development takes so much time, a lot of the units over the next two years are already in the pipeline. So the number of sites that we have had approved. We have a line of sight into the pipeline for the next couple of years. I think to your point, I think, there’s natural fear because of the margin challenges out there, and so, that’s just natural across all brands. But what you have to remember is, we still have a pipeline that’s already there and we will continue to focus on building that pipeline.

And on the ROI side, Jack in the Box especially this acquisition of Del Taco we have got meaningful knowledge sharing opportunities on the construction and development side. So we are really targeting to achieve is a four-year or less payback on invested cash to new builds, which we think would be top of class across our peer set.

Thank you.

Your next question is from the line of Nick Setyan with Wedbush Securities. Your line is open.

Thank you. Will the tech investments continue beyond FY 2023?

Yeah. It will not be as substantial, but we will continue to make tech investments and digital transformation investments that we think will either help us become more efficient in G&A or drive topline and our limit at the restaurant level. So just the POS we have to do at the restaurant level, because it’s the heart and soul of us being able to find ways to drive additional margin through things like automation or AI tools that can help us execute at the store level more profitably.

And year-over-year to underscore that, so we really leaned in on technology investments to modernize our systems and infrastructure, we are allocating roughly $10 million or so of incremental investment and 2023 versus 2022. And as Darin mentioned, it’s really to firm up our digital capabilities and web capabilities, online ordering. It’s also to modernize our antiquated POS systems, as Darin, mentioned, which had been in there for decades and are no longer supported, as well as corporate ERP systems that have been here and are also no longer supported. So we are leaning on this. It’s a one-time structural shift. We don’t expect it to increase significantly beyond that.

Is there any way to parse out the commodity and labor inflation between the two brands. And then on the Del Taco side, as 2014 to 2016, is that kind of think -- the way we should think about that medium-term and beyond 2023 or do you expect margin to tick back up to the high-teens or beyond over sort of medium to longer term?

Yeah. Inflation has been a meaningful impact not only for us, but for the industry at large. For Jack in the Box in 2023 we are facing roughly a $20 million impact after price and comp reduction, it’s call it, $7 million to $10 million of impact. Del Taco will be roughly double that. So that has been meaningful with the initiatives that Darin mentioned earlier, as well as the pricing that’s offsetting that we have been able to mitigate that somewhat and we are seeing FY 2023 as an opportunity for some of that inflation at least level off if not decelerate.

Okay. And just last question, can you tell us what the company-owned unit growth will be in FY 2023 between the two brands?

We are looking for -- we are guiding 30…

Company-owned.

Yeah. Oh! Company-owned. We don’t separate our company-owned versus franchise in our guidance.

Okay. Thank you.

Yeah.

Your next question is from the line of David Tarantino with Baird. Your line is open.

Hi. Good afternoon or good morning. I wanted to ask, I think, it got asked earlier, but around franchisee level cash flows. I was wondering if you had an update on what the cash flow per unit kind of run rate is today. I think you have given that number in the past.

Yeah. We are not providing that at this stage. We know that the industry is challenged at this point. In normalized environments we have proven to be a top tier driver in ROI. It is the number one important metric for our business. We are focused on that. We are working with our franchisees to improve their margins. One of the biggest things here and it’s getting operating hours in place. On the company side, as an example, we have been a leader operationally in doing that. We are one hour off of pre-COVID operating levels. So really closing that gap and that’s been a meaningful driver in our restaurant-level margin performance. Franchisees are roughly two hours off of that right now. So we are working to get that component of the system in line with the company’s performance and that will meaningfully improve franchise level cash margin.

Got it. And then one quick follow-up. On the Del Taco refranchising, is there a certain long run target you have for that system in particular or maybe the broader Jack in the Box portfolio. I guess what’s your target there in terms of what percentage of franchise you want that to be?

Yeah, David, we haven’t set a guide for that target. Internally, we are managing to what we think is appropriate from a time standpoint to make sure that this is accretive as possible. As we think about using the proceeds, whether it’s debt pay down or share repurchases and spurring on growth. So we are going to do that in a thoughtful and meaningful way and we will pace and sequence accordingly. And it also allows us to do it in a way that similar to what Jack in Box in the past where it was over time and select the right operators who will grow.

Understood. Thank you very much.

That said, as we have said over and all, long-term we want to be asset light.

And your final question comes from the line of Jared Garber with Goldman Sachs. Your line is open.

Great. Thank you for the question. I wanted to circle back to some of the comments from the beginning. Darin, I think you mentioned, the reimage program now, I guess, 13 units maybe have opened under that new reimage and you talked about some improving trends there specifically on transactions or traffic. One, could you give us a little bit more color on what exactly you are seeing in those stores, if they are geographically co-located or more dispersed? And then, I guess, secondarily, it sounds like there is a hefty number of applications sitting on the desk for that reimage. I think you said 366, so just curious about the timing of which we might see some of those units get approved and remodels? Thanks.

Yeah. I mean we have definitely seen a traffic led sales bump when we have done reimage. Third -- what we said was of that number of 13 we have approved for construction, so those aren’t actually completed yet of that large portfolio that we 366 that have applied and turned in their forms. And what we do with that process as we worked through it with the franchisees to improve those, so that we understand kind of a line of sight into the capital over the next four years to five years and that doesn’t mean all 366 will happen. What it means is that, those had applied, we work with them to go through a process, so we can start to parse out what investment will be required on our part and their part over the next five years to seven years, and so it doesn’t mean those are all going to happen in the next 12 months to 24 months.

Okay.

Ladies and gentlemen, thank you for participating. This concludes today’s conference call. You may now disconnect.