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Jack In The Box Inc. (JACK)

March 14, 2013 8:50 am ET

Executives

Carol A. DiRaimo - Vice President of Investor Relations & Corporate Communications

Leonard A. Comma - President and Chief Operating Officer

Analysts

David Palmer - UBS Investment Bank, Research Division

David Palmer - UBS Investment Bank, Research Division

All right. Okay, well, thank you, Carol and Lenny, for joining us here today, and sorry for the run over from the first session. I'm going to introduce Lenny here in a second. As a reminder, we're going to have -- this is going to be a fireside chat. We have index cards that will be made available to you, and we would encourage you to write down your questions, and we'll have those passed up, and we'll work those into our Q&A today.

Lenny Comma has been Chief Operating Officer of Jack in the Box since early 2010, with the additional title of President since May 2012. He has been with the company in various operation, leadership roles since 2001, and I know his operations focus has made a big difference in the last few years in key metrics, and we'll talk more about that.

Many of you know -- also know Carol DiRaimo, has been with the company since 2008. She's been the VP of Investor Relations and Corporate Communications since that time. She's previously spent 14 years at Applebee's International, where she held various positions including VP of Investor Relations from 2004 to 2007. I know that Carol is also a leader among her Investor Relations peers, having served on the Board Directors -- Board of Directors at NIRI. Welcome, Lenny and Carol.

Carol A. DiRaimo

Thanks, David.

Leonard A. Comma

Thank you.

David Palmer - UBS Investment Bank, Research Division

I know Boston's not exactly San Diego in March, so thank you for being here. Lenny, before we get into questions, perhaps you'd start with a bit of a state of the union for Jack in the Box.

Leonard A. Comma

Sure. So I'll take a few minutes and just share what's happening with Jack and then Carol and I will entertain any questions. I guess there are 3 components that I want to -- that I really want to speak about that really make up our investment thesis. The first one is our franchising business; second one, I'll speak a little bit about company operations and then thirdly, speak a little bit about what's happening with Qdoba.

So first franchising, probably makes sense for those of you who may not be as familiar with the story to know that over about the last 6 years, Jack in the Box has refranchised our business and actually sold off now 76% of our restaurants to our franchisees. As a result of that activity, we've really generated an annuity like cash flow for the company, which is coming from 2 sources: One from rental income, and I can go into that in some detail later if folks want some detail on that and then second, from royalties. And there's very companies that actually have both of those streams, but the business turns out to be very profitable for us set up in that model.

Second thing is our company operations. And I can speak a little bit about what's happening with company operations and also -- how it relates to some of the initiatives that have impacted not only company but franchise. But if you look at our results in 2012, they were the best same-store sales results for company operated since 2007. We have 4.6% year-over-year increase for same-store sales for the company. And we think that, that really came from and along with franchisees that had a nice increase in sales, and that came from several initiatives that we've been focusing on for the last handful of years.

The way Jack in the Box looks at it, we'll go back to early 2000s, when just about every fast food company was focusing primarily on new food items and new news around food. A very few companies were focusing on sort of the entire brand experience, which would be food, service and the image. Clearly the winner, McDonald's, back in the early 2000s, made a commitment to focusing the entire experience, and I think that, that we've all seen what they've been able to achieve. Jack in the Box in about the mid-2000s started really taking a more holistic approach to the business. We started looking at reimages, and we have largely completed all of our interior and exterior reimages, and our new logos will be up by August in all of our franchise locations -- excuse me, by April in all of our franchise locations. We're at 100% up in our company locations at this time.

So we've got a great new look. We've also improved our food. We've improved our french fries, our hamburger patties, our bacon, our tacos, our coffee, and we continue to invest in food with new items that will hit the menu as LTOs as well as permanent new items. So we've got great new things happening in the area of food on our menu.

And then lastly, and probably most importantly over the last couple of years, our focus on service. Back in early 2010, we really just had a -- an awakening, I guess, you could say where the company realized that certain things just weren't it going well for us in the service front. Our speed of service times were too slow. Our restaurants were not accurate enough, they were not clean enough, they were not friendly enough. And so we put a huge initiative in place to sort of wake up the organization and get them focused on improving the service. We have seen a steady improvement in our service scores since that time. We've achieved 8 consecutive quarters of improvements in our speed of service times. And we continue to see that the focus in this area is paying big dividends. So if you kind of look at our results for last year and then also first quarter of this year, same-store sales for company store's up 2.1%. We believe that this is all due to the holistic approach that we've had to reimaging our stores, improving our food and improving our service. So you'll -- you can expect Jack in the Box to continue to look at the business that way. We want to make sure that we don't make mistakes that maybe prior to the early 2000s, a lot of companies were making where we were kind of one-tricked ponies, focused mainly on food and then potentially allowing other parts of your business to become irrelevant in the consumer's eyes. So holistic approach going forward is what we think will help drive same-store sales.

And then lastly, Qdoba, which is now a big part of our story. And Qdoba story is really around growing brand awareness, and we'll achieve that in 2 different ways: One, we need to grow in new units. There's some markets where we have great penetration, and as a result of that, we have great awareness and our AUVs are much higher. We have other markets that still need to be built out, and we know that by getting that awareness, we'll be able to drive up the AUVs and the results. The Qdoba results, when you look at above about 1 million AUV, we get a lot of leverage on the sales, and so we know that the brand awareness and driving up to those type of AUVs really will drive the overall results for us.

But the other part of the story is that Qdoba has a lot of great differentiating factors that our consumers are just not aware of, and we want to make sure that we tell that part of the story. So we have a new campaign and the campaign will really focus on the things that we do to provide high-quality food. For example, we smash the avocados everyday to create fresh guacamole. We're slicing tomatoes everyday to create fresh salsa. We're slow cooking our pork for 6 hours to create a very flavorful pork, we're seasoning and grilling our meats fresh every day, and seasoning and cooking our rice as well as other items. So what you see from Qdoba is really this fresh -- freshly prepared, very high quality ingredients that go into everything we do. We want to make sure that the consumer knows that. And what we've done through our consumer research is that when consumers are aware of that, they're way more loyal to the brand and way more likely to repeat their visits.

Some additional new news you may have heard earlier this week is we just hired our new President for Qdoba, Tim Casey. He has 30 years of experience in the industry, and we think he's going to be a great cultural fit to the team in Denver, but he'll also bring this focus on both branding and operations. He has a lot of experience with several great brands, one being Starbucks, also Coffee Bean & Green Leaf.

Carol A. DiRaimo

Tea Leaf. Tea Leaf, excuse me.

Leonard A. Comma

And also he spent time most recently with Mrs. Fields and TCBY, so lots of experience in branding, also lots of experience with operational execution. So we're looking forward to what he will bring to the team.

And then also just prior to finding Tim, we were able to bring Jeff Wood to the team, who has a background with Brinker in development and he is our Chief Development Officer. And it's really just showing our commitment to growing the new units at the Qdoba brand. So that's pretty much what's going on with

Jack in the Box, might be a good time to want to take questions.

Question-and-Answer Session

David Palmer - UBS Investment Bank, Research Division

Yes. I got to tell you, I'm fairly new to the story. As Carol knows, we were talking about this business before hand. It's a rich -- you could have a very rich discussion about Jack in the Box from the standpoint that it's got to -- to the big brands, and it's also got different business models. You have an operations and a customer satisfaction story, going on. So I mean, we could easily fill up this time talking about things. I find it one of the interesting things is the rent structure. Maybe we'll just get that out of the way first because I think it's interesting that there's the leverage within that model, I think, that's even unique to Jack even further than the rent. Could you maybe highlight that?

Leonard A. Comma

Sure. So one of the things to think about is we executed the refranchising strategy. We essentially sold these operations to the franchisees, but we retained control of the real estate. And Jack in the Box charges the franchisee the greater of 9.5% of sales or the underlying rent. But our rent is generally fixed which achieves for us about a 3% to 3.5% margin or spread. So that's really how we generate profit on the rentals, and keep in mind when sales go up for the franchises, our fixed costs don't go up. But their rent as a percent of sales does. So we allow leverage on the increased sales as well through that rental stream.

Carol A. DiRaimo

And that -- our rental stream was about $75 million of cash flow last year, which is about 1/3 of our cash flow. So I think that's the really probably misunderstood part of the story that's a significant part of our cash flow.

David Palmer - UBS Investment Bank, Research Division

And Lenny you mentioned the operations awakening that occurred or -- began to occur in early 2010, it's been highlighted that the drive-thru progress, could you perhaps just go through order accuracy drive-thru, overall customer satisfaction scores, anything that could numerically drive it home for us?

Leonard A. Comma

Yes. I think, first, it's good to know the background, Jack in the Box has a menu that serves anything, any time of the day. So we will serve breakfast all day. We'll serve any of the other items all day, and it creates some complexities for our operation. But I think over time, what we did is rationalize that our slow speed of service times, were due to this complexity. Yet, when we analyzed our business, clearly, we have bright spots within our operation that were performing significantly faster than the rest of our units. So essentially, we drew a line in the sand and said it's time for us to stop rationalizing that performance. We -- it was a lot of focus on basic blocking and tackling and the use of the systems that we have and holding people accountable to that. But we did it in a pretty rigorous way. We blew up a lot of things and created some positive disruption in the organization, so that everyone would understand how important it was. So I'd say that it was a combination of creating a sense of urgency. And a combination of holding people accountable that really sort of woke the organization up. But the kinds of things that we focused on, for example, continuous cooking is something in our industry that is essential, but especially for Jack in the Box, that we don't make it until you order it. We need to keep the flow of proteins moving through the grill and the fryer or else we will fall behind. But we found that as people were not using those systems, they significantly slowed down the service times. We also found that when the order was being taken, we had individuals in our operation that were doing a lot of multitasking. And especially the service worker who actually served the food through the drive-thru window, they often times were filling drinks, making shakes, loading up fries in bags, while at the same time, taking orders. But what they weren't doing is paying attention to what was being rung up into the register at a time of the order. So we created some protocols whereby the person taking the order has to confirm that the order is correct before we allow the car to pull forward from the drive-thru from the speaker box. So that significantly reduced the opportunity to make mistakes with the order, and so order accuracy was improved. And then I'd offer up that the cleanliness issues in our operation were really a matter of commitment. I wish I could create some reason why our operations are not as clean as they should be. But I think there was simply lack of commitment from the organization. And we simply needed to get committed to how important to put in the guests first. So internally, we have completely changed the culture of Jack in the Box over the last 3 years. And internally, there is a mantra and a well known sort of vernacular that the guest is always first, and in every decision that we make, if we put the guest first, we won't end up in some of the same situations that we had overcome in the most recent years from a service perspective.

David Palmer - UBS Investment Bank, Research Division

When you look at where Jack is now, speed of service and just your customer satisfaction scores versus peers, now what opportunities remain?

Leonard A. Comma

Yes. So speed of service is probably one of the biggest opportunities that still remains. So even though we've made a significant amount of progress there, we can improve the business by about another minute and still not be one of the faster QSRs in the industry. We might start getting in the hunt, but we would not be one of the faster ones. And the truth is, our overall goal is not to be the fastest. We will continue to have a complex menu with a wide breadth of menu items, in order to serve that in a way that is high quality and also believable to the guest that there's quality, we want to make sure that we take the appropriate amount of time to serve that food. But at the same time, it needs to be within this range of expectations that allows the guests to trust us and feel that they can get in and out of our drive-thru at a fast pace. So the way we will address the last sort of minute that we're trying to tackle is over the next couple of years, I would say half of the effort will really be toward additional blocking and tackling. It's really just getting our outliers to a place where they're more consistent, and the other half, is going to be getting smarter. It's looking for efficiencies in the kitchen, studying time and motion, taking a look at the equipment that we use to see if there's any slight modifications that would find us 5 and 10 and 20 seconds here and there, and we do believe those opportunities will exist as well.

David Palmer - UBS Investment Bank, Research Division

And there was an old McDonald's rule of thumb, and I know that's a high-capacity utilization box that they run, that 6 seconds off their drive-thru speed was 1 point of comp. So you're mind can raise thinking about that minute, and how big of a deal the comps that could be. Is there any way to illustrate or maybe even reflect back on the progress you've made and think about how much comps boost directly from this that you've gotten.

Leonard A. Comma

Yes. We haven't shared that number directly. But what I can tell you is internally, we've studied it and we understand what it will yield. And so internally, we do have some very specific targets around what we will achieve in 2013 and beyond. So that's probably about as far as we've gone.

Carol A. DiRaimo

What I would add to that is we know it's about 6 guests a day at a Jack in the Box moves our same-store sales by a point. So if you think about, and we've got 5 day parts, you put 1 more guest through at any of those day parts, you're almost at a point of comp, so that's just kind of sizing it, and that's how we size it for our operators too.

David Palmer - UBS Investment Bank, Research Division

Reimaging has been -- is being done by many brands now. I -- there was, I think, a bit of a 2-stage thing where the signage was done after the interiors with Jack. Could you talk about what your learnings were, where was the bigger impact in comps between in those phases. And maybe just in general, how did -- how have you perhaps tweaked and learned through your own reimaging experience?

Leonard A. Comma

Sure. I think first, we haven't actually shared any specific comps associated with just the reimage, but keep in mind that with everything else we executed over the last 2, 3 years, it would be difficult for us to parse that out. However, internally, we do feel quite confident that we're getting a positive return on the investment or obviously, we wouldn't be doing it. But if you take a look at what's to be learned, I think the key message is you need to do this any type of major capital investment you need to do it in collaboration with your franchisees. That's probably the biggest lesson learned. We -- when we included the franchisees, we were able to gain a lot of efficiencies in what we were trying to execute. We were able to reduce the amount of downtime to the operations. We were able to reduce the overall cost of the improvement. So I would say that was probably the key lesson learned of the entire thing. Going into it, the lesson that we learned prior to even breaking ground on any of these things, was that if you're trying to serve food in a sort of current restaurant environment that has now these fast casual entities and a lot of improvements happening in casual dining, you will soon find yourself outpaced by all those investments even in the QSR space. And essentially, if we're going to make that simpler, the guest has a higher set of expectations today based on what’s happened in the fast casual space and as a result, the QSRs or fast food can't afford to allow their facilities to become irrelevant on the guest side. So we certainly had to learn that lesson and then commit to investing going forward. And I think that we'll have our eyes on that on a continued fashion.

David Palmer - UBS Investment Bank, Research Division

It was just dawning on me as say that what McDonald's -- Wendy's may not be big in California for instance, but fast casual is, so perhaps you were keen to that, and certainly, realize that competition earlier than others.

Leonard A. Comma

Yes. I would say that everybody was being impacted by it. But making those types of investments is a big decision. And I think some are going to be slower to react, certainly, McDonald's was the first. And then Jack in the Box and a few others followed suit. But I think the bigger decision maybe the longer it takes for everybody to make a commitment to it, you want to kind of see that it's going to pan out, so some testing is required. But in this particular case, when we took a look at our consumer information and where we stood versus our peer group and in the consumer's eyes, it was pretty obvious to us that we needed to make the investment.

Carol A. DiRaimo

And our brand is older than McDonald's. So we've got a lot of older Boxes out there. So it's important to make those look more relevant 60 plus years later in some cases.

David Palmer - UBS Investment Bank, Research Division

The value is -- there's lots of different types of value that are being thrown out there these days. And I have seen that many of the hamburger chains wrestling with their coupon mix versus a value tier and how they market that these days, targeted versus national, advertising menu of a certain menu, dollar drinks. So how do -- how is Jack in the Box feeling about its value strategy, and perhaps, how has that changed?

Leonard A. Comma

Sure. Well I think first, if you look at our size versus some of the other major competitors, and you look at our brand equities versus the competitors, we don't believe that Jack in the Box is going to win by playing the copycat value game. Meaning, you're not going to see Jack in the Box respond to all the value messages in the marketplace by having a ton of $0.99 and $1 type offerings being advertised. What you will see us do though is have these valuable bundle deals that we will promote. And in the consumer's eyes, for our brand, that has worked very well historically. So we will do that. We think that is the better place for us to go for our brand to go. We think it's better for our franchisees from a margin perspective. And then also, if you consider that value is really not the way that Jack in the Box is going to win, it will be recognition for who we are from a brand personality standpoint that will actually help us to win. We wouldn't want to sort of enter into the sea of sameness of, "Hey, it's all about $1.00 and 99 -- $0.99 things." What we do have equity in that we don't have to speak very much about is our $0.99, 2 tacos. And it's sort of this iconic offer that we have that has a lot of equity for us. We don't talk very much about it. But it is sort of this -- has this cultlike following. And as a result, we do get our needs met from a value perspective by continuing to have that offer. But it's not the type of thing that we're going to put our media dollars after very often.

Carol A. DiRaimo

And a lot of folks on the East Coast that haven't been to Jack in the Box don't realize we sell more tacos than anything else on our menu, so...

David Palmer - UBS Investment Bank, Research Division

That is crazy. And -- I mean, you really do have an incredibly diverse menu. I would -- if I were working there, you're talking about speed of service, I would be using that excuse too. But the wild thing is, you not only have tacos, but you have breakfast all day. I just have to ask, I mean, how do your guys pull it off? It seems like an incredible operations challenge?.

Leonard A. Comma

Yes. Well, I think that it really does come down to the training of the employees. And also, treating employees in a way that's going to keep them there longer. We -- the fast food industry turns over about 100% of its employees every year. If we look at how that sort of pans out for us, in reality, there's a core set of very qualified individuals that really stay employed with us for a long period of time. Let's call it half. And the other half turns over twice a year. So having that core set in there is really the way that you're going to get the execution out of a complex operation. You can't afford to not have that talent there. So when we go into new markets, what we'll end up doing is bringing in outside talent temporarily to help bring up the level of capability of all the new employees. Because it is a complex operation, and it requires a lot of investment on our part to bring people up -- up to speed. But there's a lot of equity that we have in the diverse menu, and the fact that we serve it all day. So and again, it sort of points to some of the ways that we win in the market place different from a value message or some of the ways that some of our competitors try to win.

David Palmer - UBS Investment Bank, Research Division

Right. I'm amazed and today, we'll talk to various companies that have different business models in terms of percent in franchise versus company-operated, and it's amazing how different those mixes are. And you see some going to 99% and others at 90%, some at 80%, you're at 80%, and even with that, we talk about this rent structure that's also different. I mean, why is that 80%, for you, the right mix?

Leonard A. Comma

Yes. I think the way to look at that is we have a handful of locations still to sell. Everything that we will sell, all the deals will be accretive to earnings. And then it will leave us with a set of company operations that has a very high AUV. So much so that it would almost be impossible for us to sell those to franchisees. We couldn't get them to pay enough for those to make it worth our while and create a situation where we'd want a higher percentage of franchise locations. So essentially, when you look at the answer, the answer becomes the best thing for this business would be to retain that set of high AUV stores, operate them ourself and have the franchisees operate the sets of stores that have a slightly lower AUV they can purchase at sort of their sweet spot of investment and then run those. So Carol, I don't know if you want to add some color to it.

Carol A. DiRaimo

Yes. The only thing I'd add though, when we did the 3 franchising, we really sold the bulk of the restaurant to existing franchisees. So the Jack in the Box system is much different than the typical kind of mom-and-pop QSR. The average franchisee has 16 restaurants. We only have 105 franchisees. And we only have about 5% of the system that has less than 5 restaurants. So it's a much more sophisticated group that has that capital to take on entire territories, so we're not just selling off one-off restaurants. And then if you look at our geographic mix, we've got about 70% of our stores are in California and Texas, and we think it's important from a testing perspective to keep a base of stores in those 2 markets because things don't necessarily test the same way in those markets.

Leonard A. Comma

Yes. And also I will say that I believe it's significantly easier to get things done in the franchise committee when they see that the company has skin in the game. But I would say from a financial standpoint, it makes more sense financially for us to keep the stores that we'll end up with, but the added benefit is the skin in the game that helps us sell in the types of initiatives that we need the franchisees to be on board with as well.

David Palmer - UBS Investment Bank, Research Division

As a reminder, if you have any questions, you want to write those down, Bill will grab those from you. The -- one of the things that I think is interesting is that local scale. The fact that you're a top 2 player in many of your markets, obviously, with McDonald's, probably than the other one. From a marketing standpoint, how does that make you -- how does that dictate your strategy?

Leonard A. Comma

Yes. So just some details on that, if you look at just the markets where we do business, we're actually the #2 player. And we're right up there with market share of 10%, right up there with Taco Bell and Wendy's and other major players in those markets. And if you were to break it down into our 10 major markets, we're #2 in 9 of the 10 major markets with the exception of Dallas. So again, it does make us a regional player from the standpoint of us not having national coverage. And so from our marketing standpoint, what we're confidently looking at is the efficiency of a regional spend versus a national spend. And essentially, if you go to a national spend, you're going to pay some premium prices for that spend, especially in the northeast, where we have the coverage, we have no restaurants. So today, it's still relatively inefficient for us to switch our marketing to a national, a national buy, so we focus on the regional buy. And then we obviously, complement that with also the coupon offerings and the things that we do online as well to entice people into the business. But essentially, from a marketing standpoint, we're looking at a regional spend.

Carol A. DiRaimo

And so as an example of that we run a Super Bowl ad regionally, so it does hit all those major markets, but we're not paying -- I forgot what the number was this year -- $3 million, for a 30-second spot. So we can get that coverage at a much lower cost and have a Super Bowl commercial, if you will.

David Palmer - UBS Investment Bank, Research Division

Building on that, has the company ever contemplated, and this would dovetail with the unit growth strategy, one of the things that would happen, if you got to a certain point, you decided to really move across the country, you would want to seed that with -- by going to a national, embracing that inefficiency on a national basis to seed that growth, have you thought about making that switch from a strategy perspective?

Leonard A. Comma

Yes, we have, and we get that question often. I guess the way to look at it is, we've spent last 5 years focused on refranchising, and our franchise organization has really put all their capital into either purchasing our restaurants or then reimaging our restaurants. So that's essentially where their focus has been. As we wind down the refranchising strategy, we would like to see growth from our franchisees in new markets, and at that time that we probably would need to revisit that strategy based on whatever growth rates we think we can achieve.

David Palmer - UBS Investment Bank, Research Division

I know we just a new Qdoba guy, is it Tim Casey? And so it's going to -- not going to be very possible for you to speak for everything that's going on that's fresh and new, and I don't think he's even started.

Carol A. DiRaimo

He starts in a couple of weeks.

Leonard A. Comma

A couple of weeks, yes.

David Palmer - UBS Investment Bank, Research Division

So starting in a couple of weeks. But could you perhaps get -- add to that state of the union on the Qdoba side, what they're working on and their growth strategy?

Leonard A. Comma

Sure, yes. So first, I've had an opportunity to speak to Tim both in the interview process and then after he accepted. I can tell you he's extremely excited to join the company. And he's already spoken about his approach. He wants to spend a lot of time immersing himself in the consumer data about the brand, so that he can understand what's happening through the consumer side. He is a fan of the brand and has frequented the brand for many years, so he's very familiar with who we are, and he was attracted to us based on what he knows about us today and where he thinks he can take the business. So we're excited to bring his energy into the mix. What we've been focusing on during the search for Tim is really understanding the brand's equities that maybe the consumers not as well aware of and using our messaging and also our operation in a way to bring those things to life. We think those are the safe things to focus while we get Tim in place and allow him to understand the brand further and potentially, come up with some strategy that would have us slightly change direction. But capitalizing on our equities is certainly a safe place to go right now. And so emphasizing the food preparation and telling our story in a compelling way that has people understand the quality of the food and what all goes into it is really where our focus is, so it's sort of telling the story. And then from a growth perspective, Jeff Wood has been in place for, I guess, a couple of months now, at least. And he's been studying the performance of all of the Qdoba restaurants and the demographics of all of those surrounding geographies to understand where have we been most successful and how can we use those learnings to grow more strategically in the future. So I think those are safe places for us to focus and it'll allow Tim to hit the ground running when he joins the team.

David Palmer - UBS Investment Bank, Research Division

One of the questions from the audience was, your description of Qdoba sound similar to Chipotle. Could you give -- and from a quality of product standpoint in terms of the proposition, could you -- is there anything that you could -- could you describe to folks how it is different or is even similar?

Leonard A. Comma

Sure. Yes, I think what differentiates Qdoba is the variety on the menu, first of all, and then the preparation that goes into the food is different from what happens at Chipotle. Chipotle focuses on where they get their supply. And the types of proteins they use and that sort of thing. Qdoba's story is really around how we're preparing the food and then also the variety on the menu. So we've got a Craft 2 menu, it allows individuals to get smaller portions of several of their favorite things that they would see on the menu. We have Queso, we have Mexican Gumbo, fajitas. We have some interesting things that you just don't find in a typical fresh Mexican restaurant. So when we talk to individuals about our menu, they generally refer to 2 things: One, variety; and two, our 3-cheese Queso. So it really is the food, the preparation of, the taste of and the variety of the food that differentiates us. And it's interesting, but when people are aware of the story, they can clearly make the distinction. When they're not aware of the story, then we get the same thing that we got from the audience, "Hey, what's the difference between you and Chipotle." And so it's what helped us to understand that we need to do a better job of telling that story, educating the consumer. And then demonstrating that in the operation because if you think about what Qdoba's operation is, you're preparing a bunch of fresh food, but then essentially, you're staging it in almost an assembly line fashion and preparing it for the consumer. They don't get to see all that preparation. They don't get to see you frying the chips that you're actually going to serve them. They don't get to see you smashing the guacamole. They very rarely get to see you grilling the meats, chopping the tomatoes, all those sorts of things. So we will start to prepare less food more often, so that throughout the shift, they can start to experience the freshness that comes along with what we're preparing.

Carol A. DiRaimo

I'll also say Qdoba tends to skew more female and a little bit more kid-friendly, if you will, and particularly in our more densely populated markets, if you walked into a Chipotle, and walk into a Qdoba, you might see a slightly different demographic mix.

David Palmer - UBS Investment Bank, Research Division

It feels like the Chipotle is a little darker, edgier music. It's just going young male edgier...

Carol A. DiRaimo

I think that's true.

David Palmer - UBS Investment Bank, Research Division

Getting -- we just talked about the diversity of the menu at Jack in the Box, but get -- taking the other inside of that is are there sales layers that you can explore, things from a marketing standpoint, where you think if you take $1.5 million AUV and really push it higher?

Leonard A. Comma

Yes. We do think there are areas we can explore. We haven't spoken about things publicly. But the way we will approach it, the company, over the last 1.5 years has really focused on finalizing the refranchising strategy and getting the company structurally to a place where going forward, we really are built for running primarily a franchise business and a Qdoba business. So we have, in a restructure taking several of the elements that used to exist in separate functions and put them all under one President, myself. And so when we look at those sales layers in the future versus maybe the way we've looked at them in the past, we'll look at them through the lens of not only what we're creating, but how it's going to be executed. So a good example of that on a much smaller scale would be our Breakfast Platter. We came out with a new breakfast platter, and years ago, Jack in the Box, many, many years ago, we served pancakes, we had platters, we did all sorts of things. But keep in mind that if you're cooking hamburgers on a grill, and a guest shows up and says, "I want a Breakfast Platter at lunch," you now have to cook fresh pancakes on the same grill that you're currently cooking hamburgers. That's very difficult to do and serve in a quality way. No customer's going to want to taste hamburger as part of their pancakes. So in the past, we would have said, "Hey, we're just -- we're going to do it that way," and operations has to figure it out. It would've created a lot of issues for us. Today, we've actually came up with a quality pancake that we can heat through our microwave system, that does not have to hit the grill in the middle of lunchtime, which removes all of the complexity from serving that item because scrambled eggs can be cooked ahead of time and held for at least a handful of minutes, same thing with bacon or sausage. You can cook those things and hold them for at least a few minutes so that they can build the platter. But pancakes, you can't really cook and hold pancakes and serve a quality item. So you either have to cook them on the grill, or you have to have a great microwave pancake. So that's what we engineered, a great microwave pancake. And so now we can serve that all day without disrupting the operation. Maybe through the lens that we would have looked at this in the past, it would have been not so clear to us what the disruption to the operation was going to be, and we would have tried to execute it maybe a little more difficult way.

David Palmer - UBS Investment Bank, Research Division

Maybe just bringing it a little near in, in terms of what are the some of the marketing focus right now and some of the things that you're doing you can talk about.

Leonard A. Comma

Yes. So we will continue to focus on improving the food. We think that not only in fast casual now, but also in fast food, there continues to be a focus on improvement of quality of the food. And so we will invest a lot of time and energy to take a relook at everything that we do, all the proteins that we serve, the bread that we serve to see if there are ways that we can enhance the taste and quality of those products. So that's probably where most of our focus is now. And then to top that off, it's really an LTO focus. I mean, our company has been known for always - having something new and innovative hitting the menu. We'll continue to do that. Sometimes we'll do it with a new combination of existing ingredients, which is the most efficient thing for us to do. And then periodically, we'll bring in new proteins or breads or toppings or what have you to create new products. So you'll see a combination of those 2 things as really the focus right now. And as far as any major new sales layers through completely new offerings, those are the types of things we'll probably be a little slower bring to the menu just to make sure that they won't be disruptive to the operation.

Carol A. DiRaimo

And I'd say and backing all of that as our advertising, which we really haven't talked about, so Jack has an award-winning campaign that's been going on for almost 18 years now. So the Jack character, if you will, if you go on our website, look at the commercial, Jack is very irreverent and we're trying to bring that irreverence more into our restaurants also, makes the employees much more engaged in the coolness factor of that, if you will.

David Palmer - UBS Investment Bank, Research Division

Yes. I don't know if anyone is from any of our markets, but if you had an opportunity to see the Hot Mess commercial and -- of the Hot Mess burger, it was a very funny commercial. I won't describe it to you, but you can go check it out on YouTube. And it was pretty edgy. But what we did is we had a huge rollout for that product internally so that our -- all of our employees were just as engaged in rolling out the Hot Mess burger and the whole 80s rock theme that went with it, as the guess would be. So we had musical coupons, we had tattoos that said "Hot Mess" and all of those allowed guests to get discounts or upgrades on their product, our employees were all dressed in t-shirts that said, "I must confess" on the front and then the back said "I love a Hot Mess." And they had chants and songs and things that they would sing when someone ordered a Hot Mess burger. The types of fun and engagement that you really see our commercials, bringing some of that experience into the restaurant, we think is going to pay off for us.

David Palmer - UBS Investment Bank, Research Division

One last question just on cash and use of our cash flow, what -- how do you see you that in the future? Where are you going to used that free cash flow?.

Leonard A. Comma

Yes. I can take and if you want to jump, jump in. We've talked about returning cash to shareholders through stock buybacks. And we've done that pretty steadily. But on our most recent call, Jerry spoke about being a little more consistent and deliberate in the way that we do that. So that the expectation out there is sort of well understood. So we think we'll continue to do that and we'll continue to invest in return-oriented things as well. So you'll see those as the primary uses of our cash. Obviously, Qdoba's growth is a big part of where our cash will be going.

Carol A. DiRaimo

I'd say part of our refranchising and has resulted in a -- being a free cash flow -- negative free cash flow to a free cash flow generator. And that's been a big transformation through refranchising.

David Palmer - UBS Investment Bank, Research Division

Well, thank you very much, Jack in the Box, Carol and Lenny. Thanks, everybody.

Leonard A. Comma

Thank you.

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