Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jack Second Quarter 2023 Earnings Webcast. [Operator Instructions] Thank you. Chris Brandon, Vice President of Investor Relations, you may begin your conference.

Thanks, operator, and good morning, everyone. We appreciate you joining today's conference call, highlighting results from our second quarter 2023. With me today are Chief Executive Officer, Darin Harris; and our Interim Chief Financial Officer, Dawn Hooper. Following their prepared remarks, we will be happy to take questions from our covering sell-side analysts. Note that during both our discussion and Q&A, we may refer to non-GAAP items. Please refer to the non-GAAP reconciliations provided in today's earnings release, which is available on our Investor Relations website at jackinthebox.com. We will also be making forward-looking statements based on current information and judgments that reflect management's outlook for the future. However, actual results may differ materially from these expectations because of business risks. We, therefore, consider the safe harbor statement in today's earnings release and the cautionary statements in our most recent 10-K to be part of our discussion. Material risk factors as well as information relating to company operations are detailed in our most recent 10-K, 10-Q and other public documents filed with the SEC and are available on our Investor Relations website. I'd like to provide our conference and event schedule for the next few weeks. We will be attending the Cowen Future of the Consumer Conference on Tuesday, June 6; the Baird Global Consumer, Tech and Services Conference on Wednesday, June 7; and the RBC Capital Markets Consumer Conference on Thursday, June 8, all in person and all taking place in New York City. The week following, we will attend the Oppenheimer Conference on Wednesday, June 14, which is being held virtually. We look forward to participating and seeing many of you there. Lastly, we'd like to apologize in advance for any background noise. Our headquarters are 5 miles from Miramar, and the naval base decided to go ahead with their training exercises this morning regardless of the Jack in the Box earnings call. While fun to watch out the window, it is not ideal for a conference call. So please forgive us for any aviation or top gun sounding noises throughout our remarks. And with that, I would like to turn the call over to our Chief Executive Officer, Darin Harris.

Thanks, Chris. We are very pleased to report strong quarter 2 performance as we are seeing momentum from our strategy execution and the results prove it out. Our performance can be best characterized by a sharp increase in same-store sales, improvements in restaurant and franchise level margin, growth in adjusted EBITDA and operating EPS and combined with continued confidence in reaching positive net unit growth for the year. This progress on top of our results from the first quarter have given us the confidence to raise annual guidance across key metrics. In doing so, we want to thank our franchisees, dedicated center staff and our restaurant-level team members who are working together to successfully execute our strategy and put wins on the scoreboard. They are a talented team that makes it possible to achieve our objective of creating value for our shareholders. I will keep utilizing our 4 strategic pillars of the guide in discussing the progress and outcomes of many actions supporting our strategy before turning it over to Dawn to review our financial results and updated guidance in greater detail. We start with building brand loyalty. In our efforts to grow sales and accelerate transactions through our crave marketing strategy and positioning. We exhibited strong calendar execution in quarter 2 by balancing value with premium offerings, beginning the quarter focused on the debut of the $5 Jack Pack combo. This new value platform can be revisited throughout the year and was particularly effective in driving incremental transactions. In January, we launched a new beverage layer through our partnership with Red Bull, debuting our premium Red Bull infusion ice beverages. These products expanded our variety and drove incremental sales in our beverage category by providing customers with a new use occasion. We also enhanced our core by rolling out…

Thanks, Darin. I will begin my review with a discussion of each of our 2 brands, followed by details on our consolidated performance and capital allocation. Finally, I will provide updates on our outlook for fiscal year 2023 as we are increasing our guidance across several key metrics. Let's start with Jack in the Box, where Q2 system same-store sales growth was 9.5%, consisting of company-owned comps of 10.8% and franchise comps of 9.4%. On a 3-year basis, same-store sales growth was 29.3%. The system-wide quarterly same-store sales breakdown was as follows: a 9.1% increase in pricing, reflecting a sequential decrease of 90 basis points; a 0.8% decrease in transactions, reflecting a 30 basis point sequential improvement; and a 1.2% increase in mix, reflecting a 230 basis point sequential improvement. We are especially encouraged by the return of a positive year-over-year mix shift for the firm time since Q3 of 2021. Transactions were supported by our hook and build strategy as well as the successful marketing of our barbell menu with culturally relevant messaging. These marketing initiatives, in addition to improvements in hours of operation and ops execution, have been the key drivers of our improving transactions over the last 3 quarters. Increasing average operating and dinning room hours also remain tailwinds for the Jack in the Box system. And while company ops are leading the way, franchise ops are catching up. Notably, 11.5% of net sales came from digital channels, the highest in Jack's history. The majority of digital sales stems from third-party aggregators, but mobile ordering on the Jack app is increasing month-to-month and web ordering is starting to build as well, having launched fairly recently in Q1 of 2023. On product categories, notable contributions came from sides, burgers, chicken and breakfast. Our daypart generated positive sales, but…

[Operator Instructions] And your first question comes from the line of Brian Bittner from Oppenheimer.

I just boarded a plane. So hopefully, you can hear me. But Darin, Jack in the Box, same-store sales have significantly outperformed so far this year relative to your original guidance that you gave at the beginning of the fiscal year. What's been the biggest drivers of the upside surprise? Is it a flip in the mix? Or is there anything else that you'd like to describe as what's driving this upside? And what are your current indicators telling you about the health of your core consumer as we move forward from here?

So I think overall, Brian, it's been a strong quarter as you can tell and I think there's just a triangulation of things happening. We've had strong operations performance. We've had the right promotions at the right time speaking to the right guest. And from those 2 things, that's led to some things we've done in our marketing speaking to our guests. The last piece of this is with our marketing and offers all 3 things are resonating. So we've had the combination of price. We've had sequential improvement in transactions. We've had positive improvement from mix. And then the acceleration of our digital business. So all those things are working together to really drive our top line. And so we feel great about the momentum we've been able to maintain in our business.

And your next question comes from the line of Lauren Silberman from Credit Suisse.

And congrats on the quarter. Would you be able to talk about the cadence of comp that you saw throughout the quarter? And any color on what you're seeing quarter-to-date? I know you talked about continued momentum. And then related, any additional color you can provide on what you're seeing across different consumer cohorts? I know the past couple of quarters, you had mentioned about regarding the strength in the low and high-end consumer and potentially some opportunities in the middle band.

Lauren, thanks for the question. I would say on the cadence on composition during the quarter, we really have some favorable momentum in specifically February and March. As a reminder, our quarter ended April 15 And trends in Q3 are -- remain favorable. The momentum continues, and we're active on the innovation front. We have a lot of strong promotions coming in Ribeye burger. We have fresh toast sticks which is always a fan favorite. So a lot of positivity going into Q3.

And as a result, Lauren, we've taken the chance to move our guidance upwards to mid- to high single digits. So as Dawn remarked, there's really no big changes in momentum. Our AUV is strong and it continues to remain favorable. And then I think you mentioned something about the consumers. And so as we look at the business and the income level -- I'm sorry and the income level of our customers. What we've been able to do is we've seen a really good balance between all levels of income. And most substantially over a 2-year basis, we're seeing heavy contribution from high income. But overall, this year, we've seen a really balanced across all levels of income and positive momentum in both sales and transactions.

And your next question comes from the line of Dennis Geiger from UBS.

Great. Encouraging development update, specific to the unit growth and the development agreement that you highlighted. I'm wondering if you could talk a bit more about sort of where franchisee sentiment is now on development and broadly, particularly as it relates to the thoughts on the environment and cost across cost pressures and interest rates. And if you're seeing any impact there, obviously heading in the right direction with all the agreements. Just if there's been any impact there, Darin, and how you'd kind of frame some of that up?

Yes, Dennis, I think -- as I think about our development pipeline, the biggest positive, seeing our people continue to show desire to sign agreements where we mentioned in our release and in our commentary that the pipeline for real estate continues to build. We have more locations in both permitting all the way through construction than we've had in the last 10 years. So the sentiment is positive. I think naturally, as most of the industry has described, we've had a run-up in costs, but we've also had a run-up in pricing to offset some of those costs related to our sales. So all the benefits we are getting from a lower cost model, we've had to make up for in price or have been raised because of the increase in cost of build. So long story short is favorability from the franchisees and sentiment is positive. And ultimately, we're showing it through our pipeline growth. And so at this time, we've kept our guide at 25 to 30 for gross openings.

And your next question comes from the line of Andrew Charles from TD Cowen.

Darin, we got a lot of questions around what is different today for Jack in the Box versus the brand is more challenged 2008-2009 experience, that, of course, predate your time with the company. And it's good to hear about the continued momentum that you're seeing in 3Q. But hypothetically, if we were to see a more challenging macro for the industry, which part of the crave playbook would you anticipate leaning into more to help preserve traffic?

I think for us, it's balancing our barbell approach to both premium, which is we've seen working, but also having a very strong value offer that drives people into the restaurant. So we've been deeply in the middle of our value menu, things like $5 Jack Pack. We also have highlighted things like munchies Under $3 as a way to drive the value, but also combine it with a premium promotion like we did with the Ribeye Burger or Popcorn Chicken. And then beyond that, I think we've been really strong at driving our digital business compared to pre-pandemic and 2008. And I think that helps us as far as driving check and substantially increasing our overall AUV in ticket.

And your next question comes from the line of Gregory Francfort from Guggenheim Securities.

Darin, maybe just a follow-up to Dennis' question. I would imagine you're starting to get a look into what the development pipeline looks like for 2024 in openings. And do you expect acceleration in 2024? Do you expect to have to start to play out? And can you talk maybe just a little bit about franchisees balancing remodel CapEx versus growth CapEx and the way to fund that?

Yes. I think, as I mentioned, our pipeline, we've already have a line of sight into 61 restaurants that between now and the end of next year that are in the permit -- permitting and design and construction phases. So we have a very strong pipeline. Some of those obviously can get extended beyond '24. But the pipeline is as strong as it's ever been at Jack in the Box. From a standpoint of related to reimage and franchisees balancing between reimage and development. At this point, it's a balanced approach. Most of our franchisees have shown the interest in growing, and that would be the primary factor is where their capital dollar is going. And over time, as we begin to prove out our remodel program, I anticipate more and more franchisees will participate because of the return on investment from that opportunity. We're at the early stages of our reimage program. At this point, we rolled it out. We've had 71 of the 405 forms submitted to move to permitting. And those -- we'll have 5 of those remodels opened -- or reopened this year. And so we'll be able to report on the progress, and we anticipate a pretty strong return on investment. And at the same time, the company is testing our crave reimage, and we're going aggressively into the crave reimage program, so we'll be able to report on results that I think will increase the momentum of the system to want to do more reimages but not at a lack of a desire for growth.

And your next question comes from the line of Chris O'Cull from Stifel.

Dawn, I wanted to make sure we understood your comments about sales momentum continuing into the third quarter. Just wondering if your implying comps are still up in that high single-digit range. And then how much pricing will the company stores have during the last 2 quarters and maybe give us any commentary you think about menu mix change?

Yes. I think we're just going to say that momentum continues to be favorable. As far as pricing, we guided to pricing being up high single digits. Pricing through Q1 and Q2 is about net of 9.7% for the Jack brand, so kind of continuing at that higher level. However, if you recall, the most substantial pricing we took was in Q3 and Q4 last year. So the rollover of pricing is going to decrease as we progress throughout the year.

And your next question comes from the line of Alex Slagle from Jefferies.

Congrats on the quarter. With the outlook for 65 to 85 units to be refranchised this fiscal year. Does this alter your view on the longer-term opportunity for 120 over 3 years? I mean perhaps it's premature to talk about that, but it would seem you're happier about the kinds of valuations and development agreements you're seeing. So any color on how you're thinking about the opportunity beyond this year?

Yes, at this point. Our focus on the refranchising transactions is that, we've provided the guidance at 120 over 3 years. We've had offers on every market. We like the valuations that we've received. They're accretive. And so what we've shared is that they'll probably move faster than the 3 years. As we get through this early stage of the 120, then we'll update you on the further or the next steps related to our overall refranchising strategy. And with that, as we've stated before that we will use proceeds towards share repurchases and you see in this report, we increased our guidance to at least $70 million in share repurchases this fiscal year.

And your next question comes from the line of Eric Gonzalez from KeyBanc.

Congrats on the quarter. My question about your guidance. Given the momentum that you're seeing as you head into the third quarter, I'm wondering whether you might be being a bit conservative with the outlook for the second half? Just given that you delivered low double-digit EPS growth in the first half, and I think the midpoint of the guidance implies that EPS would be down mid-to high single digits in the back half. Obviously, you're lapping the Del Taco acquisitions, but maybe if you can comment on that assumption and then call out any other onetime items that we should note as we think about the next 2 quarters?

Yes. I don't know that I have an opinion to say that there's anything conservative or otherwise. We're focused on our guidance. We've shown that we're putting results on the scoreboard and we'll continue to keep strategy and so forth.

And your next question comes from the line of David Tarantino from Baird.

Darin, I think you referenced in your prepared remarks some pricing analytics that you're doing and helping the franchisees with better, I guess, technology around pricing. So I was wondering if you could elaborate on that and also talk about really the outlook for pricing. Do you think you can price or your franchisees can price ahead of inflation to try to recoup some of the margin pressures they've had or profitability pressures they have? Or is this more of a strategy to just offset the inflation they're seeing and drive margins through some of the productivity initiatives you mentioned? So any color there would be great.

Yes. So I think I'll start with the latter part of the question first, and that is, what we've been able to do with pricing is cover this year's inflation what we've seen in food and wage. And so that was our focus is going to this year and make sure at least through pricing covering this year's inflation and then through other means, whether it's operational performance, better discipline around how we look at mix and what we're promoting chip away at last year's inflation. And we've been able to do that on both brands is make up for some of the margin we lost in 2022. So that's been our focus. Now about 16 to 18 months ago, we built an internal pricing team. We've supported them with technology tools and machine learning so that we can go in and we can understand the ability to find strategic pricing opportunities by store, by market and do competitive benchmarking. So we've been able to find each quarter different opportunities related to pricing, and that's where we remain focused is how do we find by store, by market and by product, an opportunity to price more strategically, and make sure we're in line with the competition versus just historically, the approach looking at pricing sensitivity and then spreading a price across the whole menu. So now we're looking specifically by item and by market.

And your next question comes from the line of Chris Carril from RBC Capital Markets.

So Darin, can you expand maybe a little bit more on the progress you made in staffing levels and in-restaurant operations? And maybe help us better understand to what extent you think that's providing a tailwind to the momentum you're seeing at Jack here? And then just relative to the other initiatives you have in place?

Yes. As far as from a staffing standpoint, what we've seen is Jack on the company-owned side, it's been working since we implemented our playbook, we're at pre-COVID levels, staffing actually exceeded those on the company side of the business. Our franchisees have been following that playbook and making up for some of the lost ground. We're about 0.6 hours away from being at pre-COVID levels on the franchise side of the business. So we're definitely seeing improvement there. And on the Del Taco, we're about an hour off of pre-COVID levels. And the team has really made up some progress over the last 1.5 quarters using some of the same playbook and their own. And so yes, we still think there's upside. From a Q2 standpoint, we think it had about a 2% impact to same-store sales and a positive -- from a positive standpoint. And then we still think there's opportunity in the back half of the year.

Your next question comes from the line of Brian Harbour from Morgan Stanley.

Can you just maybe comment on the mix component of the same-store sales? And is that more about channels, delivery, it sounds like it's still performing well. Or anything in customer behavior you'd call out? Or just was it some specific promotions that drove that?

Yes. I mean we were very pleased to see the favorable mix return up 1.2% favorable to Q1 performance. I'd say that we've seen positive for the first time, I guess, since Q3 of 2021, so 6 quarters. We've seen guests move -- more guests move into the premium items that is contributing to some of that mix benefit that we're posting.

To add to Dawn's comment, we've been balancing between an innovation item in core. And what we've seen is a carryover effect when we promoted core that it reminds our guests of a product that they love, such as our Bacon Ultimate Cheeseburger, and we saw that carry over into this quarter more guests ordering that premium product.

And your next question comes from the line of Jeffrey Bernstein from Barclays.

Darin, I wanted to follow up on the franchisee pipeline of unit opportunity and their health more broadly. On the pipeline, I think you said you have like 60 or so Jack units that are in permitting, design and construction, which presumably, I guess, is double the 30 gross units you're expecting this year, although I'm not sure if that 61 is inclusive in it. But with an 18-month type pipeline needed to open up a new store, it doesn't seem like the growth in fiscal '24 will be that much more than '23. So just trying to gauge, I know your prior target was to get to 4% plus net unit growth in '24. I would think that that's been delayed a little bit. But just trying to get your expectation for how many you think gross openings you could have in '24 and whether it's any risk that franchisee balance sheets are elevated or are they becoming a little bit more cautious that the openings might lag the commitments?

We will guide '24 later this year as we typically do and then we provide longer-term guidance at our Investor Day. Overall, as I mentioned, we are positive about the pipeline. The pipeline that we've seen at Jack in the Box is the strongest I've seen since my tenure and in the last 10 years. We've approved more sites, as I mentioned in my commentary, in the last 3 to 4 quarters than we had in the prior 3 to 4 years. So all those things point to a stronger pipeline of growth. We are definitely -- and I think the industry is seeing is that the time from site to open is taking longer because of labor, because of manufacturing challenges and getting equipment. But overall, the key is to fill the top of the funnel, and that is our commitment then with sites and get stores in that design and permitting process so we can get them open. And so 61 for us, like I said, it's the most we've had in our pipeline at this point in 10 years at this stage with more coming behind it from a site approval standpoint. So we feel really good about where we are. It has taken longer, and the cycle to build stores is not as efficient. And that's where we're spending our time, how do we make the pipeline more efficient from the time a site comes into opening, and we'll continue to focus on our guide of 25 to 30 in 2023.

And the -- please go ahead, sir.

Well, thank you again for joining the call today. We were really excited about this quarter how we performed. We believe that the strategy that we have in place is working. We felt that it was showing in results in that next quarter, we anticipate our performance to be strong as we see strong momentum. And so we look forward to seeing many of you this summer on the road at conferences, and we look forward to the next time we speak in August for our third quarter 2023 earnings call.

This concludes today's conference call. Thank you for your participation. You may now disconnect.