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Jack In The Box Inc. (NASDAQ:JACK)

February 28, 2012 12:00 pm ET

Executives

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

Linda A. Lang - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Leonard A. Comma - Chief Operating Officer and Executive Vice President

Gary J. Beisler - Chief Executive Officer of Qdoba Restaurant Corporation and President of Qdoba Restaurant Corporation

Jerry P. Rebel - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Unknown Analyst

Nick Setyan - Wedbush Securities Inc., Research Division

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Larry Miller - RBC Capital Markets, LLC, Research Division

Robert M. Derrington - Morgan Keegan & Company, Inc., Research Division

Conrad Lyon - B. Riley & Co., LLC, Research Division

John S. Glass - Morgan Stanley, Research Division

Carol A. DiRaimo

Great. Good morning. Thanks to those of you who were able to join us on the tour, and the fabulous San Diego weather last night, that's a rainstorm we don't get -- I've been here 4 years, haven't seen one like that. And we'd also like to thank the folks at Darden for helping us to put together last night's dinner, Matt Stroud, Eugene Lee and the rest of the Darden team who helped coordinate the event at EDB [ph], so we appreciate their assistance.

Before we begin, I like to remind you that this presentation includes plans and estimates for the future, which are subject to various risks and uncertainties that may cause actual results to differ from these plans and estimates. I encourage you to review the risk factors outlined in our recent 10-K and 10-Qs on file with the SEC and available through our website.

During today's presentation, we will refer to non-GAAP measures for which a reconciliation is posted on the Investors section of our website at www.jackinthebox.com.

During this presentation, when we refer to Jack, we are talking about the entire company, including Qdoba. And when we refer to JIB, we're talking about the Jack in the Box brand. Copies of today's presentation will be available on our website this afternoon, and we included thumb drives with the presentations in the swag bags we'll be handing out as you leave.

For those listening to the webcast that might be less familiar with the company, we operate 2 brands, Jack in the Box and Qdoba. Jack in the Box is the nation's fifth largest QSR burger chain, with more than 2200 restaurants operating in 20 states at the end of our first quarter. Our average check of over $6 reflects the brand's premium positioning. In 2003, we acquired Qdoba Mexican Grill, a leader in the fast casual segment. Today, there are more than 600 Qdoba locations operating at 42 states and the District of Columbia. Qdoba is the second largest brand in the fast casual Mexican segment and the largest franchise brand in that space, with 56% franchise operated at the end of the first quarter. Qdoba continues to become more important to our overall results. At the end of the first quarter, it represented 28% of our company's store base, which was just 18% a year ago.

Our agenda for today, we'll have Linda Lang, kicking it off with an overview of our key accomplishments since she became CEO of 2005 and our investment thesis; followed by Lenny Comma, who will discuss driving sustainable sales growth at Jack in the Box. We'll then take a 15 minute break before Gary Beisler comes up to provide an overview of Qdoba and our accelerated growth plans for that brand. Jerry Rebel will then wrap up by reviewing the annuity-like cash flows coming from our Jack in the Box franchise model, the impact of our refranchising strategy on our future results, unit economics for both brands and then will outline our long-term financial goals. We'll then pause for a few minutes to hand out lunch before beginning the Q&A session. We anticipate finishing by noon, although we have one bus departing at 11:45 for those of you on the 1:10 flight.

With that, let me turn it over to Linda Lang, our Chairman, CEO and President.

Linda A. Lang

Thanks, Carol. Good morning, everyone. So let me thank Carol and her team for putting this whole meeting together. And you guys all know Carol, right? She controls absolutely every detail and does a fabulous job. But the one thing she couldn't control was the weather last night, so sorry about that. Maybe next time it will be a typical beautiful San Diego sunny day. But it's a pleasure to have you all here. I know you traveled a long way to be here, and we appreciate the time you're spending with us today. Let me also welcome the Jack in the Box and Qdoba management team. I think you got a chance to meet several of the members of the team last night at dinner and hopefully, you got the chance to talk with them. So we have several of them with us today. And last night in the reception, there were a couple of people I was talking to and they said, "So Linda, what's your story? When did you start with Jack in the Box?" And for those that don't know my story, I thought I'd just share that with you. I actually started with the company in 1984, so 28 years ago. So for some of you, you might not have even been born. So I was a teenager at the time, but anyway, I started in 1984, and my very first job was an Accounts Payable Supervisor. So I worked for Bechtel Engineering in San Francisco, and then I came down to San Diego and started in accounting and finance and progressively took on more responsibility in the accounting and finance area, and then in 1994 had the chance to move into marketing and ran marketing until 2000. I then went to operations -- field operations and ran Southern California operations, came back and became President in 2003, and then Chairman and CEO in 2005. So it's been an absolutely wonderful career. Every day has been a challenge and every day has been fun, and it's been absolutely my privilege and pleasure to work with the folks that I work with here at the company.

So to kick off this morning presentation, let me just share a few of the significant accomplishments that we've achieved in the last 6 years since 2005. A major milestone we reached was the transformation of the Jack in the Box business model from 25% to 72% franchised with the sale of more than 1,000 restaurants. And in fact, we reached our target 2 years ahead of our original plan. The $500 million in proceeds generated from our Jack in the Box refranchising transactions and a portion of our cash flow from operations was used to return cash to shareholders with over $900 million in stock repurchases. We've grown the Qdoba system from 250 restaurants to over 600 restaurants today, and so this is an impressive 15% compound annual growth rate. We've built over 180 Jack in the Box restaurants in a mature restaurant segment that's only growing at the rate of about 1%. So this includes entering 13 new markets in the last 6 years. We've reimaged substantially all franchised and company Jack in the Box restaurants. We simplified and de-risked the business by divesting of our convenience and fuel business, if you remember Quick Stuff, and we outsourced the transportation segment of our distribution business.

We elected 5 new board members with broad and deep experience from the hospitality and retail industries. And finally again, I'm very proud of the experienced management team that has been built with the addition of talents from outside the company, such as Carol with the -- with Applebee's, from outside the company, as well as talents developed and promoted within the company, and you've met several of those folks last night.

And while we're proud of how far we've come over the last 6 years today, our focus will be on our plans for the future and how we believe the company is extremely well positioned for growth of market share of our 2 brands: Qdoba and Jack in the Box, growth in our earnings, improvement in our ROIC and EBITDA margins and our return to positive and growing free cash flow. So let's talk about how we've positioned ourselves for growth. I talked about hitting the milestone of 72% franchised at the end of last quarter. And this year, we expect to refranchise 80 to 100 locations, leaving just 70 to 80 restaurants to franchise in fiscal 2013. This will bring us to about 80% franchised, which is aligned with the industry and yet we're able to still test and prove out operational and brand initiatives to benefit our franchise community. We position the Jack in the Box brand well within the QSR hamburger segment by focusing on improving the entire guest experience through improvements in the menu, service and environment, and our efforts paid off, with 2011 traffic growth of over 2%. We have completed our major capital project with the completion of the Jack in the Box reimage program at all company locations, and now we can put our capital to use in growing Qdoba, with a plan to double the number of company's store base from less than 250 at the end of 2011 to approximately 500 by the end of 2015, and this is a CAGR of 20%. The aggressive growth of Qdoba along with the continued strategic acquisitions of Qdoba franchise restaurants will result in Qdoba becoming a more significant part of the business.

So let me lay out our investment thesis for you this morning, a thesis that is both compelling and unique to the Jack in the Box story. And I'm to go to cover this fairly quickly because Jerry is going to give you a lot of the detail behind the thesis and the 3 components of our business. Those 3 components being the Jack in the Box company operations, Jack in the Box franchise revenues from rents and royalties and Qdoba company and franchise operations.

First is to the Jack in the Box company operations. Our refranchising has resulted in a portfolio of higher volume restaurants with higher operating margins, and we expect both of these to grow as we complete the sale of the remaining 150 to 200 restaurants. As our CapEx requirements will be lower with fewer restaurants, we'd expect growing free cash flow from this segment of our business. And with plenty of room to grow the brand in the U.S., we would expect our Jack in the Box growth rate to be above that of our domestic QSR competitors over the course of the next several years. Our primary growth drivers are franchise development and company seeding strategy in new markets, which Lenny will cover during his presentation.

The second component of the business is the Jack in the Box franchise business. We believe that as franchisees finish digesting the acquisitions of company restaurants, as well as the reimages, they'll turn their focus to growing the brand. We recently implemented an incentive program to encourage our franchisees to accelerate growth in new markets. Jack in the Box franchise-operated restaurants will provide a source of annuity-like cash flows coming from both royalties at approximately 5% and rental income. The net rental income results from the spread we are able to charge franchisees above our underlying rent, which equals approximately 3% to 3.5% of franchise sales on those leased properties. This stream of income requires no capital investment by the company and is not directly impacted by cost inflation in areas such as food cost or labor cost that can be potentially impacted by health care legislation. So therefore,, this particular stream of income results in a near-100% profit flow-through on incremental sales.

The third component of the business is Qdoba, which we view as a high-growth concept in the fastest-growing segment of the industry. Qdoba generates good returns for us, particularly as markets mature, and has a very attractive sales-to-investment ratio for both the company and our franchisees. We plan to more aggressively grow the number of company Qdoba locations over the next several years through new unit development and acquisitions of franchise locations. Accelerating the growth of our high-return Qdoba brand will generate heightened brand awareness and expand market penetration which should benefit average unit volumes. As I mentioned earlier, we plan to double the number of company restaurants from 245 at the end of 2011 to approximately 500 by the end of 2015.

So summarizing the investment thesis, we have a high-growth, high-return Qdoba business, we have our transformed Jack in the Box business model that will generate growing and less volatile cash flows from both our franchise royalty and rental income, as well as growing free cash flow from an improved base of Jack in the Box company units with higher average unit volumes and higher operating margins.

So given the 3 components of the business and our plans for growth, let me share some of the high-level financial goals we expect to achieve by 2015. Our key financial goals by 2015 are to: one, to generate operating EPS of at least $2 per share, which is a CAGR of approximately 25% from the 2011 operating EPS of $0.83; to improve our ROIC to the mid-teens; to produce EBITDA of $275 million by 2015 versus the $177 million in 2011, approximately a $100 million increase in EBITDA; and to transition from negative free cash flow to generating annual free cash flow of approximately $75 million beginning this fiscal year. Jerry will provide further color around the 3 components and drivers of the business. He'll also share unit economics for each brand and the key assumptions underlying our long-term financial goals.

Next, let me introduce Lenny Comma, our Executive VP and Chief Operating Officer of Jack in the Box. He was promoted into the role 2 years ago and is responsible for leading all operations, both company and franchise, as well as restaurant development. We recruited Lenny from ExxonMobil in 2001 to run our C store and fuel operations, and he did such a great job, we actually divested the business in 2009. Lenny and his team has done an outstanding job in executing his plan to improve the guest experience at every Jack in the Box location. He's here to share our plan for continued improvement in such areas as fuel service, as well as other brand initiatives.

So with that, let me turn it over to Lenny Comma. Lenny.

Leonard A. Comma

Thank you, Linda. So let's jump right in. What I intend to cover today is, first, take you through the competitive landscape. I really want to give you a feel for how Jack in the Box is positioned and hopefully, I give you maybe a little different view of what you might have had in the past. Mainly, I want to talk about how we're going to drive sustainable sales, and then last, I'll leave you with a view of unit growth for Jack.

So first, the competitive landscape. If you take a look at Jack in the Box through this lens that's sort of like Jack in the Box as a regional player and has very little strength versus the national players, then you walk away with this perception that Jack in the Box really doesn't have very much strength within its markets. But I would offer to you maybe a different lens to look at our business and the lens that I would say you need to see it through is look at Jack in the Box in the markets where we do business. And if you look at it through that lens alone, what you see is that we have the second highest market share, second only to McDonald's. And so when you view us in our ability to compete, you should think of us right up there with the likes of Burger King, Wendy's or Taco Bell, and in most cases, stronger than those brands in the markets where we do business. If you want to drill this down even a little further and take a look at just the burger segment, what you'll see is that in Jack in the Box's 10 largest markets, we hold the second position in all those markets but the exception of one, Dallas. So again, if you were to look at Jack in the Box and think we don't have much strength as a regional player when you simply view us through the markets where we do business or our 10 largest markets competing strictly with the burger segment, you'll see that we have a significant amount of strength. And in fact, these 10 markets represent 70% of our system sales. And we think that this type of market penetration really gives us the ability to be recognized quickly for the improvements that we've made to our business and also for the brand equities that we capitalize on every day.

So let's talk a little bit about how we intend to drive sustainable sales. I'm really going to take you through this view of our brand equities and hopefully give you an understanding of how our brand personality, our menu relevance and our refreshed image all contribute to our ability to drive sales. But I'm also going to take you through some of Jack in the Box's weaknesses and where we think we have room for improvement and how we think that continuing to improve in those ways will also drive sustainable sales.

So first, our brand personality. Let's talk about Jack. He's our iconic spokesman, and he's really one of our biggest brand equities. The Jack's Back campaign is the longest ongoing advertising campaign in the fast food industry, and it's now in its 17th year. Now it's centered around humorous and reverent marketing, and it has won as many awards, including Clios, Beldings and 9 Effies, which really are about the effectiveness of the ads in driving sales. Keep in mind that Jack in the Box is almost as effective as the top spender, but we spend significantly less than they do. Now it's one thing to have ads that break through the clutter, but consider there when it comes to the likability of our ads, we rank #1. And this really starts to get closer to what I want you all to understand about our brand personality and how it creates this very unique relationship with the guests. When we communicate to the guests, they communicate back to us. If you look at campaigns such as the Jumbaco, what you'll see on YouTube and Facebook and many other places on the Web is that people are actually putting their own videos out there teaching other guests how to make the Jumbaco. We have video of flash mobs showing up to our restaurants actually singing the Jumbaco song to our guests and to our employees. You don't see this response in other brands, and we believe that the relationship that we have based on our brand personality is a huge differentiator and a huge driver of our success. I'm going to give you a little bit of a glimpse into that a little later as we take you through a video in just a few slides.

So during breakfast, you had an opportunity to see many of our ads. And what I want to take you through is sort of this understanding relationship starting how we communicate out, and then I'll show you another view of how the guest communicate back to us and how this intimacy of the relationship is really something that is a strength for us and we can continue to capitalize on. So let me share you the Jumbo deal ad, and we'll get a feel for how we highlight these things.

[Presentation]

So hopefully, by watching the ad and the ones that you watched this morning, you're getting a feel for the personality of the brand, the personality that Jack exudes. That personality is something that people really relate to. And I think it's their ability to relate to that which further encourages them to respond to us. And that was sort of the traditional way that we would do it through television, but we also, through this relationship, were able to capitalize on it in different ways. So for example, the Bacon Shake, we never put that on television. In fact, we spent no advertising dollars on the Bacon Shake. It wasn't even on our menu, but it drove significant trial in our restaurants. And I know a lot of folks are saying "Bacon Shake, boy, does that sound odd," but it achieved exactly what we wanted it to achieve. It brought attention to bacon and all the products that were highlighting bacon on our menu. We will talk a little bit about Bacon Shake a little bit later. But in this next clip, what I want you to see is the response that our guests had with both the Jumbaco ad and Bacon Shake. It will give you a glimpse into the relationship we have with them.

[Presentation]

So hopefully, that gives you a greater glimpse into how the guests respond to our personality. A lot of folks try to figure out how Jack in the Box is driving the sales that it's driving and how we are able to have second or third highest AUVs in most markets and how we do that against major companies that spend a lot more than us. And I will tell you that the personality that we have and the relationship that it has afforded us is what's helping us drive those sales. And hopefully, you have been able to sort of capture the spirit of the Jack personality and what it means to our brand.

So let me move on now to the relevance of our menu. Last June, we installed new menu boards, and the reason we installed them is really to make it easier for our guests to navigate. We wanted to showcase the variety that's on our menu and keep in mind that we have one of the most diverse menus in QSR. The new boards also highlight average check builders and the encouraged trial in sales of higher margin items. Now when we rolled the boards out, we also took an opportunity to delete some of the less popular items, really as an effort to simplify the operations.

Now one of our greatest equities in presenting our menu to the guests is that we allow them to buy anything on the menu any time of day. And so I'm showing you the daypart mix here really just to plant some seeds because Jack in the Box has some opportunities which I'll speak about a later, and when you look at the size of the dayparts, it will help you understand and start to size the opportunities we have really around the speed of service. Now we sell a significant amount of products during the breakfast hour that are really traditionally lunch and dinner items. And when you look at some of the breakfast items we have, for example, the new breakfast platter, I mentioned this to some of you last night, if you go to a Jack in the Box at 10:00 or 11:00 at night and hang out for an hour, I can guarantee you that somebody's going to buy a breakfast platter. So our guests really appreciate the fact that we offer the products all day. I think for those that are working weird hours or just have a craving for certain foods are able to get it whenever they want it, and that's something that is a differentiator for us.

Now speed of service is a huge opportunity for us that I will talk about a little bit later. But what I want you to recognize in the chart here is that if we look at breakfast and lunch combined, it's 45% of our business, and it's the time of day when people are most in a rush. So when you think about the speed of service opportunities we have that I'll talk about in a while, you can sort of equate them to these 2 dayparts.

So we continue to invest in this brand strength that we believe we have in our menu by making improvements to our core products, and we've talked about some of these things in the past. We've talked about the improvements to coffee, to french fries, to bacon and to tacos. And in all cases where we invested in those products, we have higher order incidents. And most recently, we've started to invest in our patties. We now have a 100% beef patty that is seasoned while you cook it, and that is a new patty seasoning. Then you get to taste those burgers at lunch. I think a few of you actually sampled them last night when we did the restaurant tours, and I heard some great feedback, so looking forward to getting everybody to eat one those great burgers. So let me show you this next ad here which really just highlights how we brought these new burgers to market.

[Presentation]

Did any of you have the opportunity to see the real munch mobile out in the parking lot this morning? So that's the real vehicle that we use to showcase our brand and try to connect with the guests, and we did use it to connect with them on the new burgers. So you probably already picked up on this, but one of the ways that we keep the menu relevant and generate trial is to always have something new. And so these are our few examples of things that have hit the menu, and we'll continue to have new things that will generate interest and trial on the menu. Sometimes those items are limited time offers. Other times, we do them as permanent menu items.

Let's talk a little bit about value. This is a real interesting subject for Jack in the Box because we oftentimes will get folks who take a look at one financial period at one quarter, and then they'll start to sort of question, well, Jack in the Box is margined for a little lower, but their transactions and their sales grew, so that must mean that they were buying the sales by heavy discounting. And actually a more accurate perception of this would be that Jack in the Box does bundle value. And now we're going to do what we need to do to stay competitive and really respond to what's happening in the marketplace, but most often, we're going to do that in a bundled value way so that we don't sacrifice the margins, and these are just examples of how we do that. So here, what you see is a showcase of some additional variety on the menu but with a very specific purpose of growing average check. Our guests love these items. They're very cravable, and we do sell a significant number of them. These average check builders don't always hold a high mix on the menu, but they do drive average check, and I think you know what our average check is, and you can see that compared to the rest of the industry. The strategy is working for us.

So I really wanted to get across to you 2 things that impact the guest experience around the food and the personality and the relationship. But this next thing is something that, just a couple of years ago, we considered to be a weakness, and that is our image. And here we are today putting in front of you as a brand strength because, thanks to a very committed franchise organization and this holistic approach that we've taken to invest in the business, we were able to complete over 1,000 reimages just over the last year. Our franchisees completed just a few over 700, and they completed those mostly at the back half of last year, and we paid out most of those incentives in Q1 of this year, so we don't expect to be paying out too many more incentives throughout the year as we're just 95% complete with this project at this time. Now you can expect over the next year that you'll see logos go up in our franchise locations. We have completed all the logos in our company locations, and we think it's a great way to signify all the investments that we've made in the business. Our franchisees have about another year to get their logos up. And again, once they get those up, we think we'll have additional ways to sort of highlight that Jack in the Box has some great brand equities and a great new image. So we look forward to seeing that happen.

So it's fun to talk about the strengths. Our brand personality is something that we all get excited about. It's sort of the fun part of the business. The menu is something that we all get excited about because we're passionate about the food. It tastes great. It's cravable. And now we have an image that we can be really proud. But there are a few things that are opportunities for improvement, and the 2 that are the greatest would be speed of service and consistency of the service. So let me take you through what we started really in Q4 of 2010 and how that's impacting our business.

First, speed of service. This is one of our greatest opportunities, and it's something that we're going to take our time in fixing. We do not want to try to blow up our operations and become fast overnight because we have some great equities in food quality, in accuracy, in cleanliness, in friendliness, the types of things that the guests expect, and we're certainly not going to take away from the brand. So we will make steady improvement in speed of service, but we'll do it very carefully so that we can continue to highlight those other strengths that we have. Now Carol talks about this all the time, but if you look at our average check and our AUVs, it takes approximately 6 guests per day to grow our same-store sales by 1%. And we know through our own research that our best performing restaurants have great overall satisfaction scores and the absolute best speed of service. So if you look at the competitors that are listed here, you can think about the size of the opportunity this way. We've made a 30-second improvement when we compare our Q1 results last year to Q1 results this year, and even with that 30-second improvement, we're still not faster than any of the people listed here. In addition to that, we have at least another full minute worth of opportunity to improve speed of service.

Now service consistency is something that we also struggled with, and when we started the initiative back in Q4 2010 to improve overall service execution, what we've seen is that we've become much more consistent, much more consistent really in every area: accuracy, friendliness, cleanliness, speed of service, and we are seeing the guests respond to this in our loyalty studies and our Voice of Guest studies. But consistency is something that we still have to work on. We still have this variability from daypart to daypart or from day to day or from restaurant to restaurant. So we'll continue to invest in consistency. And we think that where it shows up most is in the improvements that we make in speed of service.

So let me try to tie this all together for you. Jack in the Box has invested a lot of time in trying to understand who its guests are, how we should target those guests, what it is about their lifestyles, their attitudes, the things that teach us who they are as people. We've invested a significant amount of time over the last 1.5 years to understand these guests better. And as we're understanding more about them, we're making changes to the menu, to the service and to the image, things that we've talked about that make the brand more relevant to those guests. And then with our service initiatives, we're able to execute those things more consistently. And as we do that, the guests are starting to trust us more. And as they build this trust with us, they have a stronger affection for the brand, and you're seeing that affection in the video I showed earlier, people singing the Jumbaco song, flash mobs in our restaurants teaching guests how to make Jumbacos, coming to our restaurants to buy the Bacon Shake. And you saw similar response in some of our ads in the past, when Jack got hit by a bus, or when we had the mini burgers and the song that complemented that. So our guests really are growing this affection for us, and as a result of that growing affection, they communicate more with us, and that communication helps us to learn more about them and the cycle then repeats. We can invest in the menu, the service and the image in ways they continue to make the brand and evolve the brand in ways that continue to make it more relevant to those guests. This is sort of where the magic happens fpr Jack in the Box, and a lot of folks are trying to decipher how are they generating sales, and how do they have the high AUVs, and what is it about their brand that is creating that magic, and I'll tell you, we have a very strong brand personality, and we unfortunately didn't treat our guests in a consistent way that made them happy. And so they wanted to love us all the time, sometimes we were sort of turning them into jaded lovers. But we've learned more about how to treat the guests the right way. We're doing that. They're loving us more, and they're showing us that love in the form of sales, and that's really what just the bottom line of all these investments really is.

And so to highlight that, I'll show you this chart that just -- the thing to really think about here is over the last 3 quarters, Jack in the Box's performance is really second only to McDonald's. So you go back to all investments we've made, and it's paying off, and we continue to have this upward trajectory in our performance. And we'll continue to invest in the brand in the ways that I've described, capitalizing on those equities and fixing those things that we need to fix to continue to drive sustainable sales in this fashion.

So I've completed my review of the brand equities and the opportunities we have for improvement. And so now let me take you through Jack in the Box's growth opportunities. And to answer the question, can the brand travel? I'll share with you first this clip from Indianapolis, where we've opened up one of our newest stores.

[Presentation]

So hopefully that gives you a feel for whether or not the brand is accepted in new markets. People really do love the brand. They love the personality. And it's interesting, when you tell people you work for Jack in the Box, whether in new market or existing market, they always say the same things, "We love your advertising, we love your tacos, we love Jack," and they often use the word "love." It's a pretty common response to the personality that we present. So we think the brand can travel. And when you look at this, what you're seeing here is our systemwide Jack in the Box footprint as of the end of Q1. We are present in only 20 states, so we think we have room to grow. We've been growing in existing and contiguous markets. We expect to open 30 to 35 new Jack in the Box restaurants systemwide this year. We're targeting 2% to 3% system growth beginning this fiscal year, and that growth will be primarily through franchisees. But the company growth will be primarily through a seeding strategy in new markets, in markets like Oklahoma City, Tulsa, Kansas City, Indianapolis. And the seeding strategy is really designed to prove market viability. It gives franchisees a foothold in cash flow to help facilitate their growth while reducing their risk, and so we would expect to recoup our investment in these markets in about 2 to 3 years, as we turn the restaurants over to the franchisees along with development agreements.

So think about the Jack in the Box franchisees investment over the last couple of years. The vast majority of sites that were refranchised were sold to existing franchisees. And on top of that, our franchisees went ahead and reimaged many restaurants over the last 1.5 years, so their focus was really investing in existing locations, and now we'd like to turn their focus to investing in new markets and new locations. So we are providing some incentives, and so I've included this ad that we ran, and you can take this -- I know you'll have a thumb drive copy of the presentation to get an idea of the incentives that we offer for the new markets.

Now we believe we have a very strong franchise system. We have 100 franchisees representing just about 1,600 restaurants. The average tenure of franchisees is 23 years. So these aren't a bunch of mom-and-pop operators and not a bunch of new operators. These are experienced tenured people who really do believe in the brand, and we think it's a strategic advantage. Consider this, when we started the plan back in quarter 4 of 2010 to improve our service, myself and many of the people sitting in the room here from the management team took about 10 days to travel around the country and meet face-to-face with the entire franchise organization to really ignite the brand, to give them feedback on where we were going, some direction to where we're going and to get their buy-in and to make sure that they could get onboard. And we were able to create change very quickly, very effectively. This is a relatively small franchise system compared to other companies. And we look at their commitment to the brand and the size and structure of this franchise organization as a way for us to be nimble. Now we think that we can be fast at implementing change, and we can do it effectively with the system this size. One thing also to think about -- we had this conversation last night at my dinner table -- one of the #1 ways to find out if franchisees are bought-in to where you're going is to see whether or not they're willing to invest in the brand. And I mentioned it just a few seconds ago. Our exiting franchisees are responsible for most of the sites that we refranchised for purchasing those locations. And right on the heels of that, they invested in the reimage. And right on the heels of that, they'll put up new logos. So this is a very committed franchise organization. It's very productive. They do challenge us, and we like to have that challenge. Those stakeholders will simply push us to be better. They have a seat at the table. They're heard, and I think that we have a relationship, again, that is a strategic advantage for us.

So let me summarize. Hopefully, you have an idea both through the new market video and also the other videos with the response to Jumbaco and the Bacon Shake, that we have a very unique brand personality. It fosters a relationship that's more intimate with the guests than other brands have, and it helps us to generate sales and will continue to help us to generate those sales. The fact that we can now complement it with faster service and more consistent service simply allows us to layer on sales. When you look at the size of the opportunity for improving our speed, you can really look at it as an entirely new sales layer for Jack in the Box. We hold a very strong position with AUVs and market share in all the markets where we do business, and we were doing that as one of the slowest players in the industry. We've gotten faster, but as I mentioned earlier, we have at least another minute worth of opportunity. And so we think that as we get faster, we essentially are providing more purchase occasions to those guests. They'll trust you that you can be quick, and they'll come to you more often, and we're counting on that. As we are able to do that consistently, that is going to build trust, and that trust is what generates the repeat business, and it's what continues to grow our average unit volumes. The message is pretty simple. It's not very complex, but it is what our opportunities are: To grow our sales and sustain that growth.

So at the Q&A session later, if you have further questions about anything I presented, I'll be happy to try to provide more detail. But we are going to now take a break. And many of you have requested to try the Bacon Shake, and so we are going to provide you with some Bacon Shake samples, and again, something very effective that we used to bring attention to the various products that were highlighting bacon. And we're going to ask that this is a 15-minute break and that we come back promptly -- 15-minute break, so we'll be starting back up at 10:00. All right? Thank you very much.

[Break]

Linda A. Lang

Okay, we'll go ahead and get started again. Did everyone get to try the Bacon Shake? Tastes like bacon, right? Yes. All right. I'll suggest you try the OREO Shake next time.

Anyway, let me just briefly introduce Gary Beisler. I know a lot of you have met Gary over the years, and Gary is the CEO and President of Qdoba Restaurant Corp. And he is a very seasoned veteran of the restaurant industry. He's been with -- in QSR in his prior life in fast food with Rally's and Wendy's and started actually with Qdoba, it was called as Z-Teca at that time, back in 1998 with a handful of restaurants right, Gary? And then Jack in the Box acquired Qdoba in 2003. And so I'm very proud of the work that Gary has led Qdoba and the tremendous growth that they've achieved over the last several years. He's got a great management team out in Denver, and Gary and I and the Jack in the Box management team have been great partners in leading the efforts of Qdoba. So let me introduce Gary, and he's going to talk about the acceleration of the company store growth of Qdoba, as well as the brand initiatives for Qdoba. Thanks.

Gary J. Beisler

Thanks, Linda. I know you guys are looking up here going, "That's a fine looking guy up there," and looking at me and saying, "Okay, who are you and what did you do with Gary?" Right? I mean, I got to get an updated picture, no mustache. It really is a pleasure to be here today. I really appreciate the opportunity to come talk to you here in San Diego and give you some insight into the opportunities at Qdoba Mexican Grill in the upcoming years. I'm going to cover our brand positioning this morning and what differentiates Qdoba in the fast casual Mexican grill category. Also I'm going to talk about our approach to driving same-store sales and average unit volumes, our plans to accelerate our company growth and how strategic franchise acquisitions fits into our business plan.

So to get going, I'll talk to you about giving my thoughts on brand positioning, which is a very important thing, obviously, for Qdoba. At Qdoba, we believe that our brand is about one simple thing: The pure enjoyment of food. As Americans have become more discerning and knowledgeable about food, we think the industry has responded with more and more information but very little emotion. As fanatical food lovers, which is what we are at Qdoba, we asked ourselves, as food has gotten overly complicated and rational, has the pure enjoyment of food been stripped away? With our growing concern about what we eat it, it seems we might have forgotten why we eat. So in the end, we believe people primarily choose what they eat not for intellectual reasons but for profoundly emotional reasons. Our true love of food comes not from the head but from the heart. At Qdoba, we have embraced food as the pleasurable experience it is, and that's why we celebrate people -- I'm sorry, we all celebrate food for people who love food. And we created a little video that helps explain this. We use it for employees, we use it for Investor Relations and we can use it for vendors and such. So if you'd play this for me, I'd appreciate it.

[Presentation]

Okay. At Qdoba, we really do believe that we're not just the big burrito, and that's not what we want to be. We believe it all comes down to a great variety of flavors and tastes and that food tastes best when it's made fresh, that's pretty obvious, huh? And that's what we do every day in every restaurant. While some restaurants like to lecture customers about what they're eating, we like keeping it simple and focus on making our food really craveable and delicious. So whatever our guests' preference is, we have that available for them, for everyone, whether it's the indulgent taste of burrito, and you can tell by looking at me, I've eaten a few of those or you can get the light and low-calorie naked taco salad, it's really up to them. It's all about choice at Qdoba.

We built this brand out of these 4 pillars. We call them our brand pillars, and they're the foundation for brand and the filter by which we make decisions about our concept going forward. And I'd like to talk to you about each of them individually for a second.

First, there's our environment. We believe we've created an environment that showcases handcrafted preparation and cooking. Employees work in a display cooking kitchen, where people can see them visually. We prepare our tortilla chips, guacamole and our salsas fresh every day. We slow cook and hand shred our pork and our beef right in the stores. And our skilled cooks grill our meats over an open flame right there, in view of the guests. And yes, we really do train our cooks to cook and that sounds kind of funny, but it's not an assembly line, we really are cooking food and making food and our people love doing that.

Secondly is our ingredients. Our food that celebrates our passion for our ingredients and how we feel about that. We use only hass avocados because that's the only we could think that's acceptable with us for our guacamole. We use the freshest poblano, habanero and jalapeño peppers in our signature three-cheese queso, which is the one thing that people talk about when you're talking about Qdoba and almost immediately they say, "oh my God, I love queso, what do you put in that, cocaine or what?" So people just absolutely love it, they're addicted to it. And we even use flatiron steak, which is the second most tender cut of beef there is, only second to the fillet. That's what we use to put our steak burritos.

Thirdly, menu and flavors. And it's -- our menu, we believe, is full of very innovative flavors and tastes. Some examples are Ancho chile barbecue sauce, poblano pesto, and ranchero sauce. Three good examples, but we also have the unique offering as well. If anybody here has have been to Qdoba, you've had a Craft 2. Our Craft 2 menu, we can pick half portions of any of the menu items and get the different flavor and taste of different menu items. Mexican gumbo, and seasonally, we have mango salsa, which is very, very popular in the summer. Our customers really do appreciate that we have healthier alternatives and if they choose, they can have a whole-wheat tortilla and they believe that they don't have to sacrifice flavor or taste for the sake of calories. Again, it's all about choice.

Our fourth pillar is our service. Our service system invites interaction with the guests. We have to talk to you in order to make your food, right? And we make their food customed to their requests, right in front of them, so it's all customized. And coupled with that, we have a couple of other things that really, I think, help with the guests interaction piece and one of them is our reward, our Qdoba Rewards Program, that creates brand engagement and loyalty. It's a best-in-class program within our industry. There's no doubt about that. And we also have a unique difference in -- against key competitors with our catering program. And it's a variety of self-service hot taco, naked burrito or nacho bars, and this is a great way for people to experience Qdoba. It could be at home, could be at work, special occasions, like graduates, birthdays, or even something like Cinco de Mayo.

And here's a quick glimpse of -- for those of you who haven't been in Qdoba, what our menu actually looks like, physically within the side of the store. And it highlights the signature flavors and combinations our seasonal offerings, when available, and things like our quesadillas, tortilla soup, nachos, kids' meals and things of that sort. So this is a good way to look at how much variety we have versus any of our competitors.

We can't do a presentation like this without talking about our marketing strategies. I was just talking to, in the line here, Drake[ph], talking about the fact that media is nor a thing that we have regular access to at Qdoba. And as we talk about our strategy, our primary efforts have been to market our brand through local store tactics and promotions. And this will continue. It's been the basis of how we've grown the business. Some major markets are supported by electronic media, but not the majority. And we've been making some strategic changes to our approach through email, social media and other digital vehicles for national sales and brand building initiatives. We see the movement toward more digital strategies that create an engaging bond with our guests, being a more significant piece of our future marketing efforts.

And of course, what do we expect on top of that, rank, driving same store sales and averaging the volumes. And I think we all know that marketing strategies are important, but at the end of the day, the question is, did we drive sales in AUVs, whatever meets the road there. We know awareness creates trial and it's marketing's job to get them in the door.

But the second most vital piece of the equation is to develop real estate and penetrate our new markets. We expect annual unit volumes to grow as markets and individual stores mature. We also expect our new units to comp at higher rates than mature ones. We're targeting 3% to 4% same-store sales growth annually beginning in fiscal '13 through fiscal '15. And Jerry is going to provide some color on that when he comes up to do his presentation right after me.

Just a quick visual for you, of, obviously, the map of the United States and where we currently have Qdoba. This is our footprint as of the end of Q1 fiscal '12. And we believe that we have plenty of room to grow. And I just like to make kind of a note here, that generally speaking, in the company markets where we have higher penetration, we have higher average unit volumes. It correlates to one another.

So as we accelerate growth, we've got some very clear development targets. Domestically, we have a long-term target of 2,000 locations within the United States. We expect 15% to 20% growth -- company growth, excuse me, through fiscal 2015, which will result in doubling the company restaurant base to approximately 500 stores. Company development would generally be focused in major metropolitan areas.

Franchise development will be more weighted to smaller markets or less populated suburban areas where a local franchisee can operate more efficiently. We expect franchise growth of 30 to 40 units per year going forward. We also plan to acquire a franchisee that fits within our model. I'll talk more about that in a second, when I get a little more specific about that.

And we also plan to aggressively develop non-traditional venues, which is something we have not talked much about in the past. So I might kind of segue into that, quite frankly. Non-traditional development is turning out to be a pretty significant piece of our business. Its a very blossoming opportunity for the Qdoba brand. We currently operate 9 non-traditional locations, and we expect to open 3 more in fiscal '12. We're extremely active in this area. Everything from airports to travel plazas and I'll put a few examples up here and we don't like telling everybody everywhere we're going but these are some good examples of where we will be.

And we're becoming experts at meeting the needs of these venues because they're very specialized. And we're focused on doing that [ph] traditional development, expect us to help them understand how Qdoba fits into these non-traditional spaces. And just as interestingly, we are currently negotiating contracts for 12 more non-traditional locations, as I'm talking to you guys through today. So we see this as a real opportunity to be able to develop where, maybe, some of our competition can't.

Kind of back to the development process for a second. Just a great segue into our variety of real estate solutions that we've created in order to meet the demands of the ramped up development plan. So here's what the majority of our sites in our system look like today. This is the high-profile end cap and an anchored shopping center, which happens to be down in Denver, Colorado. But we have other solutions and we will consider going in line if this location is here.

However, we generally require some sort of exterior trade through this element and help us stand out in the crowd. So when we did this deal, we had the landlord, obviously, agreed to let us come in and modify this in-line location so that we can stand out from the street and we don't blend in and look like a mom-and-pop business.

We'll also consider some malls that have high dollar per square foot sales. This is an example of one of those malls, for those of you who live in California. for those in L.A. And this is the interior view of what it looks like. And in these particular mall locations, we also like to have exterior visibility in entrances and this is an example of that. We have exterior signage on this, a parking field right out of the front of the restaurant, gives it easy access to folks that really don't want the mall, but just want the food experience. And here's an example of a high-profile urban location. This in downtown Chicago. And the reason I put this on here in Seattle, more people expect this to be on urban locations, that we do everything we can and we negotiate and to get the high visibility signage, to get exterior trade dress, especially in a place like this, we're everything is busy, and visually, you need to stand out in the crowd.

As I mentioned earlier, we're active in non-traditional development. So I couldn't do this presentation without showing you one of these. And I'm very proud of this. This Qdoba is located in the main foodcourt of the Seattle's Tacoma Airport. It operates 24 hours a day and has a breakfast menu. The amazing part of this is, this is only 900 square feet of restaurant and it just recently annualized at $4 million in sales. And it is the highest volume Qdoba in the system, but it's proof that it can happen, it can be done. And we're very proud of it, very excited about that. It's one of the reasons why non-traditional could be a great venue for us.

And lastly, and far from least, here's a picture of our current freestanding prototype. Also very of this as well. We think we've built a really memorable facility here. Needless to say, this provides us the kind of the ultimate opportunity to be high profile and display our unique exterior trade dress. Currently, about 10% of our locations are freestanding in our system today. Not necessarily all look like this, but this is the current prototype. But about 10% of our stores are stand-alone.

So now that we've looked at the exterior, let's take a couple of minutes and look at the interior. From a trade dress perspective, we think we accreted a differentiating look and feel of our restaurants. This interior photo should give you a sense of the warm, modern and contemporary feel of a Qdoba. Any restaurant that's been built in the last 18 months looks like this. And as both company and franchise restaurants age and our need to remodel, they would will be converted to this look as well.

This one is a photo of our service line, and show you how open that area is, our open cooking area. It The looks has showcased the handcrafted preparation of menu items, as well as the open grill and the grilling of our proteins. Our operating system is built with speed in mind. In our highest throughput locations, we have achieved over 200 guest transactions in an hour. We will continue to focus on speed of service, keeping in mind that we cannot jeopardize the overall guest experience for speed, that interaction piece that I've talked about in the pillars is extremely important to our success.

So I'm going to change gears on, here, now that we've talked about real estate and facilities and development, and I couldn't do this presentation without talking about our franchising business.

We are the largest franchisor of fast-casual -- that's -- fast-casual Mexican, that was mentioned earlier today. And I will tell you that our franchise system is very energized, they're very engaged. Here's some statistics about them that I won't read off to you. You'll have it obviously in the deck. And we believe that we have a solid development pipeline to take us through 2015 and achieve this piece of our business plan.

The topic that directly relates to franchising is our strategy to acquire franchise locations when it makes sense. We use a number of parameters that guide us on our decision-making process. We're looking for markets with above-average unit volumes, above-average restaurant operating margins, solid same-store year-over-year positive sales trends, and are well operated and can give us more room for new unit development. We also have an expectation that when we do franchise acquisitions, that they will be accretive to earnings the day they are acquired.

So to kind of sum it all up and tie it all together, I'd try to summarize everything. We believe that we have a differentiated brand within the high growth, fast-casual, Mexican grill category. And we're nationally scalable and we're ready for ramped-up growth. I've been here 14 years now, and this is what I've been wishing for. Qdoba has attractive unit economics, which Jerry will cover in his presentation. Our franchisees are building new restaurants, we're going to opportunistically acquire franchise locations and through our marketing efforts and accelerating company growth, we expect to grow our same-store sales trends and our average unit volumes well into the future. We have tons of reasons to be bullish on Qdoba's future, and I'm very excited about it. So thank you for your time, and I'd like to turn this back over to Linda.

Linda A. Lang

Okay. So the fun thing about being the CEO of Jack in the Box, that has Jack in the Box and Qdoba, is that both brands, and I think you can hear from Gary and from Leni, the customers -- our customers or guests of Jack in the Box love Jack in the Box. And the customers and guests that experienced and know Qdoba love Qdoba. And I don't think there are a lot of brands out there, I think, that can say that, so it's really exciting to us. And with that, I'd really like to introduce, Jerry Rebel, our Executive VP and CFO. And Jerry came to us via Flemings and CBS back in 2003. We've brought him in the controller, and then he was promoted to our CFO in 2005. And Jerry has just been a tremendous leader in the organization in transforming the business model. So he's not only a brilliant numbers guy -- don't get your head too big there, Jerry -- not only a brilliant numbers guy, but he's a great strategist. And he's responsible for the financial management and accounting of Jack Inc., as well as franchise sales and our supply chain. So with that, let me turn it over to Jerry to wrap up the presentation this morning.

Jerry P. Rebel

Thank you, Linda and good morning, everyone, and thanks again for joining us today, and I'm going to ask slight to those of you were able to make it. To wrap up our discussion this morning, I'm going to walk through the key elements of our investment pieces. Our Jack in the Box business model for that brand has been changed. We are now a franchise-operated brand. We're 72% franchised, as we stand here to date, and we're targeting 80% franchise by the end of 2013. So I'm going to spend some time talking about our franchise cash books. And I'll show with more specificity of what the company operating units look like post refranchising, and also, the outlook for the remaining markets to be refranchised. I'll touch on unit economics for both brands. I'm going to drill down a bit more into the Qdoba restaurant operating margins. And I'll finish up with our long-term plans and including how we plan to essentially double our operating EPS by 2015 from 2012 levels. And we'll talk about the investment pieces.

I think the key elements here -- slide change please, thank you. Our key elements here for Jack in the Box, 2 sources of EBITDA from franchise operations: royalties and rents. Company-operated restaurants with high AUVs and high restaurant operating margin, and Qdoba, high growth, high return, significant EBITDA grower.

I've said, for our Jack in the Box refranchising strategy, is all about complete -- let's start with our cash flows from franchise operations. I think the key point here is most brands generate one cash flow stream from franchise operations royalties. Our Jack in the Box brand generates 2: royalty and rental income stream from franchisees. And we control a substantial majority of the real estate lease by our franchisees to operate Jack in the Box restaurants. And we typically charge them rent based on 9.5% of their sales, which is generally 3% to 3.5% above our underlying rent cost. And we're going to talk more about that in a couple of minutes.

In fiscal 2011, we generated $282 million in franchise revenues, of which, $161 million was from rent. Now, our franchise cost structure breaks down like this: our cash expenses associated with franchise support, along with brand and operational standards oversight and the gray section of the bar; our cash expenses for rent paid to control the properties we lease to franchisees, in the red section; and a noncash expenses for depreciation on those properties. Now it's important to note that as our franchise revenues increase from rising franchise sales, our costs do not increase as a direct result, providing significant operating earnings flow-through on the increasing in revenue streams.

Let's take a look at the EBITDA generated from our royalties and franchisees. In fiscal 2011, EBITDA from royalties and fees, after franchise support cost, total to $109 million. And when you look at the EBITDA margin, it was 90%, including royalties and fees and net of the reimage payments that we had through franchisees.

Moving on to the rental stream. The number of Jack in the Box rental producing properties continues to grow as we complete our refranchising strategy. At end of fiscal 2011, we had over 1,400 Jack in the Box locations that we lease to franchisees, or nearly 90% of the Jack in the Box franchise locations. Slide change, please. Thank you.

What differentiates the Jack in the Box business model for most others is the EBITDA and operating earnings generated from our rental income stream. Now let me talk a bit about the construct of the element of our business model here. Now, we generally charge franchisees rent based upon the greater of 9.5% of their sales or our underlying rent cost. And the rent we pay on those properties is generally fixed, creating the 3% to 3.5% rent spread that I spoke about earlier. Now since our rental costs generally do not fluctuate based on sales, as franchisees sales increase, the marginal EBITDA flow-through on the incremental sales can be as high as the 9.5%.

In fiscal 2011, we generated $61 million of rental income, EBITDA with an EBITDA margin rate of 38%, the operating earnings generated was approximately $37 million net of the depreciation that I spoke of earlier, for a margin of approximately 23%. Now I realize that the additional source of EBITDA at those lower margin rates does reduce our margin rates optically in terms of total franchise margins. But on balance, I'd much rather have the additional EBITDA on the rental income stream than a little higher margin rate.

Franchise operations. Generated EBITDA of $170 million in fiscal 2011 before non-direct corporate G&A allocations. And we expect these high; margin annuity-like cash flows to continue to increase as we complete our refranchising strategy and as franchisees same-store sales continue to grow. And again, there is nearly 100% profit flow-through on the incremental sales growth.

Let me shift now to talk about the expected impact of completing our Jack in the Box refranchising strategy. We plan to refranchise 150 to 200 additional restaurants by the end of fiscal 2013. And this is a snapshot of the franchise markets that are available for sale as we show here from our website. And you can see the markets that are available. They include some seed markets, 67 restaurants in the Southeast and a few markets in Texas and Washington.

So let's look at the impact that refranchising should have on our margins going forward. Now as we said before, at the conclusion of our refranchising strategy, we expect that our restaurant operating margins will be above 16% in a normalized inflationary environment. Now, we discussed this next point on our year-end call, but I believe it's important to reiterate here. Our pro forma restaurant operating margin for fiscal 2011, excluding the storage that we refranchised last year, would have been approximately 100 basis points higher than our reported 10.7% consolidated margin. Just as a reference, the Jack in the Box brand margins were 12.6% last year. In addition, if we include the additional -- excuse me, if we exclude the additional 150 to 200 restaurants that we plan to sell going forward, our pro forma Jack in the Box restaurant operating margin for 2011 would have exceeded 16% even with 2011's 5% commodity inflation, and our AUVs would've exceeded $1.6 million.

Let's look at the remaining 150 to 200 restaurants that we plan to sell over the next couple of years and our expectations for proceeds, for gains and the accretive impact on operating EPS. First, the 80 to 120 restaurants we have in our 2012 guidance. Proceeds of $35 million to $50 million, gains of $15 million to $25 million, and these restaurants are generally located in the Texas and Washington markets, and they have average unit volumes of about $1.3 million.

We estimate these transactions will be about $0.04 to $0.06 accretive to annualized operating EPS. And as you know, any partial year accretive impact to fiscal 2012 earnings are already included in our guidance. The 70 to 80 restaurants that we plan to sell in fiscal 2013 are primarily located in the southeast markets. Their lower current AUVs of $900,000 are estimated to generate lower proceeds and gains, which should be more accretive to operating EPS on an annualized basis.

And just as a note, the southeast markets are currently generating same-store sales of greater than 10% on a 2-year cumulative basis. It is likely that we will offer variable royalties in these markets of lower than 5%, while sales are building to provide franchisees with a profitable business model. So if you're modeling, I would not model a rent spread on these locations particularly in the early part of that refranchising transaction. And we expect to sell these 70 to 80 restaurants to be about $0.10 to $0.12 accretive to annualized operating EPS.

Let's turn to unit economics for both brands. And I'm going to show you the slides that we typically would show once a year, if you can get a feel on that. But I'm going to go through those pretty quickly. I will tell you that we expect the Jack in the Box growth to be primarily through franchising, with company growth focused on seeded markets, as well as infill company operated markets. We are allocating more capital to Qdoba because of the growth -- excuse me, because of the greater returns that they have, and we'll show you what that looks like in a minute. And I'm also going to show you a bit a bit more detail on Qdoba's restaurant operating margins.

So I ask you to refer to the non-GAAP reconciliation information that we have on our website for more detail on the construct of this information for both of our brands. But the highlights are, Jack in the Box average unit volumes of $1.405 million for company ops in fiscal 2011, cash on cash return of more than 16%, EBITDA margins of 11.5%. And I'll just mention that for modeling purposes, we are targeting new restaurant investments, so only look for those locations that we believe can do at least $1.6 million in average unit volumes.

Turning to Qdoba. Qdoba company, average unit volumes $922,000 for fiscal year 2011. EBITDA margin of 16.1%. Cash on cash return of more than 21%, and this assumes an average cash investment over the last 3 years of $695,000 per unit. And this does include the Manhattan market, which has a higher-than-average investment cost.

Now since we plan on substantial investment in Qdoba growth, I thought it might be helpful to drill down a bit on their unit economics. I think there's 2 key points from this Slide. One is, Qdoba restaurants generally take longer than Jack in the Box to mature, especially in new markets. And secondly, at average unit volumes near or above $1 million, the brand enjoys significant fast fix cost leverage on those increasing sales and generate strong restaurant operating margin, EBITDA and impressive cash on cash returns. Now the information here represents the Qdoba company markets, operated as of fiscal 2011, as well as first quarter restaurants added. And in addition, we've also included, on a pro forma basis, the 36 units that we acquired thus far this year from Qdoba franchise operators.

I'll also mention, and it's in the fine print there on the slide, but Gary mentioned about a $4 million restaurant in the Sea Tac Airport. We have not included that here because that is untypical, and we did not want to skew the results for you. Now what I can tell you is that about 1/3 of the company's store base averages, greater than $1 million. As you can see what that looks like on the right-hand side. Again, it's about 1/3 of the company stores where they had annual sales of -- in excess of $1 million and restaurant operating margins of 24%. And those restaurants also represent about 50% of the restaurants that have been open for more than 3 years.

That wraps up the investment pieces review. Let's talk about our long-term goals through 2015. By 2015, we expect to generate operating EPS of at least $2 a share, a compound annual growth rate of about 25% from the 2011's operating EPS of $0.83 a share and roughly double our fiscal year 2012 guidance. We expect to produce EBIT -- EBITDA x gains of $275 million by 2015, an approximately $100 million increase, and generate annual free cash flow of approximately $75 million per year beginning this year and improve our Return on Invested Capital to the mid-teens.

Now our long-term assumptions that drive these goals or [indiscernible] goals are same-store sales growth for Jack in the Box at 2% to 3% per year, and Qdoba, 3% to 4% per year. As Gary mentioned, Qdoba Company operated unit growth of 15% to 20% per year. We expect Qdoba company-operated restaurants to approximate 55% of the Qdoba system by 2015, and we expect to operate roughly the same number of Qdoba restaurants as Jack in the Box by the end of 2015, about 500 units in each brand being company operated.

There's been a fair amount of discussion and questions regarding our G&A, so let's take a look. Our G&A cost target has been narrowed to approximately 3.5% to 4% of system-wide sales. Let's talk a bit about how we will get there. The refranchising of the 150 to 200 additional units that I spoke of earlier will contribute a portion of the reduction. The remainder is expected to come through activities that are currently underway, including a general rightsizing of the Jack in the Box organization, consistent with our new franchise business model; process reengineering across the entire company; potential outsourcing of certain activities where that makes sense and a broader and deeper integration of Qdoba back office and support functions, should enable us to hit that target.

Now, so what do we think the look business looks like in 2015 and how's the $275 million in EBITDA breakdown? We expected the EBITDA, excluding gains, to grow by about $100 million from the end of 2011 to 2015. Our fiscal year 2011 EBITDA, excluding gains, was split between Jack in the Box, generating 86%, and Qdoba, 14%. Now due to the accelerated growth of the Qdoba company-operated store base, we expect Qdoba to represent nearly 1/4 of our $275 million of EBITDA in 2015, or over $60 million as compared to $24 million in 2011. Approximately 54% of the Jack in the Box brand EBITDA, before G&A in 2011, came from franchise operations. And we expect that portion to grow to over 60% in 2015. Now the EBITDA Compound Annual Growth Rate, as calculated from above, is expected to be about 8.5% for our Jack in the Box business and approximately 25% for Qdoba.

So it is how we view the generators of that operating EPS growth to at least $2 by 2015 from where our 2012 expectations are. And we expect an approximate percent for that to come; from Jack in the Box franchise operations of 30%, the remaining franchise transactions that I spoke about generating about 15% of that improvement; the operating EPS, about 20% from the targeted G&A reductions that I spoke about; and then Jack in the Box, same-store sales and the restaurant operating margin expansion generating about 15%. We expect Qdoba to contribute approximately 20% of the operating EPS growth, but nearly 40% of the EBITDA growth by year 2015.

Let's move on and talk about our CapEx projections. We plan for significant reductions in the Jack in the Box brand capital needs as we complete our refranchising strategy. Our increased growth in Qdoba company operations will necessitate additional capital. So we are now expecting CapEx to grow to $110 million to $120 million in fiscal year 2014 and to between $120 million and $130 million in fiscal year 2015. I'm going to show you what that breaks down -- what the breakdown looks like by brand on the next couple of slides.

So here is the estimates for Qdoba's CapEx, with most of the increase coming from unit growth, ramping up from approximately 40 company units in 2012 to about 75 units in 2015. And on Jack in the Box, we expect the majority of our Jack in the Box CapEx will be related to new unit growth in existing markets and seeding new markets for further franchise development, along with other return-oriented CapEx that drive same-store sales or take cost out of that because you can see a significant reduction there.

Our capital allocation priorities, we believe, are aligned with driving return-oriented investments and increasing shareholder value through investment in our high-growth fast-casual concept Qdoba, including strategic acquisitions of the existing high-performance franchise markets and growth of new company-operated units projected at 15% to 20% unit growth per year. Also, Jack in the Box growth, primarily through seeded markets and investments to drive same-store sales and improve restaurant operating margin in existing units through remodels, refreshes, maintenance on those units, as well as restaurant equipments and technology that can also drive same-store sales and reduce operating cost.

And also, we'll continue to be opportunistic with returning cash to shareholders as we have been historically.

Now for modeling purposes, let me tell you what we had in there and with respect to share repurchase activity. So our guidance assumes that stock buybacks are only used to offset dilution for the modeling. So the $2 of operating EPS is real business-generated operating EPS growth. However, I want to reiterate again that we would expect to continue to be optimistic with respect to share buybacks.

And I'll close by touching on some of our key investment drivers. Jack in the Box, 3 cash flow generators: annuity-like franchise royalty and rental income streams, along with a company operated store base with higher average unit volumes and restaurant operating margin. And for Qdoba, high unit and EBITDA growth. And I think there's truly a scarcity out there for high-growth concepts and restaurant retail, we believe we have one of those here.

And with that, I'm going to turn this back over to Carol. I think we're running a little early, so we're going to open this up for Q&A before we'll serve lunch and then we'll come back to Q&A following lunch.

Carol A. DiRaimo

Great. So we're just going to take some [ph] questions. We are going to break for launch for just a few minutes at 11, so they can serve lunch, so they can start Q&A and then resume that. I also want to make one clarifying point for those on the webcast. Our ported margins last year were 12.7%. So in case that didn't come across clearly. Let's take questions?

Question-and-Answer Session

Unknown Analyst

Jerry, you went really fast. I couldn't write everything down. So in your Qdoba slide, when you're talking about company unit development, if I got it right, you said 40 units next year at $35 million to $40 million and then in the out years, you got 75 units at $85 million to $90 million. So that means, on a per unit basis, in the out years, you're a lot less than the current year. Is that a skew in where you expect to open restaurants? Or because at the high-end its $90 million on 75 versus $40 million on 40, unless I wrote it wrong?

Jerry P. Rebel

Let me turn to that slide. Yes, I think what we said here is the 40 units and -- this is maybe where we have the wrong year. The 40 units are in 2012, and so we're growing to 75 units by 2015. So that number actually more than doubles in 2015, the total CapEx versus what it's expected to be in 2012. And of course, you have some remodels in there also. And then the other thing I would add is, as we're ramping up that company growth, you're always going to have more construction in progress in the later years than what you're going to have now as we have 75 units that we're planning in 2015. We'll have more construction in progress to open up units in 2016.

Unknown Analyst

I want to make sure I understand that Qdoba operating margins, particularly those younger stores, less than 3 years old. I think the slide said, stores less than 3 years old have a 1.2% operating margin. First of all, that history is that you were also -- your projected assumption -- does that mean that as you accelerate your unit development, does that put a drag? Or what kind of drag does that put on the enterprises' margins and what can you do to improve that? Is that typical, maybe I'm reacting and it was -- and that's very average for new stores in any concept, but it seems very low, particularly for 3 years into it?

Jerry P. Rebel

Yes. John, these are the actual units that we have in our portfolio today. As I mentioned, in the prepared remarks, was the Qdoba restaurants typically take longer time to mature. And remember, Qdoba answers in a new market without the brand recognition that, say, a Jack in the Box does today. so it does take a little longer for that concept to mature and to build sales. But once they've been open before that long, and you can see what the restaurant operating margins look like, at even something that approaches $1 million, with the restaurant operating margins of more than 18% and significant EBITDA generation on those locations, even at that volume, it makes for a very wise investment for us going forward to continue to open up these restaurants, accelerate the pace, get greater density more quickly in these restaurants and then, go ahead and drive those AUVs. What I'd also tell you, as part of the benefit of acquiring the units that we've been acquiring, that are already at those $1 million levels and that have those restaurant operating margins, like I spoke on the call, that were north of 20% collectively here for the restaurants acquired this fiscal year, that goes a long way towards helping to diffuse some of the maturation of those new market growth.

Unknown Analyst

As far as the $0.5 to $2 of EPS, you talk about 16% company-owned margins. Can you just walk us through what that assumes for the Jack in the Box business and what that assumes for the Qdoba business?

Jerry P. Rebel

Yes. It's -- while we had indicated that the Jack in the Box business, on a pro forma basis, post refranchising, we would have restaurant operating margins in 2011 of a little north of 16%. But I think we would see, in terms of the total split, it will be about -- both brands will be in that 16% range. Remember, we're going to operate as many Qdoba restaurants going forward, as well Jack in the Box restaurants going forward, so there's going to have much more similarly weighted restaurant operating margins going forward.

Nick Setyan - Wedbush Securities Inc., Research Division

This is Nick Setyan from Wedbush. My question is on the rental revenue streams. Does that assume that 3% to 3.5% margin to perpetuity or is there some portion of that where you guys are paying below market rents and as you renegotiate rents at market rates, that goes away?

Jerry P. Rebel

Yes, I would say that most of what causes that is the fact of what we're able to do sale leasebacks on, in terms of the cap rate that we can get with our balance sheet. And then charge in the franchisees 9.5%, to actually what drives that versus it, being below market rent. So even if we would have -- even if we would do sale-leaseback today on a restaurant recently built, we'd still expect to get a rent spread of about that on restaurants that have north of $1.6 million in average unit volumes.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

It's David Tarantino. Just a couple of questions on Qdoba's average unit volumes and the expectations going forward. First, with the new stores coming in at a faster pace. Is 3% to 4% same-store sales enough to hold onto the average unit volumes you're seeing today? And then I'm curious to know more about sort of the concept, the higher penetration levels lead to higher unit volumes there. And I guess what markets could you give us as an example if that's the case? And what does the competitive landscape in those type of markets look like today?

Jerry P. Rebel

As far as penetration goes, our experience and we can point to markets for Denver when we talk about Denver, but we're at parity with a key competitor in 50 stores and 50 stores. We see same-store sales growth continue to build. I could go market by market. I don't want to do that specifically to give the competition a heads-up. But our history has been that when we move into a marketplace, people just -- I mean, don't know who we are and what we do. And by the time we reached some level of saturation, depends on what the market is, in Colorado Springs it could be 5, right? I mean, in a small market in New Jersey we probably need 50. So all I can point to is our history that as we have penetrated the markets, that we do see that unit growth. When we went before prerecession, we had 39 consecutive quarters of comp store sales. And we had a couple of quarters there where we felt negative slightly, and then we've gone back into an 8 -- 8 quarters of consecutive comp store sales again. So it's been our history. I don't if that answers the question as clearly as you like but...

Gary J. Beisler

Let just me add on just a bit to that. So one of the things that you struggle with when you give guidance likely are expectations that go out to 2015 is creating some level of believability. So we were here telling you that a brand was going to grow at 7% or 8% and then we're going to get the $2 worth of EPS and at that time, people would look at the us and say "I'm not sure that I buy into that story." What we're trying to tell you here, though, is that our targets at the $2 EPS, for operating EPS, by 2015 is made up with the assumptions that I just described. So if you believe that, that might be a little low, we can have a discussion about that, but I think what that should give you, though, was that even with that kind of a 3% to 4% comp store growth, we believe that we can get in that -- to that at least $2 worth of operating EPS in that timeframe.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Lenny, just a follow-up question regarding the Jack in the Box speed of service opportunity. You mentioned the potential to improve speed of service by maybe 1 minute from here. I was just curious where you would stack up versus the peers on that one slide if you were to achieve that.

Leonard A. Comma

Yes, so I mentioned that we had already made a 30-second improvement, Q1 last year versus Q1 this year. If we were to improve another minute, we still would find ourselves as the slowest player on that list. So I think the one minute is relatively conservative size with the opportunity.

Linda A. Lang

I'll just add it's not our objective to become the fastest in the QSR burger segment. And the reason that we don't believe that makes sense for the brand is for a couple of reasons. One is the diversity of our menu to the fact that we don't make it until our customers order it. So we don't build ahead and hold under heat lamp and we serve everything any time of day. So that adds a little complexity into our operating system, but we think it's important and our customers know that, at Jack in the Box, it's going to take a little bit longer because the food quality is superior.

Leonard A. Comma

I'll add one additional point to that. We have locations today and I stated it in one of the slides that spoke about how we're performing. We have locations today that are performing 1 minute faster than our average and able to deliver the high-quality food any time of day. And so it's just as much about the average number moving as it is about the consistency of the operations all delivering at that speed.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Jeff Bernstein from Barclays. Just for us -- for Lenny, the question on the Jack in the Box future of growth opportunity or the JIB brand future growth opportunity. Just wondering, obviously, you're in a small percentage of the total states. It seems like there's a huge opportunity there domestically. I'm just wondering how you think about the contiguous growth opportunity versus kind of going clear cross-country and the franchise interest in doing something like that. I know you mentioned they're putting their capital first so it demonstrates that they're into the brand. I'm just wondering the franchise interest to do that pace of growth. And do you get a look at the franchisee's balance sheets to get a feel for the health of the franchisees and their ability to do that or to borrow money to do so?

Leonard A. Comma

Yes, so we do get the franchisee financials so we have a very good look at sort of their ability to grow and their ability to sort of capitalize these things. The issue with going to contiguous markets versus sort of jumping into new markets is really about the demographics in the market and whether or not our target consumer is there at a rate that allows us to build a restaurant and be noticed and get enough business. So we are -- we're not sort of confined to the contiguous market although it is the safest way for us to grow. So we will also look at times jumping past a few markets if we believe that the opportunity is right for us, and our franchisees are interested in that. And the way we will look at it is to try to sit some of those markets. And as I stated in the one slide, it's really about showing them the viability of the market and then giving them a cash flow. That's really the foothold that they need. It shows them that there's not as much risk. We can sell those locations to the franchisees and then they continue to develop out the markets.

Linda A. Lang

It's interesting if you compare and contrast the opening of Qdoba and opening of Jack in the Box, very different in terms of the maturity of the brand, right? Because Qdoba has only been around since '98, Jack in the Box has been around from 1951. So you saw the video of Indianapolis. We opened at record-breaking sales when Jack in the Box goes into a new market because there's a lot of brand awareness and a lot of pent-up demand. Qdoba on the other hand, though, doesn't have that history and doesn't have that brand awareness. So it's a brand awareness market penetration story and objective for Qdoba. And for Jack in the Box it's, let's make sure that we can efficiently operate in a market that is far, or far reaching from our existing markets and do it in a way that's going to be financially viable for our franchisee, which is why we have the seating strategy where we go in, we lower the risk, we develop our kind of flagship units in a couple of key markets and then it makes a little bit safer or easier for a franchisee to then come in, buy those restaurants from us and then begin to get infill that market. Hopefully, we can move away at some point, away from a seating strategy and we'll have enough demand from our franchise developers to go in and open new markets on their own. And we have had a couple of the developers do that with Jack in the Box.

Carol A. DiRaimo

I think we'll go on a break because lunch is here.

Jerry P. Rebel

I just wanted to add one thing on the follow-up on John Glass' question about the Qdoba margin, particularly in the restaurants that are less than 3 years old. So if you think about it, as we continue to develop those -- the new restaurant, those restaurants continue to mature. And they should move up that curve and get into that $1 million range over that -- over this 2015 timeframe. Just to give you some sense of scale, to get to this $200,000 increase in average unit volumes, it's only about $3,800 a week worth of sales per store. So it kind of give you just some sense of scale. It's not a big leap to get from there to the next level where you're performing at where the greater than 3 years openings look like and getting to that $1 million average unit volume.

Carol A. DiRaimo

Great. I think lunch is here. For those on the webcast, we're going to pause a few minutes while we serve lunch and then we'll resume at probably 10 after.

[Break]

Carol A. DiRaimo

I think we're going to go to Larry Miller from RBC as we resume from break.

Larry Miller - RBC Capital Markets, LLC, Research Division

One of the things, Jerry and Gary, we all do is kind of benchmark you guys against your peers. And so for Qdoba, you got a pretty high standard because you have -- what we see is Chipotle out there. And the volumes are twice what your volumes are except for the stores that you just showed us, but generally across the system, average is twice what we're seeing and the margins are a little bit better, and the comps specifically are more than double what you're doing. So I just want to get the sense of like how you guys think about your business versus theirs. And at the end of the day, do they look similar? Or what's different about the 2 as you guys see it?

Gary J. Beisler

Geez, Larry, I've never been compared to Chipotle. I have to think about that. First of all, I would recognize the fact that, and I think, we all would that, they have been a bit of an anomaly in our industry. I mean, they have created a brand like unseen in probably 20 years. So hats off to them for doing that. And MacDonald's gave them a great start with what I would call rocket fuel. And in the early days, they're twice our size with respect to the brand. But I would tell you, and I've said this to many folks, is that we have a different business model than Chipotle. And I look at it like the pizza guys and like the hamburger guys. I even compared it last night to, so what does Walmart do and what does Target do? I don't know those exact answers, but I'll bet you Walmart probably does 50% or 60% more business than average Target. I don't know, but we have a comparative of McDonald's and Jack in the Box. You have huge disparities in volume. It doesn't mean that, that particular brand isn't a strong band. It doesn't mean that it's not a great investment for investors in great returns. We've built our business model with less rent, a different menu that allows us to have a lower food cost structure. There's a lot of things that we've done that we've been very deliberate about. So when I look at it -- I'm from Belleville, Kentucky, and I remember watching Papa John's and I know a lot of you have been around Papa John's or seen Papa John's for a long time. When they came out, people said "Well, they're never going to compete with Pizza Hut." And slogan [ph] took "Better Ingredients, Better Pizza" to a really interesting place like 3,000 restaurants. Very successful brand. There's never always -- there's never just one winner, especially in something like this. So I think as long as we take care of our business and don't break our business model, that the returns that we'll give to shareholders over time will be comparable. And I respect the competitor, but I don't necessarily have to be them, and I think based on the brand positionings, the things that I gave you guys earlier today in my presentation, there's a very deliberate message in there about rational versus emotional. And I think in markets where we're at parity with them or we were in the market before them, we either do dominate them or are parity with volume. So the fact that they're twice the size and got there sooner has a big bearing on how well they've grown their business.

Larry Miller - RBC Capital Markets, LLC, Research Division

Just one more follow-up on Qdoba. The units that you've opened in the last few 3 years have this much lower margins and maybe something was different about those and the stores you've opened in the past, maybe they all used to do this, open really low in the first 3 years, maybe it's traditional. Over the next couple of years, you doubled the company-operated base, some through acquisitions, but largely through new unit growth. And Jerry, you said you're kind of thinking about a 16% margin for them in 2015. If that doesn't change, that the margins stay low in the first 3 years, how do you get to 16% in 2015, because the new -- the first 3 years they have really low margin? How does -- does the new units that you plan to open really change in terms of margin structure? Does the traditional path of having low first 3-year margins really change?

Jerry P. Rebel

I'm going to let Gary answer most of that. Let me take the easy part. So one of the things that Gary spoke about with the acquisitions of some of the recent franchise markets that we've had and one of the elements that he said we were looking for was opportunities to grow in those markets. Those are already established markets with great brand penetration and great brand awareness. So those units that will open up in those new markets will generate significantly higher average unit volumes out-of-the-box than you would expect a new restaurant to do in an under penetrated market or in a brand-new market. But I think you have that. Also, you have the notion that as these restaurants continue to mature and they move up that scale and get even north of that $1 million, that we saw 1/3 of our restaurants are averaging more than $1.3 million, they have restaurant operating margin that are 24%. So those aren't going to -- those won't stand still and nor will the restaurants that are in that middle bucket that are open more than 3 years who weren't quite averaging that $1 million yet.

Gary J. Beisler

And I think it's somewhat compounded by the fact that our business plan says we're developing these large major Metropolitan areas on the company store side instead of trying to franchise them. And when we're entering into the Chicagos and the Los Angeles of the world to pick 2 off the top of my head, when we have 15, 20 stores in the market that need 70, 80, 90 in order to have real brand presence, we expect those to be more difficult to grow as the brand -- because the brand is just not known. But it goes back into the question I was asked earlier, it's been our history that as we penetrate markets that we get traction, we get brand recognition and we grow same-store sales.

Unknown Analyst

Jerry, I got a question on the cash flow, I guess. I understand in your guidance you're not implying any share repurchase greater than just to sort of offset dilution. However, you're going to have a lot of cash if, again, the numbers came quick. But looking at your CapEx, looking at your earnings growth and EBITDA growth, should we model free cash flow of roughly $75 million plus on a 5-year basis? So is that the correct math to look at as far as how much cash you could have accumulated if we don't do the share repurchase?

Jerry P. Rebel

Yes. I think that would be -- that's about the right answer there. And I'll also tell you just for modeling purposes we're anticipating that we would have some kind of permanent debt structure on the balance sheet of at least $200 million going forward. So that helps you figure out how much extra cash we're going to have that may be of help to you also.

Unknown Analyst

And then why not use some of that cash actually to do more of a MacDonald's type model where you own the land and own your stores rather than the 350 basis point spread. You can actually make more if you put your balance sheet to work there.

Jerry P. Rebel

Yes, that's really -- that's the return model and we actually look at that, so particularly in the new markets. We take a look at whether or not we think it's a better return for us to own those as we put out the franchisees or rather we think it's advantageous to take the opportunity to get extraordinarily attractive cap rates right now. So we can get cap rates that are less than 6 in various markets right now. So when you look at it that way, it's still very attractive to go ahead and do a sale lease back and get the cash a back end. But we will look at that going forward. We're not always going to get 5.5%, 6% cap rates.

Robert M. Derrington - Morgan Keegan & Company, Inc., Research Division

Gary, Bob Derrington, Morgan Keegan. You've got a pretty impressive trend in same-store sales for your Qdoba business. As we look forward, it looks to be very impressive as well. But my question is you don't operate in a vacuum. You've got some competition out there, especially the bigger player within the category who's got designs on more aggressive marketing in the future. So my question is, what's the reasonableness of your same-store sales kind of the assumptions here and especially as that competitor gets more aggressive at trying to communicate? How do you respond? What do you have planned ultimately to drive your own same-store sales through communication?

Gary J. Beisler

Well, the brand positioning is a big piece of it. And we talked about the emotional versus rational. Chipotle's using a more rational approach about -- it's going to be good for you because we've done these things, locally sourcing, et cetera, et cetera. And when I talk about the emotional side of food, that really is coming from the heart, so to speak, because I believe that and I -- when I -- and we talk to consumers, we do research. We hear -- I heard it from you guys last night, the preferential comments about "I really like your food better." That message has to come through more clearly, especially to millennials. It's part of what we're doing in our changeup. I didn't really get into a ton of detail on the marketing front. Part of it is I don't want to say too much to my competition, but I will tell you that we are really, really, really taking a huge push to not be any, I won't say any dependent, dependent on traditional media. That we are going through really the digital front. We're putting more resources behind that with bodies and money in order to develop programs that talk to those people that live on that thing they hold in their hand. That's who the heavy user is. And it goes back into, I think, it's a combination of things. It's getting the brand, the market penetration piece of the equation, obviously, operation. But that marketing message, which is "Hey, food is a really, truly emotional experience." It's -- people choose it because they love something in particular. There's a reason why Americans eat a lot of hamburgers. They love hamburgers. And they've proven that. And so I believe that there's -- it's always -- there's never one silver bullet about driving comp store sales. I mean, there's 4 pillars we talked about, the service piece. I really do believe you have to be careful not to break the model. With speed to service, you can actually break it in a brand like ours where it becomes totally impersonal. And I know there's that practical side that says you got to be able to get a lot of bodies at a short period of time. So I get all that. What I do know is that when people get hooked on Qdoba, they love it and they keep coming back. And the key is getting that trial, changing their habits, which is probably a second big piece is, you got to get them several times in order to change that habit because if you're used to going to a competitor and there's other competitors other than Chipotle out there. And most is very strong in the Southeast, same type of thing. But we know that once we get them through our research and through sales building that we have traditionally done this because the only thing that happened was this whole thing called recession, where we had a couple of quarters where we didn't do so well. But even those are only 2% and 3% negative. So when I look at this 3% and 4%, I'm very bullish that these are accomplishable and conservative in the sense of we built the model, we believe we can accomplish.

Robert M. Derrington - Morgan Keegan & Company, Inc., Research Division

Yes, back on the Jack in the Box business for a moment, can you give us a sense on the lift or the help you're getting from remodels right now in the system? Is there anyway to quantify that? And how long does it last? And then maybe just the longer-term composition of your 3% to 4% comp guidance, how you sort of get there with price and mix and traffic.

Leonard A. Comma

So we have been careful not to present the brand in a way that we believe we can invest in one particular thing and generate the return. So when you look at the reimages, you really have to look at them as being complimented by the service initiatives and the investments we've made in the menu. You really can't look at it singularly. And so we're not going to try to pull out that return number because it really isn't. It would not be accurately portrayed. It is not the way we approach improving the brand or driving the sales and so we haven't presented it that way. As far as Jack in the Box is 2% to 3% growth, you can really go back to what I said in the presentation about us capitalizing on our equities. We have a fantastic brand personality. We'll continue to use that to bring attention to the brand and to the menu, and we have made some significant improvements in our overall speed to service and the consistency in the way we deliver, and I shared with you sort of the size of opportunity for the speed of service as well. So that's really the color around this. And when I sort of take you through that slide where it says, "Let's put it all together." What you'll see there is that when we invest in the future we'll continue to invest holistically in the menu, in the service and in the image, not singularly in either of those things with an expectation that they work on their own. Essentially, what you do when you think you can invest that way is you tend to tell the guest or give the guest mixed messages. So a lot of companies go after, for example, a high-quality menu offering yet their image is low quality. And that's very confusing to a guest. You might have poor service, but great tasting food or poor service, but a fantastic facility. In the restaurant industry, it really doesn't work unless you do all 3.

Unknown Analyst

Just 2 unrelated questions. One in your comp store sales expectations, what are you assuming for price at both Jack in the Box and Qdoba? And secondly, Gary, on the -- as a follow-up to the other question, are you assuming an increase in marketing percent going forward? Or are you holding percent marketing the same just on a bigger base?

Gary J. Beisler

Yes, let me hit the price first. The price we've assumed 1% price per year.

Unknown Analyst

In both companies.

Gary J. Beisler

In both, yes.

Jerry P. Rebel

And as far as marketing goes, we are spending 5% on the company's stores and we intend to keep that and maintain that level.

Unknown Analyst

Two questions. One is on the, I guess, the cash flow or EBITDA guidance by 2015. What does that assume for D&A? Because if you assume $75 million of free cash flow, it seems like D&A's in that $110 million, $115 million. That's pretty good math. And then secondly on the margins, I just wanted to clarify in 2015, the restaurant operating margins, you're assuming what for the overall combined entity? And what by the 2 divisions?

Jerry P. Rebel

Yes, I think we said about 16% for the combined entity, with Jack in the Box being a little higher than what Qdoba is, but we didn't give specificity exactly to the brands.

Unknown Analyst

And just to follow up then, based on the pro forma you laid out there where Jack's are running 16.4% or something like that, you're expecting them to stay flat through 2015 even though the AUVs are going up?

Jerry P. Rebel

No, I said -- well, I actually -- I expect the Jack's margins to go up a little bit. Let me just tell you a little bit about what we have in our forecast here. So we're anticipating roughly 5% commodity inflation this year. And then we're assuming that commodity inflation never goes down. So we're assuming an additional 1% commodity inflation going forward. So we're not anticipating that we ever see beef cost back to less than $2 a pound for '90s and less than $1.10 or so a pound for '50s. So that may be impacting those margin assumptions going forward. But again, I'll go back to what I said on the question or in my response to the question about the Qdoba 3% to 4% comps. What we want to do here is provide a model that's believable. And if we're anticipating -- if I come up here and tell you that restaurant operating margin will from 16% to 18%, people are going to figure out how does that work? What we're trying to get is with reasonable price increases and with reasonable inflation going forward, we think we're going to be in that kind of a range, 16% plus on a combined element. Jack in the Box a little higher than what Qdoba is.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Conrad Lyon with B. Riley. Lenny, just a clarification on the one-minute opportunity. Any color on what that translates into guests per day?

Leonard A. Comma

I don't think we've shared that. Yes, so...

Unknown Analyst

Gary, I'd be curious if we kind of approach this brand, building the brand awareness maybe from a different direction, what kind of systemwide sales level would you need where the business model could absorb mass media?

Gary J. Beisler

I don't know how you want to define mass media. There are certain markets where we have heavy penetration, where we can afford radio on a regular basis as a tie up if you will, and every -- maybe some markets in Los Angeles, L.A. I couldn't even tell you, I have no idea. I can tell you that at 1,500, 2,000 restaurants whatever the case may be, I think it will still be very difficult to have any type of national advertising and that's where our digital strategies have to be very important in order to make things work nationally through that type of advertising and reach. I don't believe that we will be able to be on network television across the country at 2,000 restaurants. It doesn't seem affordable to me.

Unknown Analyst

Right. I was just wondering if awareness seems to be the biggest component for the bucket that's the smallest and the volumes, possibly if you're going to relook at the models, first get the message out, maybe a little quicker than you would have otherwise. So that's kind of where I was scratching the surface on that one. Lenny, I'd be kind of curious at least qualitatively, what do you think are the biggest model mix as far as ramping up the speed of service?

Leonard A. Comma

I would say if you look at the restaurants that are performing the best today, they're already proving out that it can be done and it's in the footprint of the buildings you visited last night. I think most of you had a chance to visit. Our kitchens are very similar to that across the system, and we're already showing that we can do it. So I don't necessarily think there's one particular specific bottleneck other than how the operators are running the restaurants and whether or not they've taken the time to break down what specifically their crews are struggling with and then work through that. Elana Hobson, who's sitting with us here today, our Vice President of Operations, has done a fantastic job of really getting the operators engaged in analyzing their business and taking more accountability for those specific bottlenecks that are really location-specific more so than a brand-specific thing.

Unknown Analyst

Just one follow-up on uses of cash. I understand you don't necessarily want to build share repurchase into the earnings outlook, but just in terms of ranking, kind of uses of cash, whether it's debt paydown, acquiring Qdoba stores or share buyback, is there any reason that you will be less active with share buyback going forward? Or is it just you're not building that into the guidance?

Jerry P. Rebel

Yes, I think -- look, the way we've always looked at capital deployment has been with return-oriented CapEx first. So if there's an opportunity to buy additional Qdoba high-performing franchise markets, you'd probably put that one first, also looking at additional growth opportunities above what we talked about for Qdoba. And I think beyond that, you're probably looking at returning cash to shareholders. The business model already assumes that we have reasonable debt in there. So I wouldn't anticipate using that for any significant debt paydown from where we expect to be at, at the end of this fiscal year.

John S. Glass - Morgan Stanley, Research Division

It's John Glass. Two unrelated questions. One is the topic of national advertising for Jack comes up episodically. Some of your competitors in this sort of mid-sized range naturally used that to become national brands. So far, I think you said that hasn't been one of your strategies. Maybe you could just talk about it. Is that within this 2015 time horizon? Do you think that might be a likelihood?

Linda A. Lang

Yes, we do a small amount of national advertising. But we really -- in fact, it started to grow a few years ago and then we pulled back from that and really are focusing more on the local advertising. If anything has grown, it's probably been in the digital world where you saw a lot of the work that we're doing with social networking in the social network sites. So I don't see a big reallocation of our media to national because we still -- there's still a lot of inefficiencies in running national television. So it's not a huge strategy going forward. And even out to 2015, our footprint wouldn't probably justify the investment in national television.

John S. Glass - Morgan Stanley, Research Division

Unrelated, on the Qdoba front, how do you find franchisees who are willing to sell at this point? Is there a big enough reservoir of franchisees out there that you think that, not knowing beforehand, but you could make an acquisition annually? What is the likelihood and why would they be selling early in the brand's history? You're growing. There's some excitement around volumes, things. So why were there willing sellers of prices that you're willing to accept?

Jerry P. Rebel

I'll give you 2 examples, John, of what has happened with all of them because there's been several. One guy is 65 years old. He's been building Qdoba since I got involved back in 1998, and he's retiring. I mean stuff like that happens, right? One other gentleman sold us 20 restaurants and took the money and signed for a new development agreement for 14 more. You put his personal financial safety net underneath him. Loves the brand, is still engaged. I think there's always things that happen. Our system isn't that big. Even one group had a partner problem. So I think opportunistic was the word that I used. People have different things that happen in life and that goes back to maybe a different circumstance on all of them. I know that my friend, Mr. Rebel, here is not going to allow me to overpay anything than down that road. But it's not going to happen, he said again. But there's just things and the thing is that we built this into our plan as we talked about it last year. And we believe it's attainable and achievable. But we're not calling everybody up saying, "Hey, you want to sell your restaurants?" We're doing it opportunistically as in life happens, in business as well. So we'll take advantage of those, and yes, there are still more to be had.

Unknown Analyst

Jerry, just a clarification. One of the slides where you said the 2015, how we get to some of the parts on EBITDA. I think you said Jack in the Box refranchising accounting for 20%? Can you just describe what -- is that ceding markets and then selling those stores? What is that refranchising 20% on EBITDA?

Jerry P. Rebel

I'm sorry, that's the accretive impact to annualized operating EPS of selling the remaining 150, 200 restaurants.

Unknown Analyst

So not the gains, but the impact of losing those off your margins?

Jerry P. Rebel

Not the gains. The operating EPS. We'll make more money from having to buy -- do franchise rents and royalty schemes than we do by running them today.

Unknown Analyst

And that's conservatively assuming that you're not going to have a rent spread as you said on these stores that are lower volume?

Jerry P. Rebel

We would expect a full royalty and rent spread on the restaurants that we expect to sell these year, the 80 to 120. And then on the 70 to 80, primarily the Southeast locations. I would model any rent spread on those at least through 2015 as those sales procure. And the royalty rate may actually be a little less than that through that timeframe.

Linda A. Lang

I'd like to clarify. It was 15% from the refranchising transactions.

Unknown Analyst

Just a question on Jack in the Box and the mix. I think you brought the slide that showed kind of mix of the different dayparts. A couple of things I'm just wondering. First, if you could walk through other than that mix, kind of the growth rate that you're seeing in each of those dayparts kind of strongest first, weakest and how you'd size up the margins in each of those dayparts. And as a follow-up specific to breakfast, which I think you mentioned was like 20%, 21%, I'm just wondering if you can talk about the competitive convergence and the category, whether it be future brands that are chomping at the bit or existing. I'm just wondering if you could talk about the breakfast segments specifically.

Leonard A. Comma

Yes. So I won't share with you margins by daypart. We haven't put that out there. The way that you can look at the dayparts that I presented is really sort of apples to apples. Traditional, here is what we sell at breakfast, here is what we sell at lunch. And then we do sell items outside of the daypart that are traditionally lunch items at breakfast or breakfast items at lunch. So keep in mind we serve the menu all day. We do try to present a mix that just shares with you what we're selling during those times of day. We have breakfast. It's really one of the strongest segments we have. It's the one that's growing the most. And regardless of the sort of competitive intrusion into that daypart, we seem to be getting our fair share and then some. And I think with introductions of products like the Breakfast Platter and with the improvements in speed of service in dayparts that are more sensitive to speed of service, that's why you're seeing that.

Unknown Analyst

Without giving, I guess, too much detail on each daypart, can you just compare it like the top versus the bottom in terms of which is growing fastest and slowest and the best and worst margin from that perspective?

Leonard A. Comma

I think the best thing to leave you with is that our breakfast segment, which is probably most important to talk about because others are trying to intrude, is holding its own and continues to be one of our best performing segments.

Unknown Analyst

Gary, another question for you and I'm sorry to continue the comparisons to one of your competitors. But as you continue to kind of compete with each other in some of these big markets, attracting talent is clearly a big factor. And you've got a really, really unique kind of compensation scheme, promotion plan, growth opportunities lately. I mean very, very unique package. How do you compete for that talent, especially in the franchise markets where, I mean, the upside's just not there, right? I mean, if you're in a franchise store, you're kind of capped on the upside unless you can get into the company system. Does this play into maybe buying in some of these systems, growing the company-operated business? How do you compete for the -- for talent against the competitor like that?

Gary J. Beisler

I don't think you're competing just against them. I think I'm competing against everybody that sells food. I mean, people want to focus on Chipotle, but clearly, I grew up in this business and one of the things that I think all of us did that have been this business over the last were looking for opportunity. And there's so many restaurant companies that provide no opportunity anymore, there's no growth. And a matter of fact, we get very -- we get people very excitable when we acquire franchisees because the very thing you just said a second ago, they finally say, "Wow! Look at these opportunities." There's going to be regional positions and director positions and vice president. It doesn't matter whether it's in the store or whether it's in our corporate office. I think a lot of it has to do with culture, how we treat people. And we have an operating culture within our business, where the restaurant comes first, the people in the restaurants come first. And we don't have any fancy name for a store manager. I mean, we don't think that's a program that we have to endorse. We believe that we provide people with clear paths and opportunity. If they want to be in this business, where else are you going to be? What other company do you want to be with right now if you're treated well, which is what we do within our culture. I mean, myself and the COO are both operators. We've lived in that environment and that environment is more important than anything. And I think that culture alone is enough to compete in the marketplace for the talent. People want growth.

Linda A. Lang

For those of you who have the 1:10 flight, the cabs are here. And then we're going to take it to Ashley. So I'm just letting those of you know that those cabs are here.

Unknown Analyst

Jerry, can you talk -- I mean, we talked about Jack in the Box and getting back to the 16% margin, some of it is refranchising. But going back before 2008, Jack in the Box margins were close to 18% -- 17.5%, 18%. Is there a scenario or what is the scenario that you could get back to those margins? Or have you, in terms of what you've done with the menu and labor that, that's -- that is not possible to get back to those levels?

Jerry P. Rebel

Probably the quickest way, Ashley, would be to have commodity costs that look like they did back in 2008. Because when we did that, we had restaurant operators where we had average unit volumes of about 1,440,000 for the company operating units then and substantially lower commodity costs. We were in the 17.5, 18% range. If we had commodities that look like that at our $1.6 million AUV post refranchising, we'd probably be north of 18% today. So that's the one that I think we have the biggest impact. That's also the one that we have the least control over. The other way to do that would be to increase those AUVs to get closer to a $2 million AUV. But that's just how the math works.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Conrad again. A question about synergies as Qdoba gets bigger. Are there purchasing, real estate or even marketing synergies that might be available for perhaps like Jack in the Box eating Qdoba burrito or something like that?

Leonard A. Comma

So I think the best synergy that we're going to have with the Qdoba brand is going to happen in ways that do not face the guest. We don't want to confuse the guest about what the offerings are. The consumers that are being targeted are slightly different between the 2 brands, and even the employees that potentially work in the 2 brands have a different profile. So the best thing to do would be to let the 2 brands stand on their own sort of 2 feet separately. But behind the scenes, there's a lot of synergies that we're already capitalizing on with things like the supply chain for example.

Unknown Analyst

Jerry, just a follow-up on the G&A commentary that you had earlier. You mentioned that your guidance assumes some efficiency gains and potentially some outsourcing of certain services that you're doing. Can you give some examples of that and maybe comment specifically on the distribution business and if that's on the table in terms of being outsourced?

Jerry P. Rebel

Sure. Let me answer the last question first. So with respect to distribution, we've looked at distribution a number of times because we don't feel like we have to own it. But typically, when we've gone out to look at distribution in the past, we've had a significant cost advantage to keeping it inside. But we continue to look at that and we may look at it again going forward. But I mean, rest assured, we're not -- we don't feel like we have to own it, that we have to control it. We just have to have a good quality distribution model that gets food from point A to point B as inexpensively as we possibly can. And if we can find a lower cost solution, then we'll do that.

Unknown Analyst

[Question Inaudible]

Jerry P. Rebel

Yes, here's the -- let me talk about perhaps -- or some of the things that we have already looked at rather than give you a roadmap for what might be outsourced because folks will be impacted by that. But as an example, we've already outsourced a good portion of our payroll functions. So our payroll tax processing and following, that's been outsourced. Our W-2 processing is outsourced. We no longer cut paychecks, it's either a pay card or a direct deposit. We've outsourced the transportation end of our supply chain and distribution. We did that at about 3 years or so ago. So we'll continue to look at anything that you might consider to be transaction or process oriented that may be able to gain some efficiencies by doing it elsewhere.

Unknown Analyst

Lenny, can you talk about the use of technology at the Jack in the Box restaurants? Kind of where you see it today? And kind of where you want to be in 2015 with your technology? I think you and I have spoken in the past and it's a pretty big focus for you, isn't that right?

Leonard A. Comma

Yes. So when we've spoken about the technology investments that we're making, they really back in the house. It's really controlling and running the business. So it's those types of back-office systems that we're currently investing in. But we do have one POS system throughout our entire chain. And so we'll continue to look for ways to do guest facing things that help to differentiate the brand. And if we come upon those things, we'll make those investments. But there's nothing currently to talk about outside of the investments we're making in the back of the house.

Unknown Analyst

[indiscernible]

Carol A. DiRaimo

All right. So that ends our presentation for today and I want to thank everyone for joining us, both on the webcast and here in person. And we'll see you next time. Thanks a lot. Bye-bye.

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Source: Jack in the Box Inc. - Analyst/Investor Day

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