Jack in the Box Inc. (JACK) Q2 2016 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Jack in the Box Incorporated Second Quarter Fiscal 2016 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. 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. Carol A. DiRaimo - VP-Investor Relations & Corporate Communications: Thank you, Kate, 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 second quarter of fiscal 2016 as well as some of the guidance we updated yesterday for the third quarter and fiscal 2016. 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. Since I received a few questions about comparisons to other companies' reported same-store sales results, it should be noted that there is no benefit in our numbers for leap day, because of our fiscal period. The NPD results included in our press release also exclude the extra day. 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 that accompanies the 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. As you know, we'll be hosting an Investor and Analyst Meeting on May 24 and May 25 in Kansas City. The presentations on May 25 will be webcast. Jack in the Box management will be attending Oppenheimer's Annual Consumer Conference in Boston on June 21 and Jefferies Consumer Conference in Nantucket on June 22. Our third quarter ends on July 3, and we tentatively plan to announce results on Wednesday, August 3 after market close. Our conference call is tentatively scheduled to be held at 8:30 AM. Pacific Time on Thursday, August 4. With that, I'll turn the call over to Jerry – Lenny, sorry. I can't read this one. Leonard A. Comma - Chairman & Chief Executive Officer: Thank you, Carol, and good morning, everyone. This is Lenny. After the slow start to the second quarter, we ended with a 23% increase in operating EPS, which exceeded our expectations and guidance. The improvement was largely driven by healthy margins and cost controls, along with some benefits from mark-to-market adjustments and a lower tax rate. We were especially pleased with the solid sales performance at Qdoba company restaurants, which was driven by traffic growth, as well as with improvement in labor costs and margins at that brand as compared to the first quarter. More on Qdoba in a bit. First, I want to talk about our Jack in the Box brand, where we continue to focus our efforts on delivering higher quality burgers, drinks and breads, which is what our consumer research identified in 2014, was the top priority for our brand. The first major quality change we made was the introduction of our Buttery Jack burgers in Q2 of last year, which contributed to our best same-store sales performance in more than 15 years. And in quarter two of this year, we upgraded nearly 30 core products in one of the biggest initiatives we've undertaken to improve quality. Our most frequent guests are noticing all the improvements we're making. Over the past year, we've seen a significant increase in top Box scores, are how our burgers, drinks and fries taste, on average, a nearly 10% improvement. This kind of response is key to driving higher levels of customer loyalty over the long-term. In the short-term, we recognized the need to be more aggressive on the value front, given the amount of competitive discounting activity we're seeing. Midway through the most recent quarter, we began promoting value price combos, featuring our new improved burgers. It is to increasing trial of those products, we slowed the transaction decline we've been experiencing and our GAAP to NPD narrowed. Importantly, the way we approach value enable the company and our franchisees to preserve margins in the quarter, which remained above 20%. We also focused on the breakfast day part in the quarter, with a breakfast croissant value message and our new triple cheese and hash brown breakfast burrito, the latest in our popular line of Breakfast Burritos. Encouragingly, despite a lot of competitive promotional activity in the quarter and some continued weakness in the 10:30 to noon period, sales were positive during the entire breakfast day part with mix reaching an all-time high of 23%. Looking ahead, our promotional calendar will continue to balance both value and quality related messages with compelling new products. Now, let's take a look at our Qdoba brand. Second quarter sales were strong, on top of difficult comparisons for the year ago quarter. In the second quarter, we reformulated our Mexican Gumbo, and reintroduced these guests favorite as Loaded Tortilla Soup. With TV support in certain markets, we positioned it as the perfect antidote to the doldrums of winter. The promotion triggered a nice increase in product mix. Looking ahead, we're bringing back a seasonal favorite next week, Mango Salsa. Over the summer, expect us to encourage our guests take advantage of our new pricing structure, enjoy the refreshing flavor of mango across our entire menu. Q3 also features two of the year's biggest catering events, Cinco de Mayo and Graduations. Growing catering sales remains an important focus of ours, so expect us to continue to message catering opportunities with our guests. Moving on to our restaurant facilities, since last year, we've been testing various design elements at new company locations. More recently, we added some franchise restaurants and remodels to the tests. When we're in Kansas City, in a few weeks – in a few days, excuse me, for our Investor and Analyst Meeting, we'll have a lot to talk about regarding the future look and feel of our restaurants. I don't want to front run that discussion today, but we'll also be very clear on how we plan to expand both brands and drive sustainable sales growth in the coming years. Additionally, we'll be sharing our initiatives that are intended to deliver returns for our shareholders. On that note, I'll turn the call over to Jerry, for a more detailed look at the second quarter, and our outlook for the remainder of fiscal 2016. Jerry?

Thank you, Lenny. Good morning, everyone. After a slow start to the quarter, with operating EPS roughly flat after the first two months, we finished with a 23% increase in operating earnings. A number of items contributed to the beat, including mark-to-market adjustments of about $0.04, which resulted in a lower tax rate that benefited the quarter by about $0.02. There was also an annual adjustment to rent for certain markets that had been previously refranchised. And based on their higher sales levels, approximately $0.03 of the additional net rental income was recognized in the quarter. In addition, margins at both brands came in better than we anticipated. Despite additional promotional activity, due in part to continued favorable commodity markets. We also saw the benefit of good cost controls with more of an austerity mindset throughout the organization. For Jack in the Box, the 1% decrease in company same-store sales was comprised of pricing of 3.2% which was offset by a 1.8% decline in mix and a 2.4% decline in transactions. As Lenny mentioned, midway through the quarter, we got more aggressive on the value front, with price point messages running in the majority of our markets. Despite the additional promotional activity, Jack in the Box margins decreased by only 70 basis points compared to last year, as favorable commodity cost largely offset the impact of minimum wage increases that went into effect in January and higher cost related to equipment upgrades. For Qdoba, Q2 company same-store sales increased 3.1%, driven by transaction growth of 3.7% and catering, which contributed 0.5%, partially offset by a 1.1% decline in the average check. In addition to the solid sales performance at Qdoba, we were pleased with the sequential improvement in margins compared to Q1, as the labor staffing issues we talked about were largely addressed. A greater number of new openings in the last two quarters affected margins but we remain pleased with the new store volumes we are experiencing. Through the first two quarters of the year, we've opened 19 company Qdoba restaurants versus three in the first two quarters of last year. Favorable commodity cost helped margins and we expect that to continue for the balance of the year. We now expect commodity deflation of approximately 2% to 3% at Jack in the Box versus our prior guidance of 2% deflation. We also expect deflation of roughly 5% at Qdoba versus our prior guidance of approximately 4%. Given the annuity-like cash flows of our business model, we remain committed to returning cash to shareholders. We repurchased $150 million of stock during the quarter and now have a $150 million available under current board authorizations. Our outstanding shares decreased by more than 11% versus last year's second quarter, which will continue to contribute to our EPS growth. Our leverage ratio at the end of the quarter was 2.9 times. Here is our current thinking on guidance for other key items for the balance of the year. Our Q3 sales guidance for Jack in the Box ranges from approximately down 2% to flat at company restaurants versus a 5.5% increase in the year ago quarter. It is worth noting that franchise same-store sales, which has less of an impact from Houston are currently running at 0.4% quarter-to-date. Our Q3 sales guidance for Qdoba ranges from approximately down 1% to up 1% at company restaurants versus a 6.6% increase in the year ago quarter. We lowered our full year same-store sales guidance for Jack in the Box company restaurants to flat to up 1% and for Qdoba company restaurants to up 1.5% to 2.5%, reflecting our performance through Q2 and our outlook for Q3. Based on our lower same-store sales expectations, offset in part by the mark-to-market and rental income adjustments in Q2, we continue to expect operating earnings per share to range from $3.50 to $3.63 in fiscal 2016, compared to $3 in fiscal 2015. I will make one other note, our guidance excludes the impact of any potential restructuring charges in 2016, driven by our plans to increase Jack in the Box franchise ownership and reduce overhead costs. That concludes my prepared remarks. I'd like to turn the call back over to Lenny. Leonard A. Comma - Chairman & Chief Executive Officer: Thank you, Jerry. I just want to take a moment in light of the recent changes with Tim Casey leaving the organization and Keith Guilbault taking over as President. I first want to recognize Tim Casey for his contribution in leading the Qdoba brand over the past three years. I think he's a great brand builder and he has really helped to reinvigorate that brand and we want to wish him well. I also want to take an opportunity to welcome Keith Guilbault to the position. Keith, I think, brings a unique skill set and balance across many different disciplines starting with his operations background as Regional Vice President of Operations and Division Vice President of Operations Initiatives for the Jack in the Box brand, also spending time running the Franchise Group as VP of Franchising, also working as VP of Marketing Innovation and CMO of the Jack in the Box brand and then most recently Chief Operating Officer for Qdoba. I think he brings a wealth of experience and a balanced approach that will help to lead this brand forward and I just want to wish him well and I'm looking forward to what he will do to write the next chapter for the Qdoba brand. So with that, I'd like to turn the call over to Kate and ask her to queue up for Q&A. Thank you.

All right. Great (14:02). Thank you. Thank you. And our first question is from the line of Brian Bittner. Your line is open now. Brian J. Bittner - Oppenheimer & Co., Inc. (Broker): Thank you. Thanks for taking the question. Question on your sales so far in the third quarter. We know that the industry has been weak in April based on the industry data, based on what a lot of competitors have said. But is there a way to – I know you just told us what the franchise comps were, but is there a way to quantify how your company-owned trends look at Jack in the Box outside of Houston and look at Qdoba outside of Denver so far in the quarter?

Brian, what I can tell you is when we look at the Houston market for the company restaurants – by the way, we have about 17% of our company units are in the Houston market. When we look at the weather impacted weeks and how that's impacting the overall total, it looks like that is impacting the total comp by about 60 basis points during the first four weeks of the quarter. And that would be compared to what normal trends were for the Houston market. We had a couple of weeks in the first four weeks here where Houston was tracking down near the 10% range. Brian J. Bittner - Oppenheimer & Co., Inc. (Broker): Okay. And what about Qdoba outside of the Colorado, Denver region?

I would say less of an impact directly with Denver as I would say the – it's been a broader weather impact given the overall footprint with some late snowstorms and weather across the country. Brian J. Bittner - Oppenheimer & Co., Inc. (Broker): Okay. And just a follow-up. What gives you guys the confidence on the implied fourth quarter comp guidance, because that suggests that you have solidly positive comps in the fourth quarter, what's driving that confidence? Leonard A. Comma - Chairman & Chief Executive Officer: Brian, this is Lenny. First, I would tell you that the lineup of new product introductions and promotions for the fourth quarter supported by media for both brands is going to be exceptional compared to what we've done in the first three quarters. So that's given us a lot of confidence that we should have a strong fourth quarter. We're looking forward to seeing those things hit the marketplace. Brian J. Bittner - Oppenheimer & Co., Inc. (Broker): Okay. Thank you.

Okay. Thank you. And our next question is from the line of Andrew Charles at Cowen and Company. Your line is open now. Andrew Charles - Cowen & Co. LLC: Great. Thanks. Lenny, just following up on that, as we think about the balance of the year and menu opportunities at Jack, do you expect to see more lasting product upgrades as a continuation of the Declaration of Deliciousness which are presumably more beneficial to operations, or more around the LTOs such as the recent sourdough bacon ranch and new Breakfast Burritos? Leonard A. Comma - Chairman & Chief Executive Officer: I think what you'll see in the form of LTOs is the continued push toward the Declaration of Deliciousness. So I guess the way to say that is when you take a look at the type of products that we launch, for example, the Buttery Jack line, that's the type of quality that you should expect to see in the LTOs coming forward. And that will be complemented by some aggressive value oriented promotion as well. So, we think it will be a nice one-two punch. Andrew Charles - Cowen & Co. LLC: And I am just curious as well, just given your California exposure, about your perspectives on lower income consumer and what I would expect to be an outside benefit for Jack from increased California minimum wage, did you see California outperform the rest of the system as we looked at 2Q?

Yes, California did outperform most of the rest of the system. Andrew Charles - Cowen & Co. LLC: Thank you.

Okay. Thank you. And our next question is from the line of Joseph Buckley of Bank of America. Your line is open now.

Thank you. Can I ask a similar regional question about Texas? Several companies and brands have called out some weakness in Texas. And ex the Houston rains, is Texas lagging this system? Leonard A. Comma - Chairman & Chief Executive Officer: I think the rains are probably the biggest current driver. We've been paying close attention to this and we do see that California is outperforming Texas, but what we're not seeing yet is any confirmation that Texas has a major economic slowdown. So, we're looking really at the most recent weather impact as the bigger contributor.

Okay. And then kind of a broader question about value, you made the adjustments mid-quarter, we can back into what the Jack in the Box comp was for the last eight weeks of the quarter. But did you see sales get better as the quarter progressed? Do you think the value messaging you have done so far is gaining some traction or do you need to do more? Leonard A. Comma - Chairman & Chief Executive Officer: I think where we saw the biggest impact is we slowed down the negative trend on transactions, that's probably the thing that we're most concerned about. So, from a value perspective, I think certainly we'd love to see the top line sales, and we'd also like to see the transaction impact. And that was, what we think we achieved the back half of the quarter by putting those promotions in place. I think going forward what we'll be looking to do is make sure that we have the right balance of premium LTOs that helps to sustain the margins and the average check while we have the aggressive promotions – site promotions in there that help to allay any of the erosion of the transaction.

Okay. Thank you.

Okay. Thank you. And our next question is from the line of David Tarantino of Robert W. Baird. Your line is open now. David E. Tarantino - Robert W. Baird & Co., Inc. (Broker): Hi, good morning. Lenny, just a quick follow-up to that last comment. I was wondering if you think you're satisfied with the impact of the promotional approach that you are using on the value side. Or if you think you need to be any more aggressive in terms of whether it's the discount or price point that you are offering as you move into the rest of this year and into next year. Leonard A. Comma - Chairman & Chief Executive Officer: Yeah. I think, if you pay attention to our two-year comparisons, it was strongest in the last period. And that's probably the best indication of how well those value promotions are working for us. And taking a balanced approach to holding onto some margin while also driving some transaction and sales. So, it's a competitive marketplace. We're trying to walk the fine line both profitability and sales. It seems like there's a lot of aggressive activity out there that is willing to sacrifice a lot of the margin. We're trying to make a balanced approach on our end that retain some of the gains that we've had in this premium positioning, while at the same time make sure that we're being competitive in the marketplace and not just allowing the bottom side of our menu – the value side of our menu to completely erode. David E. Tarantino - Robert W. Baird & Co., Inc. (Broker): Great. That makes sense. And, Jerry, I was wondering if you could help us – I think it was helpful that the components you gave on the upside for Q2. But you mentioned a couple of factors, margins came in better than anticipated and you had some good cost controls. So, I was wondering if you can elaborate on what the drivers of those are and whether you think you are able to continue those as you look into the next couple of quarters?

Yeah. A couple of things, so one, on the margins, the promotional activity at both brands, actually saw improving sales, but was really good flow-through on those sales, driven in part by, I think, just overall good expense control in the restaurant, but also we were helped by the continued deflationary nature of the commodity markets. And so – and you can see that reflected in our guidance as we continue to forecast commodity to be more deflationary and what we had in the prior quarter. So, I think that's part of that and I think you'd expect to see that going forward. The other, I think, is just related to some of the work that we're doing with – that we'll talk about in much more detail when we see you guys at the Investor and Analyst Day with our overall cost control. So, we've been – has been very visible throughout the organization and I think it's just natural that with that conversation and the level of activity that we're seeing here that you're going to have folks that are a bit more cost conscious than they might otherwise be. And I think we're seeing some of that flow through, although I can tell you it's very difficult to put your finger on exactly what that is and how much it is. But it would be odd to not have that bleed through the numbers. And I think that's also reflected in the guidance going forward. David E. Tarantino - Robert W. Baird & Co., Inc. (Broker): Great. Thank you.

Okay. Thank you. And our next question is from the line of John Glass of Morgan Stanley. Your line is open now. John Glass - Morgan Stanley & Co. LLC: Thanks. Thanks very much. Jerry, you alluded to the fact that you might see some costs of the restructuring and stuff coming through later this year or that the guidance was exclusive of that. Where are you maybe in that process? I know you are going to give probably more detail in a few weeks, but where – is some of this refranchising underway now? Is it reasonable to expect any refranchising transactions in the calendar year? And can you get ahead of those with the G&A cuts or those lagged (24:16) just by their nature of need to cut the stores first?

So, I won't give a lot of color on that. What I will tell you is, one, we will give a lot of detail around that in, what, 10 days. But the corporate level G&A cuts are independent of the refranchising. I don't think you need to do a refranchising to start all of the G&A cuts. John Glass - Morgan Stanley & Co. LLC: Okay. That's helpful, I guess. And your guidance for the year, this quarter had some – you mentioned some unexpected puts and takes. Is there anything else that is notable in your thinking about the current earnings guidance that we wouldn't see, movement in the G&A line or lack of assumptions in G&A? Are there any underlying assumptions we need to know about now just to reconcile that with our own forecasts?

Yeah. Let me see if I can make this answer a bit more helpful to you than what my last answer was. John Glass - Morgan Stanley & Co. LLC: Thank you.

So, the way I would look at this, just walking through the math, John. So, we're at $1.77 in Q2, year-to-date EPS. If you just take the midpoint of our guidance, call it, $3.57, that implies $1.80 in the back half of the year rolling over $1.38 last year, roughly a 30% increase. The way I would look at this is when you look at the 53rd week impact which I think we've identified as being $0.08 a share previously. Then you look at the lower share count based upon what we've purchased offset a bit by some higher interest expense and lower SG&A which is primarily related to the ongoing lower pension expense and lower incentive compensation, because this year's performance isn't nearly as good as last year's performance was. That makes up about two-thirds of that 30% increase. The other one-third or roughly 10% of that earnings growth is related to sales and margin activities or the four walls of the restaurant, if you will. John Glass - Morgan Stanley & Co. LLC: Thank you. You made good. Thank you.

Okay. Thank you. And our next question is from the line of Keith Siegner of UBS. Your line is open now.

Thanks. And, Jerry, that was very helpful, that last bit of clarity. So I appreciate that as well. Switching gears a little bit, if we think about some of the things we have learned through this earnings seasons, right, we have learned about loyalty programs, kiosks, mobile order and pay, delivery tests. Basically all of the major mainstream quick service brands have a lot of tests in place and a lot of this we're going to see even before year end at some of these big chains. And I know I ask you this a lot but, Lenny, if you could just give us an update about what tests do you have in place, maybe just what's your philosophy about how you are thinking about these things. Just some form of update. And again, we've really learned so much about all the other brands this earnings season, so just like to know the latest about you too. Thanks. Leonard A. Comma - Chairman & Chief Executive Officer: So, when you look at the list of potentially all things digital in delivery, we understand that in order for us to be competitive going forward, we will have to play in that space. What we've been able to evaluate and get some information on is really this understanding of how much of that business is being led by the aggregators that are out there or the third-party folks that do digital for major organizations and how much of that is being done internally. And what we see is, there is going to be a pretty decent contest with the aggregators versus the internal investment. Either way what you're going to see is every major brand including us will play in that space, whether we do it all ourselves or partially ourselves, we'll be involved in everything from delivery to apps and digital applications that allow us to manage everything from CRM programs to mobile payment. I can't tell you that we have decided on the path forward as far as how much of that we want to handle internally versus how much of that we want to use the aggregators for but we have lined up several tests using both internal and external resources to sort that out within the coming years. So, our plan is to wade into that water pretty deeply and get a good understanding of the path forward and make a firm commitment to use that path. So, Keith, I know there is not a ton of detail there on all that we'll be doing specifically about the Qdoba brand. As I've talked about in the past, is a little further ahead than the Jack in the Box brand, we built an infrastructure for an app and a digital test there and we currently have that in test. We know that there will be some learnings that come out of that we will be able to apply to the Jack brand as well. And I would say, in the next six months to 12 months, we should feel a lot more sure about where we want to place those investments and how we want to move forward. But I don't feel like we're behind and I feel like the information we have and the testing we've done is right on par with where everybody else is from the standpoint of understanding and figuring out how we move forward. I don't think anybody has got it sorted out, but I do think that everybody's making that commitment right now.

That's great, thanks. And then maybe just one follow-up to an earlier question. You mentioned that product and promo for 4Q is exceptional versus 1Q to 3Q, which is really exciting considering that we had the Declaration of Delicious, Million Burger Giveaway, 29 new product updates. Should I think of it as the 1Q through 3Q in total or is this even exciting compared to those promos and products? Leonard A. Comma - Chairman & Chief Executive Officer: I really don't think that we've done anything in the first three quarters that was as exciting as what we expect to happen in the fourth quarter from a product perspective. The core product improvements that we did earlier in the year, I think, have got an exceptional results from the standpoint of the consumer recognizing the quality improvement, but I also recognize that, that's not a new product and getting attention to that in a short-term is harder to do, so that's more of a long-term play, and it really flew in the face of a lot of short-term discounting that was going on out there. In the fourth quarter, I feel like we have both some exciting discounting and some exciting new premium products hitting, and I think that's probably from a competitive environment standpoint going to stack up a little bit better.

That's great. Thank you very much.

Okay. Thank you. And our next question is from the line of Chris O'Cull of KeyBanc. Your line is open.

Thanks. Good morning, guys. My question relates to the revamped menu at Jack. Lenny, you mentioned that food quality scores have risen with the core guest, but I am wondering if the changes have increased their likelihood to return or whether you have seen that score increase in the survey work. Leonard A. Comma - Chairman & Chief Executive Officer: Yeah, great question. You could be a fly on the wall to our consumer insights conversation. And yes, the likelihood to return has increased. And we saw even in the original taste testing that we did that the likelihood to return would increase, then we had to go prove it out by actually launching the product and we're happy to report that we're seeing that now in the real world. So, pretty pleased with that. We think that the long-term ramifications for the core product improvements are positive. And we're looking forward to seeing all that we'll do.

Okay. And then – that's good to hear. And then just a question on Qdoba. I mean the comps and the transactions clearly made a nice rebound, but the profit dollars per store were flat to down, it looks like, year-over-year. Is this a sacrifice the brand is intentionally making to build awareness and trial? And if so, how long do you plan to use this kind of promotional strategy at Qdoba?

Yeah. Chris, I'm going to jump in and address this at least in the beginning here. So, if you look at the restaurants that are the non-new restaurants, those margins were actually up year-over-year even with the additional promotional activity and that's where I was getting to earlier when I mentioned that the flow-through on those promotional sales were actually quite good. We've opened up over the last three quarters 28 new units, which is 8% of our overall company store base for Qdoba. And so that is impacting the margins down a bit, although the average unit volumes on an annualized basis are over $1.1 million in those new units. And then if you look at the areas in which there would be a margin drag, it would be the areas that you would expect a new restaurant to have a margin drag, so they have a little higher labor, which is shorter-term, not longer-term, so you'd expect that to improve. They have a little higher food cost because of just the extra waste, again, more of a learning standpoint. And then you'd expect that to go away. The other piece that's driving a little higher operating cost is the depreciation because they're all brand new restaurants. And so they're going to have a little higher depreciation on that. But other than that, the restaurants are performing very well. And I would say other than the depreciation and perhaps a little occupancy cost you'd expect these restaurants to begin to perform similarly to what the longer-term openings are.

That's helpful. So the margin percent of the comparable base, Jerry, then is it up year-over-year with...

It is. It's up. It's up a bit, Chris. It's not up a ton but it is up a little bit.

That's helpful. Thank you. Leonard A. Comma - Chairman & Chief Executive Officer: Chris, you asked about the promotion strategy for Qdoba and whether we were intentionally sacrificing margin, I think that Jerry addressed the margin information that you needed, but I will, from a strategic standpoint, say that when we look back at Q1 and what we learned as the Jack in the Box brand committed a lot of resources to roll out a core products improvement initiative that was one of the biggest initiatives we've had in years. Once we committed to that, we were not able to pivot as quickly to the competitive activity that was in the marketplace and negatively impacted our results. When we took a look at what was happening with one of our major competitors in the fresh Mexican Grill space, we didn't want to have the promotional activities that we were seeing from that major competitor negatively impacting Qdoba brand. So in fact, we did pivot and make sure that we had significant amount of promotional activity in the marketplace at this time. And we'll stick with that strategy as long as the environment requires it.

Okay, thank you. That's very helpful.

Okay. Thank you. And our next question is from the line of Alex Slagle of Jefferies. Your line is open.

Thanks. A question on the Qdoba media strategy and if you can update us on the TV advertising tests, sort of how they performed versus your expectations and how we should think about the strategy through the rest of the year. Leonard A. Comma - Chairman & Chief Executive Officer: Yeah. So, we tested TV alongside several other things and what we actually found is that some of the other things we were doing outside of television actually drove better results. So although TV was a great way for us to bring attention to the brand and some of the innovation that was happening. We didn't feel like after the test it was the best go-forward strategy. So, we're going to use other media type platforms, online and also promotional activities intended to put offers in front of the consumers' face very directly and we'll use those types of things to bring that messaging alive and essentially get food in people's mouth, that strategy seems to be playing well for us. So, we're going to stay more on that side of the things versus television.

Okay. And as a follow-up on the Qdoba development, the fact that you have already built a good bit of the potential 25 to 30 Qdoba company stores expected this year. And it sounds like those are not non-traditional. Just seemingly it's a bit front-end loaded, more than expected. I mean, is it merely that or is there some potential upside to your implied guidance for company owned builds this year?

No. I'd say it is a little frontend loaded, but that was more by design, not by surprise. The 28 restaurants that I mentioned, though, was inclusive of late fourth quarter openings. So, we've actually opened up 19 restaurants this year versus three restaurants last year at this time. And last year's restaurants happened to be more backend loaded.

Thanks.

And our next question is from the line of Jeffrey Bernstein of Barclays. Your line is open.

Great. Thank you very much. Two questions. First, maybe, Lenny, on the broader category as was discussed earlier. It seems like there are some easing trends in recent weeks. I'm wondering whether you would say it's fair to say you have seen that at both brands beyond the weather which was noted for both brands. But just wondering if you would care to opine to what you attribute that to. It does seem like the value push remains across the industry, so perhaps it is something more macro. But you have got a whole lot better data than we do. So just wondering your opinion on the slowdown and then I had a follow-up. Leonard A. Comma - Chairman & Chief Executive Officer: We've got a couple hypotheses on that, but the one that seems to be playing out the most right now is the regional impacts that are driven by the weather. There have been some questions as to whether or not something is impacting us here in the tax season, but we're not quite sure that that's a place we want to go yet. I don't know that it's completely clear that there is a softening that's happening outside of a regional impact, we're going to keep a close eye on it. But at the end of the day, the pieces that are very clear is that the industry continues in a deflationary commodities environment to be aggressive. And we're going to stay focused on those things that are pretty easy to see at this point in time, and keeping a balanced mix of both promotional activity and new product introductions into the marketplace. But I'm not so sure that there is anything we're seeing, Jeff, that has us in a place where we would say, here is the right response to a softening in the industry or some long-term economic impact, we're just going to have to keep a close eye on it.

Got it. And then just at the Jack brand specifically, I think you noted in the press release that the comp was lagging that quick service sample set by 270 bps, which I guess was slightly worse than the 240 bps in fiscal 1Q. Maybe that's – maybe just month-to-month within the quarter things got meaningfully better perhaps, I don't know if you would offer color on that. But it seems like maybe you have stemmed the tide, but I'm just wondering how you go about taking share. Or whether you think just the competition of both breakfast and with value is just proving more challenging in the near-term, so we shouldn't expect any meaningful reversal in that trend. Maybe that fourth quarter excitement you are talking about might do it, but just wondering your outlook on being able to once again take share when the competitive pressures are so intense. Carol A. DiRaimo - VP-Investor Relations & Corporate Communications: Yes, Jeff. I'll actually take that one. If you look at the NPD data for the quarter, keep in mind our GAAP last year this time was up 760 basis points. So, on a two-year basis, we clearly took a significant amount of share and based on our eight, nine – 8.9% system comp. So, on a two-year basis, we took significant share as compared to the last quarter.

And is the expectation that you would go back to taking share as we perhaps look out to fiscal 2017? Or again, does competitive pressure just make it more difficult for anybody to be running away with meaningful share? Carol A. DiRaimo - VP-Investor Relations & Corporate Communications: Yeah. I don't have my crystal ball out today. However, I would say that we did see the gap narrow as we got more active on the promotional front in the back half of the quarter.

Got it. Thank you.

Okay. Thank you. And our next question is from the line of Jeff Farmer of Wells Fargo. Your line is open.

Thanks. Actually just following up on Jeff's question and it was touched on earlier. But just in terms of the same-store sales trends you are seeing from 10:30 to noon, any color there? I would assume it peaked several months ago, but has it begun to moderate? What are you seeing there? Leonard A. Comma - Chairman & Chief Executive Officer: Yes, it has begun to moderate, we can see that quarter-to-quarter. Additionally, we had mentioned back when we reported first quarter results that the breakfast items that were being sold outside of that 10:30 to noon timeframe had taken a hit, which we thought was largely due to the rollover from prior year's promotions for Jack in the Box. And it was certainly compounded though by the aggressive marketing of the breakfast all day promotion from one of our major competitors. But as we move here into Q2 and Q3, we do see that the 10:30 to noon timeframe, which is the timeframe we set was most impacted has waned. And we also see that the impact outside of that timeframe has been negated. So, we feel pretty good about where we are right now. We are able to isolate it to the 10:30 to noon timeframe and able to think about strategies that would help us to protect that timeframe and restore it going forward.

That's helpful. And then, Jerry, I think the franchise revenue margin, almost 54% in the quarter, looks like according to my model the highest it's been in five years or six years, something along those lines. So two questions. Do you expect to be able to hold on to that margin level? And could we perhaps even see that margin level move higher as we get into FY 2017?

Okay. So, let me give you the quick answer on the 54% margin sustainable, short answer is no, at least not in the short-term anyway. Let me give a little color around this rent adjustment and I'm going to try and make this brief and understandable. I think I'm going to fail on both of those targets. But this is somewhat technical and it's all accounting. When we sold the Southeast markets, we did analysis with outside real estate folks determined the rent that we should charge to those franchise operators, it was determined that the rent that we were paying under our lease was above market rates of rent. And so we decided to charge the franchisee in those markets, market rates of rent because they were lower performing restaurants, I mean one of them to be healthy in terms of cash flow. So, we basically created a rent subsidy not a technical term, but that's pretty much what we did and we had to then set up a reserve and a core (44:24) liability for that, which represented the subsidy for the entire lease term for all the restaurants in which we provided that subsidy. But what we did also in those contracts with the franchisees, we indicated that if sales improved, the rent could go up and either reduce the subsidy or wipe out the subsidy completely. And so we look at that on an annual basis which is what you saw on the second quarter. Good news is that we are seeing significant improvements in sales in many of those locations and in some of those markets, which necessitated us to effectively reduce the amount of that liability or that subsidy and therefore we got a $1.9 million benefit in the quarter. You won't expect to see any improvement or anything similar or even close to that in Q3 and Q4. And we'll look at it again next year and we'll adjust as appropriate. But if it were me, I wouldn't model anything for that adjustment because I don't know if that will go up or that will go down and if it does either, I don't know how much it's going to go up or down. So – but it will be based upon sales performance in those markets. It's technical accounting. We're happy that we have the adjustment. It is sales based again, so that is the good news, but it wouldn't be something I would rely on going forward.

Okay. Thank you.

Okay. Thank you. And our next question is from the line of Nick Setyan of Wedbush Securities. Your line is open. Nick, hello?

(46:13) questions. And then I do have kind of a bigger question. First, what was the deflation? I guess we have seen in Q2 and Q1? So, should we think about maybe that food and packaging going – taking another step down in Q3 and Q4? How should we think about the cadence there? Carol A. DiRaimo - VP-Investor Relations & Corporate Communications: So in the press release, we shared what the deflation was for each brand in the quarter.

Yes. Carol A. DiRaimo - VP-Investor Relations & Corporate Communications: And if you look at that on a go-forward basis, obviously, we increase our expected deflation numbers. So in the quarter Jack deflation was 2.9%, I believe. I'd say you're somewhere sort of in the same ranges of that 2% to 3% for the back half of the year.

Got it. And under occupancy and other, we did see a big jump as a percent of sales year-over-year at the Jack in the Box brand. Is that just deleverage on the comp? Or are there some kind of one-time items that will go away and we should see less of a headwind in the second half?

No, Nick, good question. Let me give you guys a little color on that. We mentioned in the press release about equipment upgrades impacting margin. So we've done a number of things in the Jack in the Box brand to improve the restaurants and technology and also equipment. We've improved lighting across many of our restaurants to drive same-store sales growth in the late night hours. We've also upgraded our POS hardware. We've also completely installed the Coke Freestyle systems and we've upgraded our restaurant computer network systems, which will both improve security but will also enable us to offer free Wi-Fi to all of our guests at all of our locations. So, the combination of all of those things adds about 60 basis points in costs, about 40 basis points is depreciation of that.

Got it. That's great color, thank you. And then I guess the bigger question is, since we saw the change over in the ad agency, it does seem like there has been a little bit of an evolution in how Jack as a character is portrayed and I guess how your – I don't know if is the right word is as memorable, the commercials in terms of the kind of comedy that's used, et cetera. Is there a way that you guys maybe have measured the impact of the newer commercials versus how impactful they were, memorable they were in prior years? Or I guess what is the overall strategy of how this evolution or how you guys are thinking about the evolution of how you guys plan on portraying Jack in the Box's brand? Leonard A. Comma - Chairman & Chief Executive Officer: Yeah. Good question. Good insights too, Nick. We do monitor that constantly. We'll talk about that at the Analyst Day. We do have measurements that tell us when we need to make adjustments and I think in the marketplace you're already seeing some of the types of adjustments that we make based on the feedback that we've been given. So, we see what you see and just like any promotional period, we've got to freshen the advertising periodically to keep it noticeable. So you probably already noticed that Jack's voice has come back. His voice had taken a little bit of a hiatus and he was on a journey, trying to discover new, wonderful ingredients to help to declare this deliciousness and now he's back to talk about all the things that he has discovered, so more to come on that.

Great. Thank you.

Okay. Thank you. And our next question is from the line of Matt DiFrisco of Guggenheim Securities. Your line is open.

Thank you. I have one follow-up question and then an original one. So, just curious on the specific product items towards the end of the quarter and a lot of the comp focus and your trends and how you are doing versus your peers have been focused on sort of improving into the back half of the year or the implied improvement narrowing that gap with the peers. I wonder the Jumbo Jack and the product there mid-March being launched. Is that now – can you give us some color on how much of the percentage of your menu that is? Or is that a driving force, sort of the value, and that's going to be the thing that's driving the narrowing of the gap? And I guess – or should we start to see then the improvement also in the non-breakfast day part comp wise and did you see that in the month of March? And then I have a follow-up question or a real question on growth as well and development. Leonard A. Comma - Chairman & Chief Executive Officer: Yeah. Just to share why we featured the Jumbo Jack and several other products, they were all associated with the core product improvements that we've made. It wasn't any specific strategy to use one particular product to drive sales. It was really promotional in nature to get the new food in people's mouth. So, wouldn't want you to imply anything from that other than what it was, it was just – because we were going to be on promotion and we had just improved a bunch of core products. We didn't want to have promotions out there that weren't featuring those products.

But I meant more so the value bundle also towards mid-March there being launched. Is that representing a larger portion of your menu as it progresses and gains some notoriety and builds part of identifying with your brand? Leonard A. Comma - Chairman & Chief Executive Officer: I guess I'd say that's probably in the short-term, yes. But if you look at what Jack in the Box has done historically, we've used value bundles, just like the ones we just did when we needed to get aggressive in the marketplace with promotions. I think probably what's changed today is that everybody has some form of a value bundle out there. And so, it's not so unique to Jack in the Box, but this – what you see us doing today is very much in line with what we've always done and the type of products that we've always done it with.

Great. And then just a question on development. You said in the press release here 20 Jack in the Box for the full year or for the full fiscal year primarily being franchised stores. It looks like you've – is that a net number or a gross number? Because you have opened it looks like maybe two net and then five in total year-to-date. So, I was just curious – or in gross. That seems like a big ramp-up in the back half of the year. Is that still a strong target, the 21? Or I guess if we have those coming that you must have some visibility around them if they are going to be done by September. Carol A. DiRaimo - VP-Investor Relations & Corporate Communications: Yeah, Matt, it's Carol, I'll take that question. So, yes, you're right on, it's five gross stores and our guidance on openings is always gross. And, yes, we have high visibility into the projected number of openings for the franchise and company restaurants for the balance of the year.

So, we should see those fees also flow through, I guess, in the third quarter primarily because that seems like when they will be opening? Carol A. DiRaimo - VP-Investor Relations & Corporate Communications: No, third quarter or fourth quarter, right.

Yep. Okay. Thank you. Carol A. DiRaimo - VP-Investor Relations & Corporate Communications: Operator, I think we'll – if you can prompt for additional questions.

Okay. Thank you. And our next question is from the line of Matt McGinley from Evercore. Your line is open.

Hi. Thanks for taking my question. I have a quick follow-up on the rental income benefit of $0.03 that you had. I don't need you to get into all the accounting details of what happened, but was that a benefit that helped the revenue line? Or was that a reduction on the cost side that you would have had in the quarter?

Yeah, it benefited the cost side. I'm not saying that makes logical sense, but that's where we're required to put it given the accounting rules.

Okay. Leonard A. Comma - Chairman & Chief Executive Officer: But it impacted net rental income, okay? So, that was a reduction of the expense.

Okay, got it. And then I have a follow-up on the Qdoba comp in the quarter. Can you comment on that regional weakness that you saw out of the gate with Qdoba in the third quarter? Was that just the same kind of Houston type impact that you saw with Jack in the Box or was that something broader than that? And then, on the comment on the promotional activity in the quarter, was that a timing issue or are you doing something incremental that's later in the quarter that you didn't do in the prior year? Leonard A. Comma - Chairman & Chief Executive Officer: From the Qdoba front, it was broad-based impact. It was really – it's really based on late winter storms throughout the country, more so than any particular region. And we don't have stores in Houston. So, it's certainly wasn't based on that, but 17% are in Denver. And you had a second part to your question, if you don't mind.

Yeah. The second was on the promotional cadence in the quarter. You said that it would be later in the quarter and that would accelerate the comps. So I'm wondering if that is just a timing issue or if that is something incremental that you didn't do in the prior year?

It's the timing of the promotional activity in Q3 versus where we are currently. So, lower promotional activity first four weeks, we'll have that ramp up going forward.

Okay. All right. Thank you. Carol A. DiRaimo - VP-Investor Relations & Corporate Communications: Operator, I think we have time for...

Thank you. Yes, ma'am, go ahead. Carol A. DiRaimo - VP-Investor Relations & Corporate Communications: Yes. I think we have time for one more question.

Okay. Yes. Our next question is from the line of Jake Bartlett of SunTrust Robinson Humphrey. Your line is open.

Hi, thanks for taking the question. My question was on your expectations for the promotional environment for the rest of the year. Do you expect it to remain as intense as it is now? And just kind of wanted to dig into your confidence that consumers are going to be receptive to – it sounds like more the higher end LTOs that you are going to be promoting in the fourth quarter that you feel good about. Leonard A. Comma - Chairman & Chief Executive Officer: Yeah. So, I think your first question on the competitive environment, I fully expect it to stay as is and it potentially could get more aggressive just depending on whether or not some of the major competitors that have suffered some losses in sales most recently, whether or not they're seeing any type of resurgence, if not, I would expect them to continue to get even more aggressive than they are today. So, that's sort of a week-by-week view of the marketplace that we have and in all of our promotional lineup, we have contingency plans in place to pivot to more aggressive promotional activities if necessary if we see the marketplace try to get more aggressive than it is today. So, I think that's the first piece. And the second part of your question which I wish I could recall at this time.

It was really, I think, part of the same answer. But just the confidence that you have that consumers are going to be receptive to more of a more premium or quality message by the fourth quarter. It seems like they haven't been as much year-to-date. Leonard A. Comma - Chairman & Chief Executive Officer: Here is the way I would look at that. If we're doing a premium message on a completely new product, the odds of them being receptive are much higher than when we do a premium message on an existing product. So, where we feel the confidence is that, when it comes to the discount oriented things that we'll do, those are products that are familiar to people and they will instantly see the value when they see the comparison in the everyday price to the LTO price. When we look at the premium products that we're putting in the marketplace, they'll be completely new news to the consumer and we think that increases the likelihood of success there.

Okay. And lastly real quick and I – forgive me if I missed it. But if you could give what your pricing was, the menu price increases for both concepts. And I think it's going to imply a negative mix at Jack in the Box. I am wondering whether that – we should expect that to continue throughout the rest of the year. Carol A. DiRaimo - VP-Investor Relations & Corporate Communications: Yeah. So, the pricing for both brands, I think, we've said this on the call in Jerry's comments, the price for Jack was 3.2% for the quarter. And for Qdoba, it was 1%. And yes, we did have negative mix at both brands. We don't talk about our forward pricing, price enrolls in and out all the time. And keep in mind, we obviously had a minimum wage increases in California that we did take some pricing for.

But it is fair to think that we assume that mix could possibly even get more negative given that you will have kind of a full quarter of the value bundle? Carol A. DiRaimo - VP-Investor Relations & Corporate Communications: It will really depend on what the activity is and what's the balance is on the other products that we are running.

Got it. Thank you very much. Carol A. DiRaimo - VP-Investor Relations & Corporate Communications: Great. Thanks, everyone, for joining us today. And we look forward to speaking to you all on the 24th and 25th in Kansas City.

Okay. Thank you. And this concludes today's conference. Thank you all for participating. You may now all disconnect.