Good day, everyone, and welcome to the Jack in the Box Inc. Fourth Quarter Fiscal 2014 Earnings Conference Call. Today's call is being broadcast live over the Internet. A replay of the call will be available on the Jack in the Box corporate website starting today. [Operator Instructions] At this time, for opening remarks and introductions, I'd like to turn the call over to Carol DiRaimo, Vice President of Investor Relations and Corporate Communications for Jack in the Box.

Thank you, David, and good morning, everyone. Joining me on the call today are Chairman and CEO, Lenny Comma; and Executive Vice President and CFO, Jerry Rebel. During this morning's session, we'll review the company's operating results for the fourth quarter of fiscal 2014, as well as some of the guidance we issued yesterday for the first quarter in fiscal 2015, as well as our long-term goals. In our comments this morning, per share amounts refer to diluted earnings per share, and operating earnings per share is defined as diluted EPS from continuing operations on a GAAP basis, excluding restructuring charges and gains or losses from refranchising. Following today's presentation, we'll take questions from the financial community. Please be advised that during the course of our presentation or question-and-answer session today, we may make forward-looking statements that reflect management's expectations for the future, which are based on current information. Actual results may differ materially from these expectations based on risks to the business. The Safe Harbor statement in yesterday's news release, and the cautionary statement in the company's most recent Form 10-K are considered a part of this conference call. 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. These documents are available on the Investors section of our website at: www.jackinthebox.com. A few calendar items to note. Jack in the Box management will be attending Wells Fargo's Retail and Restaurants Roundup in San Francisco on December 2; and our management will be presenting at the ICR XChange Conference in Orlando, Florida, the week of January 12. Our first quarter ends on January 18, and we tentatively plan to announce results on Tuesday, February 17 after market close. Our conference call is tentatively scheduled to be held at 8:30 a.m. Pacific Time on Wednesday, February 18. For modeling purposes, fiscal 2015 is a 52-week year, whereas fiscal 2016 will have 53 weeks. And with that, I'll turn the call over to Lenny.

Jack in the Box reported another solid quarter yesterday. Better-than-expected same-store sales growth, margin expansion at both Jack in the Box and Qdoba brands, and a 10% reduction in our share count drove a 20% increase in operating EPS versus the year ago quarter. This performance capped a terrific year for the company with operating EPS of 35%, over third consecutive year of growth in excess of 30%. Before taking a closer look at some of our fourth quarter accomplishments, let's review some highlights from fiscal 2014. Our business model transformation is essentially complete. We reached our targeted franchise ownership levels for the Jack in the Box brand of 80% to 85%. We refranchised 37 restaurants during the year, including 2 of our 3 remaining Southeast markets. And at year end, approximately 81% of our system was franchised. This transformation has resulted in a less capital-intensive business model with more annuity-like cash flows. The benefit of refranchising can be seen in our company, Jack in the Box AUVs, which increased more than $100,000 versus last year to over $1.7 million. As we restructured the organization to reflect changes in our Jack in the Box and Qdoba systems, we've been transitioning to a shared services approach to more efficiently support the enterprise in both brands. We were able to reduce G&A by 50 basis points from last year to 3.8% of system wide sales, reaching our targeted range of 3.5% to 4%. During the year, we completed our comprehensive review of the Qdoba brand strategy, and began implementing several initiatives to differentiate us from the competition. Although we're still in the very early stages of executing on our brand positioning work, company same-store sales increased 5.7% for the year, including same-store sales growth in excess of 7% for the last 3…

Thank you, Lenny, and good morning, everyone. Our 20% growth in operating EPS for the quarter and 3 consecutive years of operating EPS growth in excess of 30% are a testament to the transformation of our business model over the last several years. With pliable same-store sales growth at both brands and the benefit of refranchising, we were able to drive significant margin improvement and return a substantial amount of cash to shareholders. We refranchised 23 Jack in the Box restaurants in 2 of the 3 remaining Southeast markets during the fourth quarter. This leaves us with roughly 20 restaurants that we expect to refranchise in the second quarter of 2015, for which we have a signed letter of intent. With the sale of those remaining Southeast restaurants, our Jack in the Box refranchising strategy will be essentially complete. When excluding the restaurants we refranchised during 2014, and the remaining 20 restaurants that we expect to refranchise in 2015, we estimate our pro forma restaurant operating margin for the Jack in the Box brand for fiscal '14 would have been more than 19.5%, or 100 basis points higher than our reported Jack in the Box brand margin of 18.5%, and our company averaging of volumes would've been just under $1.8 million. For the fourth quarter, consolidated restaurant operating margins improved 190 basis points to 18% of sales, as same-store sales growth translated into nice margin expansion at both brands. Jack in the Box margins improved 210 basis points to 17.8%, as we explained in the release, and benefited from pricing of about 2.8% in the quarter. Commodity cost inflation at Jack in the Box was higher than our expectations due primarily to beef costs and negatively impacted sales leverage. Qdoba restaurant operating margin improved by 130 basis points to 18.5%…

[Operator Instructions] Our first question today comes from Brian Bittner of Oppenheimer.

First question is on Qdoba. With the new menu, the new pricing strategy, can you tell us what the -- that change in average check was from it? And can you also tell us what average check assumption you have baked into the full year guide for Qdoba's comps?

Are you referring to 2014, Brian? Or are you referring to 2015?

I'm referring to 2015 guidance, and the average check change that you've seen from the new menu.

Got it. So here's the way that we would look at the pricing strategy for Qdoba for 2015, I think, you've said it right. It is an average check lift. It's not a pricing increase, per se, as the Guac, and the Fajita Veggies, and the Queso all now -- all inclusive of that. And so -- but within the 6% to 8% comp growth, we are anticipating that there would be a combination of average check growth, as well as traffic growth in the model, Brian; although, we don't break those out, but as an example, the pricing model that we have is essentially $7.80, or $8.40 for everything depending upon what your protein is that you select. And as an example also is if you purchased a basic chicken burrito, and added guacamole, you would actually spend more for your burrito at that time than what you do today. The Guac incidents right now is about 35%. So we're seeing an increase in the Guac incidents, we're also seeing an increase in the Queso incidents, which we view as a very positive sign, as those are key flavor adds, as well as the sauces and salsas that we add, which tend to be a little broader than what you might see elsewhere in the marketplace. And those are the items that really differentiate the Qdoba profile. So we're happy to have that in there. With all of that though, while we won't see any margin flow through from food costs because of the extras that are all inclusive, we do expect to see nice flow-through on the fixed cost component, such as brand management comp and depreciation and amortization. So that is a big component of the margin move within 2015 guidance. As an example, we expect both brands to improve margins versus where they were in 2014, but we now expect the Qdoba margins to be higher than the Jack in the Box margins for fiscal 2015. That may not be the case for every individual quarter, but we expect it to be the case for the full fiscal year.

Okay, and I appreciate that. And I also appreciate that you have added EPS expectations to the long-term guidance of mid-teens. And one question on that outlook is you guys have put a 19% to 20% restaurant margin long-term goal out there, but it appears that you're going to be within that range in 2015. And if you continue to expect same-store sales growth over the long term. I'm just confused why that's kind of the endgame goal on the long-term guide? And why you wouldn't be able to continue to grow margins over the next 3 years?

Sure. Let me just give you -- clearly, in our '16 to '18 longer-term guidance, the same-store sales, mid-teens and the Jack in the Box, 2% to 3% -- excuse me, not mid-teens, but mid-single digits, and the Jack in the Box at 2%, 3% comp growth are in there. Let me just tell you what we also have included in the cost structure that may not be obvious from what we talked about within the press release. So within the long-term piece, we have cost issues or cost increase related to the Affordable Care Act, which for us, takes effect in fiscal 2016. And the employer mandate, we've estimated is a 50- to 100-basis-point cost that we do not currently have today in our system. Of course, that'll be depending upon the take rates that we have out in the restaurants. Also, the California minimum wage, which went to $9 an hour on July 1 of '14 goes to $10 an hour on January 1 of '16. And we estimate that's another 50 to 70 value basis point impact there, and then, on the commodity piece, we've talked about higher commodity cost, particularly beef in 2015. The -- our long-term model did not assume that those commodity costs trend downward for a period of time. We built some commodity inflation, albeit modest going forward. So if there is any so-called conservatism within the guidance, that's probably on the commodity piece, as we would continue to expect the beef cost to be high.

Your next question comes from Alex Slagle of Jefferies.

I just wanted to follow up on Brian's questions. I know it's been a short time since you all have the new menu, but any more comments regarding impacts you've seen on throughput? Or customer satisfaction? Or anything you're hearing from the field in terms of complications? Or pushback, or anything?

Alex, this is Lenny. A couple of things that we're seeing anecdotally that make us really happy about the way the transaction is going today, as compared to the experience that the consumer felt in the past. The -- if you can imagine going down a Qdoba line and having the -- service provider have to tell you with all the different things that you wanted to add to your meal that, that was going to be extra. What it created was this tension between the guest service person and the consumer, where there was stress from our employees as they kept having to nickel-and-dime the consumer, and it took away from their ability to really try to help the consumer build a craveable burrito or bowl. And so today, what you see is there is this looseness, I guess, you could say, it's the freedom that's taking place in the transaction where our own employees are really focusing on how to build a great meal, rather than trying to remember every item that they have to nickel-and-dime the consumer on. As a result of that, we are seeing, at least qualitatively, that the consumers are quite pleased with the guest service and the change. It's just much simpler, and it's much more focused on a quality meal. In addition to that, if you can also think about our old menu, when you got in the queue, the menu was quite complex, and it was very choppy as we tried to put together pricing for all the different items. And today, it's a really simple menu, essentially broadcasting 2 price points that's -- that are attached to the protein. And then, essentially inviting the consumer to try out all the great new flavors that we have. And that also seems to be very well received by the consumers. So as far as any impact to throughputs, the only impact has been positive, which is seen in not only a growth in our sales, but also our traffic is up. So in the test markets, we saw similar results to what we're seeing today. The simplified approach, the more food-focused and guest-service approach really helped to drive traffic, and, I think, the consumers are rewarding us for it. So overall, we're pleased with this, and just one additional thing, I would add, is that there's really no one else out there doing this. And it was really important that as we try to differentiate the brand, we didn't just differentiate it with the food, but we also differentiate it in the way that we provide the service.

Great, that's helpful. And then, Jerry, just one follow-up on the guidance for '15 in the long term. Confirms that include any share repurchase in the assumptions?

Yes. It assumes it for '15, as well as -- for the longer-term view; we continue to expect to generate significant cash flow and return a portion of that to the shareholders. And I'll just remind the -- everybody that we'll be setting a pattern that we've yet to let a share repurchase authorization expire, and as we indicated in the long-term plan that we continue to return cash to shareholders, both through share repurchases as well as dividends.

Okay. Some portion of that $217 million available in the buybacks now, is that actually assumed to be repurchased during the year in the earnings guidance? Okay.

Yes, it is.

Your next question comes from Joe Buckley of Bank of America.

I know you gave us some pricing data by brand, and maybe you gave us the full complement of traffic and check breakdown for the fourth quarter, but, I think, I missed it, if you did. So could I ask you for that, for starters?

So the -- for Jack in the Box, the price was 2.8% in the quarter; and for Qdoba, the price was 1.9% in the quarter. And traffic for Jack was down 2.6%. Traffic for Qdoba was up 1.7%.

Okay, that's helpful. And Jerry, can you talk about the balance sheet? And how you're thinking about your leverage ratio? I know [indiscernible] sometimes to find things a little bit differently, but it looks like you could add a turn of EBITDA and stay at 3x levered, maybe a little bit less than 3x levered, and just talk about how you're thinking about it? And if that math is accurate?

No. We aren't thinking about it that way, Joe. And in fact, that thinking is included in our long-term outlook, exactly that way. We're working our way to that 2 to 3 as quickly as we can. We did repurchase $320 million during the year. So we are working our way towards there, and we do believe that, that's the right longer-term view. So you're a spot on, 2 to 3x and continue to be active with respect to share buybacks.

And do you think you're more likely to get to the higher end of that range in the long-term guidance framework as opposed to 2015?

We'll get -- we'll be more within the range than we are now, Joe.

Your next question comes from John Glass of Morgan Stanley.

This is Jake Bartlett for John. Just had a question, just to follow-up on the impact of the pricing changes at Qdoba. So I want to confirm, it is a traffic builder. A meaningful -- I mean, check builder, and it's a meaningful mix builder, is that correct?

Yes. Yes, you're correct, Jake.

Okay. And then, the next question is on Jack in the Box, and kind of looking at the 1% to 2% unit growth guidance going forward. What are the limits of that? I mean, is there -- can you see that increase going forward beyond? Maybe just the pushes and pulls as to why that's kind of more muted.

Yes. So a couple things. First off, let me mention that as we've anticipated bringing in our new brand president now, with Frances in place, one of the things that we took a look at it 2015, was just some refresh -- research on the Jack in the Box brand, to start to get an understanding of what future potential of that brand might be above and beyond what it is today. We are optimistic about the future of the Jack in the Box brand, but what we have done pretty consistently in generating any sort of forward-looking positions on growth, whether it'd be sales or unit growth, is we try to operate in a show-me state. So from our perspective, step 1 would be to prove that we can bolster the performance of the existing Jack in the Box restaurant, and then, once we started to see signs of that type of performance, very similarly to what we've seen with Qdoba, then step 2 would be to take maybe a more aggressive stance on growth going forward. So, I think, what you'll find is through 2015 and most of 2016, we will primarily be focusing on the growth of the existing locations, not due to the fact that the endgame is simply same store sales growth, but more so, in alignment with your question, to really put us in a place where we can grow more aggressively with new units. And so next 2 years, we'll focus on existing. We'll prove that out, and then, we'll look to ramp up growth 2017 and beyond, but we're not willing to take a more aggressive stance today than what we've put out there because at the end of the day, we feel like we need to prove that we can raise the sales of the existing sites first.

Next question comes from Chris O'Cull of KeyBanc.

This is Dave Carlson, on for Chris. I have 2 questions. The first is -- you guys are seeing AUVs, I think, in excess of $1.1 million of Qdoba, and, I think, it was 18.3% restaurant level margin this year. Can you guys speak to the margin profile? The source in AUVs of $1.3 million or higher? Just really trying to get a sense of the flow-through as the comp continues to build.

Yes. So we get -- actually, we get a pretty significant flow through on the sales vis-à-vis a fixed cost component, as we get to that $1.3 million level. So we have roughly 1/3 of our restaurants that generate about that kind of sales volume and the margins. And this isn't -- this isn't this year, Dave, but the margins are 23% or higher on those locations. So does that help?

That -- absolutely, it does. And you said that, that was from a previous year, the 23%?

That's from a previous year, yes.

My second question relates to G&A. When we really try to cobble together the components for changes in SG&A from '13 to '14, looking at the reduction in the pension expense, I think, there was a benefit from mark-to-market adjustments of around $3.2 million to have some of the -- on the pension plan investments, I think, modestly lower stock based comp expense in '14. It really appears that the G&A increased during fiscal '14 on an absolute dollar basis, and I'm coming up with something around the tune of $8 million. That said, how much higher was performance based comp during fiscal '14? And can you speak to whether there's much if any reductions in G&A expense during the year?

Yes. So there were reductions in the G&A expense, both in the pension as well as from our business model reengineering as well as the shared service integration fees. We did have higher share base and incentive compensation of about $1.2 million higher, and -- versus -- and we had higher mark-to-market than what we did in the prior year also, but the incentive comp was clearly higher than what it was in 2013. But I'm not sure I get to the same numbers that you're getting to. What I can tell you for '15, is that maybe helpful, is that, if you look at our total SG&A numbers, we've given you the rate. The dollar numbers are going to be similar to what they were in 2014, with lower incentive comp being offset by higher pension expense and advertising higher at Qdoba because of new restaurants and higher sales and refranchising driving lower advertising cost for the company numbers at the Jack in the Box brand. And we'll post the 10-K later this week. That'll -- all that detail will be in there for you.

Your next question comes from Keith Siegner of UBS.

Jerry, I was wondering if you could walk through some of the moving pieces related to the franchise cost structure, the franchise support structure and maybe those margins. With the 2 of the 3 Southeast markets done, with the other 1 coming in second quarter, with some of the other changes in the portfolio with Qdoba, et cetera, how do we think about modeling the franchise restaurant cost? Is there a change in, say, for example, property and the spread you're earning on rent? Or not earning on some of these units? How do we model out that franchise and restaurant costs given this last round in completion of the franchising program?

Sure. 2 questions. So let me talk about the margin compare to the fourth quarter this year, and then, I'll talk to you about how we're thinking about the Southeast locations going forward. So -- and by the way, we do have a new table in the press release that looks at the franchise margin component, but the change in the franchise margin this year versus last year, which was down about 50 basis points on the print, was really due to the change in the initial franchise fees, which were largely caused by selling 23 company restaurants this year in the fourth quarter versus 56 in the fourth quarter last year. So if you adjust for that, the margin on franchise -- of the franchises was actually up 50 or 60 basis points there. So this year was all related to just timing of additional franchise fees, in the quarter, did not have an adjustment for the full year. I think, going forward, with the Southeast cases, what we've said, I think, maybe in the past, but with respect to the rent, particularly, is that we're not expecting a rental income spread on the Southeast, as the sales levels that those restaurants have are not sufficient today to pay an additional rent spread on that. So they're basically paying passthrough rent. So you'd expect the rental cost to go up without a commensurate increase in the rental income. As those restaurants grow in same store sales, we will begin to see some rental income spread, which you're probably not looking for that over the next year or 2. And that is included, or I should say, we have not included any rental income spread in our guidance for the next couple of years on the Southeast.

Next question comes from David Tarantino of Robert W. Baird.

My question is coming back to the Qdoba comp strength that you're seeing, and, I think, the comment was that the quarter-to-date trend is above the high end of your guidance, and it suggests that you've seen a nice acceleration from Q4 here and quarter-to-date. I was wondering if you could talk about whether that change in trajectory has been more related to the check benefit of this new pricing architecture? Or whether you're seeing increased momentum on the traffic side?

So we see both. We see increased momentum in check and traffic, but check is the lion's share of what we're seeing in the game today.

Got it. Great. And then, I guess, on that, Lenny, I know you've had this pricing architecture out there in some of the locations and tests for quite some time. Could you talk about maybe how the overall customer feedback or consumer feedback has been relative to the value proposition? Because from my understanding, there's some moving parts here, the entry-level price point has gone up maybe fairly significantly, but now you get free Guacamole and Queso, which is a pretty big benefit. So I'm wondering, kind of, what you're seeing from a value proposition perception among some of the guests' feedback you've gotten so far?

Yes. So we've gotten a vast majority of feedback, very positive. In the early stages, we did get some feedback where folks were pointing out that essentially, you get to pick whatever you want, but you do, as you state, enter into it at a higher price point, but, I think, what happened was as folks started to experience the food with all of the various flavors added that, heretofore, they weren't able to get without an additional price, and most often, would reject because of the additional price. Their meal is so much better than what they were experiencing in the past, that when they look at the overall value proposition associated with it, it's been very favorable. And so as a result of, I think, the sort of finished experience the consumer is continuing to vote with their dollars and also with their footsteps as the traffic has continued to increase. So one of the reasons we test it is we knew that with this higher entry point, there would be potentially some rejection. We at least hypothesized that as folks started to experience burritos with guacamole and with Queso Diablo, and those types of things, grilled vegetables, that the finished product would bring them back, and that essentially, they would, in their minds, develop a new consumer value proposition that says essentially this food is way better, and it's worth a little bit more. In addition, what we've heard from the consumer is that they really like the predictability of the pricing. They know that when they get to the end of the line, the price doesn't change because of all things that they've added on. And what we're actually seeing is this predictability is leading to folks purchasing drinks, and it's not something that we've shared details on, but at least qualitatively, we feel good about the percentage of folks they're adding the drink at the end of that. And we think that's essentially because they go into it with a high level of predictability.

Your next question comes from Robert Derrington of Wunderlich Securities.

Lenny, can you give us a little gaze in your crystal ball? And I apologize if I missed that, I got on the call a little bit late. As we look at Qdoba continue to evolve over time, we know that there are some plans in your study with Boston Consulting to look at the trade drafts, menu evolution. Obviously, we've seen the -- one of the earlier snippets with the change in the menu pricing strategy. What can you share with us about the directional plan for the concept, as we look out over the next year or 2?

So first, I will apologize upfront for having to keep this very high level and not getting into too much of the specifics, mainly because we need to prove out some of these tests, and we also, obviously, for competitive reasons, want to keep some of this close to the vest. So speaking 50,000 feet above, what I would tell you is the trade drafts for the facilities, you should expect to be bold. You should expect it to be clearly different from any of the other fast casual Mexican concepts that are out there. We will have a very sort of in-your-face personality that will come to life through the trade drafts. In addition to that, I think, you'll see all of those descriptors reflected in the food. So this change to the menu architecture and some of the things that we put from an LTO perspective onto the menu last year, and now permanently on the menu, as we enter into this year, you'll see more of that type of food innovation. And it will be clearly different from the offerings of the other fast casual Mexican restaurants. So it's really important to us that everything we do stands out, stands apart from our main competitors because essentially, if we want the growth trajectories to meet our long-term objectives, we're going to have to be able to enter into markets where the composition already is, and the only way that we're going to do that successfully is if the consumer can see us as something clearly different. So I wish I could go into more detail than that, but, I think, your main point would be, you should expect to see a clear departure from the personality that Qdoba exudes today and that of any of our competition.

Thanks for teasing us with that. If I could follow-up for a quick second. As we look at -- obviously, franchise development this year, this fiscal year appears to be more nontraditional locations. As we look out, is it anticipated that potentially, as we see these changes reflected in the business, in the Qdoba's business and its model, that franchise development would be anticipated to pick up maybe in fiscal '16?

Yes, I think, that's our desire. I think, that as we get through the testing on the new facility, the new prototypes, we're then in a position to ask franchisees to invest. We don't want to have franchisees jumping the gun at this point, and then, a year later, asking them to invest incrementally on top of what they've already done because it's just more difficult for them to make that work economically. So some of what you're seeing this year is really just by design. The franchise growth that you'll see in nontraditional, those are facilities that are generally compromised from the onset. They're typically smaller footprints. They may have requirements for offering food during certain dayparts that we don't even offer food today. So we kind of go into those nontraditional facilities knowing that the brand will have to make a few adjustments in order to exist in those spaces. So we feel comfortable continuing to drive that type of growth today just due to the nature of it, but when we look at our more traditional sights, whether it'd be in line or standalone buildings, we want to be really careful about what we're asking our franchisees to invest and when. So yes, I would hope to see a growth in 2016, certainly, for sure, in 2017 starts to ramp up from our franchise organization. And then, just understanding the wherewithal of our balance sheet, as we start to play this out as reflected in our guidance, you would see the Jack -- excuse me, the Qdoba company stores growing and probably at a faster rate early on than the franchises.

Your next question comes from Peter Saleh of Telsey Advisory Group.

I just wanted to ask about the long-term guidance here for Jack in the Box. You're looking at -- for same-store sales of 2% to 3% longer term, yet your guidance for the first quarter and maybe more like this year is in the, call it, 1% to 2% range. So any thoughts on why you guys anticipate maybe an acceleration in same-store sales at Jack, though a little bit more pricing that you plan on taking in '16 with some of the incremental costs coming on or just a little bit more color on that would be helpful.

Yes. So a couple of things to think about with Jack in the Box. First off, we've mentioned that we don't want to play the single item discounting games to try to drive traffic because it's detrimental to our margins, and it makes the franchise business model particularly difficult. So we have focused on the quality of the food, and we focused on food innovation to really drive the sales, and that's been the model for quite some time. I think, what you can expect to see over the next couple of years is that we will focus holistically on executing the brand in a way that drives more consumer loyalty or affinity to the brand. And that will have to be done through a combination of things. One, I think, we'll really have to look at our menu very carefully to decide how we can generate greater -- a greater consumer value proposition, and, I think, when you look at the equities that we have on our existing menu, and you'll get the innovation that we've been able to achieve over the last handful of years, I think, we have a golden opportunity to up the ante with our menu and really take both taste and quality to a new level. And, I think, we also have an opportunity to simplify our menu. For those who are familiar with our brand, the menu isn't necessarily overwhelming, but for those who are new to our brand, it's completely overwhelming where, we pride ourselves on the variety. We pride ourselves on the innovation, but it's a double-edged sword because it also beats to some complexity. And so, I know that one of the things that Frances has identified early on, is that there's probably an opportunity to take a look at…

At this time, we currently have no additional questions.

Great, thanks, everyone, for joining us. And we look forward to speaking to you on the next call.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.