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 would like to turn the call over to Carol DiRaimo, Vice President of Investor Relations and Corporate Communications for Jack in the Box. Please go ahead.

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 will 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 and 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 will take questions from the financial community. Please be advised that during the course of our presentation and our 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 & Restaurants Roundup in San Francisco on December 2 and our management will be presenting at the ICR Exchange 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 will turn the call over to Lenny.

Thank you, Carol, and good morning. Jack in the Box reported strong 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 up 35%, our 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 have reached our targeted franchise ownership levels of the Jack in the Box brand of 80% to 85%. We refranchised 37 restaurants during the year, including two of our three remaining Southeast markets, and at year-end approximately 81% of our system was franchise. 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 have been transitioning to a shared services approach to more efficiently supports the enterprise in both brands. We were able to reduce G&A by 50 basis points from last year to 3.8% of systemwide sales, reaching our target 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 are still in 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…

Thank you, Lenny, and good morning, everyone. Our 20% growth in operating EPS for the quarter and three 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 positive 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 two of the three 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 2014 would have been more than 19.5% or 800 basis points higher than our reported Jack in the Box brand margin of 18.5% and our company average unit volumes would have 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 cost and negatively impacted sales leverage. Qdoba restaurant operating margin improved by 130 basis points to…

[Operator Instructions] Our first question today comes from Brian Bittner of Oppenheimer. Your line is open.

Thank you. Congratulations. I hope you can hear me okay. First question is on Qdoba. With the new menu, the new pricing strategy, can you tell us what the step-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 am referring to 2015 guidance and the average check change that you have seen from the new menu?

Got it. So this is the way that we would look at the pricing strategy for Qdoba for 2015. I think you said it right 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. 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 add a 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 are seeing an increase in the guac incidents. We also saw 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 have 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 are happy to have that in there. With all that, though, while we won't see any margin flow-through from food cost because of the extras that are all-inclusive, we do expect to see nice flow-through on the fixed cost component such as rent, management comp and depreciation and amortization. So that is a big component of the margin move within 2015's 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 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% or 20% restaurant margin long-term goal out there, but it appears that you are going to be within that range in 2015. And if you continue to expect same-store sales growth over the long term, I am 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 three years?

Sure. So let me just give you -- clearly in our 2016 to 2018 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 the Jack in the Box at 2% to 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 have estimated is a 50 to 100 basis point of cost that we do not currently have today in our system. Of course, that will be depending upon the take rates that we have out in restaurants. Also the California minimum wage, which went to $9 an hour on July 1, 2014 goes to $10 an hour January 1, 2016. And we estimate that's another 50 to 75 basis point impact there. And then on the commodity piece, we have talked about higher commodity cost, particularly beef in 2015. Our more long-term model did not assume that those commodity costs trend downward for a period of time. We have built some commodity inflation, albeit modest going forward. So if there is any so-called conservatism within the guidance, it's probably on the commodity piece that we would continue to expect the beef cost to be high.

Your next question comes from Alex Slagle of Jefferies. Please go ahead with your question.

Hi, thanks. I just wanted to follow-up on Brian's questions. I know it's been a short time sine you are on the menu, but any more comments regarding impacts you are seeing on throughput or customer satisfaction or anything you are hearing from the field in terms of complications or pushback or anything?

Alex, this is Lenny. Couple of things that we are 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. If you can imagine going down at 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 a consumer build a craveable burrito or [indiscernible]. And so today what you see is, there is this looseness, I guess you could say, it's a 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 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 try to put together pricing for all different items and today it's a really simple menu. Essentially broadcasting two price points that are attached to the proteins 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 consumer. So as far as any impact to throughput, the only impact ahs been positive which we are seeing 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 are 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 are pleased with this. And then just one additional thing I would add is, that there is really no one else out there doing this. And it was really important that as we tried to differentiate the brand we didn't just differentiate it with the food but also differentiated it in the way we provide the service.

Great, thanks. That's helpful. And then, Jerry, just one follow-up on the guidance for 2015 and the long term, just to confirm, does that include any share repurchase in the assumptions?

Yes. It assumes that for 2015 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 will just remind everybody that what we have said in the past that we yet to just to let a share repurchase authorization expire. And as we indicated in the long-term plan, we will continue to return cash to shareholders, both through share repurchases as well as dividends.

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

Yes. It is.

Your next question comes from Joe Buckley of Bank of America. Please go ahead with your question.

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

So 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. Jerry, can you talk about the balance sheet and hoe you are thinking about your leverage ratio? I know debt agreements sometimes define things a little bit differently but it looks like you could add turn of EBITDA and stay at three times levered, maybe a little less than three times levered. And just talk about how you are thinking about it? And if that math is accurate?

You know, we are thinking about it that way, Joe. And in fact that thinking is included in our long-term outlook exactly that way. We are working our way to that two to three 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 are spot on, two to three times and continue to be active with respect to share buybacks.

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

We will be more within the range than we are now, Joe.

Okay. Fair enough. Thank you.

Your next question comes from John Glass of Morgan Stanley. Please go ahead with your question.

Hello. This is Jake Bartlett for John. It's not a question, just a follow-up on the impact of the pricing changes at Qdoba. So let me confirm, it is a traffic builder, meaningful traffic -- I mean check builder. It is a meaningful mix builder. Is that correct?

Yes. You are correct, Jake.

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

Yes. So a couple of things. First off, let me mention that as we have anticipated bringing in our new brand President, Frances in place, one of the things that we took a look at in 2015, was just some refreshed research on the Jack in the Box brand to start to get an understanding of what the 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 forward-looking positions on growth, whether it be sales or unit growth is, we try to operate in a show me state. So from our perspective, step one would be to prove that we can bolster the performance of the existing Jack in the Box restaurants. And then once we have started to see signs of that type of performance very similarly to what we have seen with Qdoba, then step two would be to take maybe more aggressive stance on growth going forward. So I think what you will find is, through 2015 and most of 2016, we will primarily be focusing on the growth of existing locations not due to the fact that the endgame is simply same-store sales growth, but more so, in line with your question, to really put it in a place where we can grow more aggressively with new units. And so next two years, we will focus on existing. We will prove that out and then we will look to ramp up growth in 2017 and beyond. But we are not willing to take a more aggressive stance today than we 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.

Got it. Thank you very much.

Next question comes from Chris O'Cull of KeyBanc. Your line is open.

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

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

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

That's from a previous year, yes.

Okay. My second question was SG&A. When we really try to cobble together the components for changes in SG&A from 2013 to 2014, looking at the reduction in the pension expense, I think there was a benefit from mark-to-market adjustments of around $3.2 million. You have some that from the pension plan investments. I think modestly lower stock based comp expense in 2014. It really appears the G&A increased during fiscal 2014 on an absolute dollar basis and I am coming up with something around the tune of $8 million dollars. That said, how much higher was performance base comp during fiscal 2014? And can you speak to whether there is much, if any, reductions in G&A expense during the year?

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 piece. We did have higher share-based and incentive compensation of about $1.2 million higher 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 am not sure I get the same number that you are getting to. What I can tell you for 2015, if that may be helpful, is that if you look at our total SG&A numbers, we have given you the rates. The dollar number is 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 costs for the company numbers at the Jack in the Box brand.

That definitely helps. Maybe I can go through some of the numbers offline. But thank you guys very much.

Yes, and we will post a 10-K later this week. All that detail will be in there for you.

Much appreciated.

Your next question comes from Keith Siegner of UBS. Please go ahead with your question.

Thank you, and congratulations, guys. Jerry. I was wondering if you could walk through some of the moving pieces related to the franchise cost structure, the franchise support cost structure and maybe those margins? With the two of the three Southeast markets done, with the other one 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 costs? Is there a change in say, for example, property and the spread you are 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 and completion of the franchising program? Thanks.

Sure. Good question. So let me talk about the margin compare to the fourth quarter this year and then I will talk to you about how we are 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 components. 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 franchisees, which were largely caused by of 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 or the franchise business was actually up 50 or 60 basis points there. So this year it was all related to just timing of initial franchise fees in the quarter. It did not have an adjustment for the full-year. I think going forward with the Southeast, Keith, is what we have said, I think maybe in the past, but with respect to the rest, particularly is that we are not expecting a rental income spread on the Southeast as the sales levels of those restaurants have are not sufficient today to pay am additional rent spread on that. So they are basically paying pass-through rent. So you would expect the rental costs to go up without a commensurate increase in the rental income. As those restaurants to grow in same-store sales, we will begin to see some rental income spread. But you are probably not looking for that over the next year or two. 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.

Okay, thank you.

Next question comes from David Tarantino of Robert W Baird. Your line is open.

Hi. Good morning, and congratulations on another great year. My question is coming back to the Qdoba comp strength that you are seeing. And I think the comment was that the quarter-to-date trend is above the high-end of your guidance which suggests that you have seen a nice acceleration from Q4 here in quarter-to-date. And 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 are seeing increased momentum on the traffic side?

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

Got it, great, and then, I guess on that, Lenny, I know you have 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 am wondering what you are seeing from a value proposition perception among some of the guest feedback you have gotten so far?

So we have gotten 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 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 I look at the overall value proposition associated with it, it's been very favorable. And so as a result of, I think, sort of finished experience, the consumer is continuing to vote with their dollars and also with their footsteps. So the traffic has continued to increase. So one of the reasons we tested is we knew that with its 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 its worth a little bit more. In addition, what we have heard from the consumer is that they really like the predictability of the pricing. They know that when we get to the end of the line, the price doesn't change because of all things that they have added on. And what we are actually seeing is, this predictability of reading to folks purchasing drinks. And it's not something that we have shared details on, but at least qualitatively we feel good about the percentage of folks that are adding a drink at the end. And we think that's essentially because they go into it with a high level of predictability.

Interesting. Thank you very much.

Your next question comes from Robert Derrington of Wunderlich Securities. Please go ahead with your question.

Yes. Thank you. Lenny, can you give us a little gaze into 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's some plans in your study with Boston Consulting to look at the trade dress, menu evolution. Obviously, we have seen 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 two?

So first, I will apologize upfront for having to keep this very high level of not getting 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 these close to the vest. So speaking 50,000 feet above, what I would tell you is, the trade dress 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 dress. In addition to that, I think you will 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 on to the menu last year and now permanently on the menu as we enter into this year, you will 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 term objectives, we are going to have to be able to enter into markets where the competition already is. And the only way that we are going to do that successfully is if the consumer can us as something clearly different. So I wish I could go in more detail than that. But I think the main point would be, you should expect to see a clear departure from the personality that Qdoba as it is 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 non-traditional locations. As we look out, is it anticipated that potentially as we see these changes reflected in the Qdoba's business and its model, that franchise development would be anticipated to pick up maybe in fiscal 2016?

Yes. I think that's our desire. I think that as we get to the testing on the new facility, the new prototypes, we are then in a position to ask franchisees to invest. We don't want to have franchisees jump in the gun at this point and then a year later asking them to invest incrementally on top of what they have already done, because it's just more difficult for them to make that work economically. So some of what you are seeing this year is really just, by design. The franchise growth that you will see in non-traditional, those are facilities that are generally compromised from the onset. They are 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 non-traditional facilities, knowing that brand will have to make a few adjustments in order to exist in those spaces. So we feel comfortable to continue to drive that type of growth today, just due to the nature of it. But when we look at our more traditional sites, whether it be in-line or stand-alone buildings, we want to be really careful about what we are asking our franchisees to invest and when. So yes, I would hope to see a growth in 2016. Certainly, for sure, in 2017 start 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 Qdoba company stores growing and probably at a faster rate early on than the franchise.

Got it. Thanks for the color. I appreciate it.

Your next question comes from Peter Saleh of Telsey Advisory Group. Please go ahead with your question.

Great. Thank you and congrats on the year. I just wanted to ask about the long-term guidance here for Jack in the Box. You are 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? Is it a little bit more pricing that you plan on taking in 2016 for 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 have mentioned that we don't want to play the single item discounting gains 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 have focused on food innovation to drive the sales. And that's been a 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 to drive more consumer loyalty or affinity to the brand. And that will have to be done through a combination of things. One, I think we really have to look at our menu very carefully to decide how we can generate a greater consumer value proposition. And I think when you look at the equities that we have on our existing menu and look at the innovation that we have 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. We pride ourselves on the variety. We pride ourselves on the innovation. But it's a double-edged sword, because it also leads to some complexity. And so I know that one of the things that Frances has identify early on is that there is probably an opportunity to take a look at…

Great. Thank you. That's all I have got.

David, are there any other questions in the queue?

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.