Jack in the Box - Q4 2023

Transcript

Operator (participant)

Thank you for standing by, and welcome to the Jack fourth quarter and full year 2023 earnings call. I would now like to welcome Chris Brandon, Vice President of Investor Relations, to begin the call. Chris, over to you.

Chris Brandon (VP of Investor Relations)

Thanks, operator, and good afternoon, everyone. We appreciate you joining today's conference call, highlighting results from our fourth quarter and fiscal year 2023. With me today, our Chief Executive Officer, Darin Harris, and for his first earnings call since joining Jack in the Box in early August, our new Chief Financial Officer, Brian Scott. Following their prepared remarks, we will be happy to take questions from our covering sell-side analysts. Dawn Hooper, Jack in the Box Senior Vice President and Controller, will also be joining us for the Q&A portion of the call. Note that during both our discussion and Q&A, we may refer to non-GAAP items. Please refer to the non-GAAP reconciliations provided in the earnings release, which is available on our investor relations website at jackinthebox.com. We will also be making forward-looking statements based on current information and judgments that reflect management's outlook for the future.

However, actual results may differ materially from these expectations because of business risks. We therefore consider the Safe Harbor statement in the earnings release and the cautionary statements in our most recent 10-K to be part of our discussion. Material risk factors as well as information relating to company operations are detailed in our most recent 10-K, 10-Q, and other public documents filed with the SEC and are all available on our investor relations website. Lastly, I'd like to provide an update on some upcoming conferences and events. We will be attending the Barclays Conference in New York City on Wednesday, November 29th, as well as the Wolfe Research and Truist events during the first week of December. In addition to the ICR conference in early January, we also recently announced our 2024 Investor Day, which will take place Wednesday, January 24th.

We hope you'll be available to attend our live webcast, and for those attending in person, we look forward to hosting you at our Restaurant Support Center headquarters in San Diego. With that, I would like to turn the call over to our Chief Executive Officer, Darin Harris.

Darin Harris (CEO)

Thank you, Chris. Before I recap our fourth quarter and full year, I want to take a moment to welcome Brian Scott to Jack in the Box and Del Taco. In just his first couple of months on the job, Brian has proven his ability to get up to speed quickly on both our business and the industry, as well as earn the respect of our team and franchisees. He is an outstanding addition to our leadership team, and I am excited for you to get to know Brian more in the coming weeks and months and learn about how he will enhance our strategy and support our growth ambition. During the quarter, I was thrilled to announce the hiring of Tom Rose as the new Brand President of Del Taco, and we look forward to having him participate in our Investor Day in late January.

Tom and I have known each other for over 20 years, and we have a deep level of trust. We have shared experiences and backgrounds as former franchisees. Tom's operational expertise and his ability to connect with franchisees is something that will benefit both brands and our culture greatly. He has already made an impact by advancing our strategic initiatives and identifying new opportunities for operational execution, sales growth, and profitability for Del Taco. We also made some recent and notable changes to the marketing function at Del, highlighted by the addition of Sara McAloon, who will join our executive leadership team as Senior VP and Chief Administrative Officer, where she will lead marketing and support the shared services teams. Sara was a trusted partner of mine while we worked together to turn around Cici's Pizza.

I had the pleasure to witness her ability to drive 17 straight quarters of same-store sales growth, clarify the brand position, and connect with franchisees. Part of the new approach will also include increased involvement of Jack's CMO and Chief Digital Officer, Ryan Ostrom, who will now support Tom and Sara with the Del Taco brand strategy, in addition to his regular role leading Jack marketing and digital for both brands. Having this type of strategic leadership now supporting Del Taco will immediately accelerate our business and support our combined growth strategy. Shifting to our fourth quarter and full year performance, we achieved several important milestones in 2023, starting with positive net new unit growth, a growing new restaurant pipeline, strong new restaurant sales, fantastic early success in opening 2 new markets, and significant improvements in franchisee profitability and four-wall economics.

We also made great progress refranchising Del Taco restaurants as we move assertively to an asset-light model. Entering 2024, I am more encouraged than ever that we have the right people and strategy in place to continue driving meaningful results and shareholder value. We continue to strike a good balance between premium value and add-on offers that have strengthened our performance the last few years. As we look into 2024, we will continue to find the right offers for our guests on a limited budget, especially through our digital offers. While we see strength from our higher-income guests, this lower-income segment remains pressured and an opportunity for us to find the right value and breakfast offering. Our focus on employing culturally relevant messaging at Jack through fiscal 2023 led us to team up with personalities such as Mark Hamill and Ryan Reynolds earlier in the year....

More recently, Snoop Dogg. We marked the 10-year anniversary of the Munchie Meal platform by introducing the limited edition Snoop's Munchie Meal, a very successful platform that drove sales and generated plenty of positive buzz for the brand. As part of Jack's crave marketing strategy, we will continue to focus on relevant partnerships where they make sense, as well as showcasing Jack Box as his own celebrity. And on that note, some of you might have seen last week that Jack Box was included in People's Sexiest Man Alive issue. Now with his own inaugural category, which is classic Jack Box, he has claimed People's Sexiest Jack Award, becoming the first restaurant mascot to join this prestigious group, thanks to his many loyal fans, who launched a petition to get him nominated. Needless to say, it's been a lot of fun.

During the quarter, we promoted new and returning fan favorite menu items at Jack, including a Double Bacon Sourdough Jack, soft and loaded potato wedges, a breakfast taco, updated combinations of the Fan Faves Box, as well as the addition of 3 new Iced Crema Chinos. We experienced positive sales in all day parts, except breakfast. While much of the comp growth was price-related, our late night day part had its fourth consecutive quarter of positive year-over-year transactions. Breakfast continues to represent an opportunity for us as customer behaviors, promotional rollovers, and aggressive competitive discounting has presented challenges. For 2024, our promotions at Jack will continue to focus on innovation, plus beverage and snack attachment to support the hook and build strategy, while continuing the success we have had with premium products and balancing it with value messaging to drive frequency. Jack's digital orders continue to increase materially.

Currently, at 12% of sales, we will continue to support our restaurants and franchisees to grow the digital business, eventually reaching our next goal of 20%. Digital carryout continued its momentum, surpassing digital delivery growth for the third straight quarter. Our first-party channels, which include app and web ordering, outpaced third party and rose 36% higher than a year ago. We are gaining traction, which allows us to both capture important guest data and utilize an efficient method of providing compelling offers to guests. Our Jack Pack Rewards program, another avenue to collect data and guest insights, increased membership by 23% versus quarter three, and achieved +90% growth rate in 2023 versus 2022.

For Del Taco, during the first half of Q4, we promoted chicken taco packs plus carnitas, and during the last 6 weeks, we promoted barbecue brisket, a premium platform which is well-received by guests for its taste and quality. We were also encouraged by the outperformance of the breakfast day part. Digital grew to 12% of sales, and operating hours improved yet again, but still have more opportunity to regain their pre-COVID levels. New signups for our Del Yeah Rewards program increased 11% in Q4, ending the year with over 1.6 million members. Sales contribution from the loyalty program continues to improve, increasing 5.8% from the prior quarter. Through our newly launched member engagement features, guests can now redeem faster with improved point level tiers to help retention and frequency.

We have made significant progress on our crave marketing strategy in 2023, and I'm excited about what the new leadership at Del Taco will bring to aggressively compete in the QSR and Mexican category, while we continue to execute on proven sales fundamentals at Jack. I'm impressed with our operators' ability to consistently deliver a better and faster guest experience since launching initiatives to support our strategic pillar of driving operational excellence. We have seen notable improvement in staffing our restaurants with the right people, training team members to execute against elevated standards, and simplifying our operating systems. As a result, I was particularly pleased to see that all-day parts improved speed of service, with Jack delivering the fifth consecutive quarter of at least 10 seconds of year-over-year improvement.

Service alerts for Jack in the Box also improved compared to Q3, and we were particularly encouraged to see improvement in our digital execution as we prioritize reducing friction for our guests via this channel. We are very close to announcing Jack in the Box's new POS provider, with implementation set to begin shortly and system-wide completion still slated to take place by the end of fiscal 2025. By modernizing our restaurant tech stack, it will facilitate cost savings, improve back-office systems, support automation, and help us achieve our digital objectives. We believe this technology is the center of our ability to deploy applications that can have a meaningful impact on the guest experience and drive increased sales and profitability. Our growth potential correlates to our ability to continue growing restaurant profits, which showed significant improvement in fiscal 2023.

During the quarter, Jack improved restaurant level margin by 450 basis points compared to last year, extending our trend of margin improvement to 4 straight quarters. Our initiatives to improve margins are making an impact. We have rolled out 60% of the initiatives, which, as you recall, should result in annualized savings of approximately $55,000 per restaurant and 200 basis points of restaurant level margin improvement at Jack. On that note, franchisee profitability improved each quarter throughout the entirety of fiscal 2023. Part of the improvement was a result of our enhanced internal pricing competency and capability... initiatives that we will also look to implement on the Del Taco side. Our approach has been surgical and data-driven to enhance profitability and identify areas of opportunity to be competitive.

With that, let me spend a moment on AB 1228, which will certainly affect labor competition within the entire restaurant and retail industry in California. We are confident in our ability to manage through this, helped by our unique franchisee scale and decades-long experience operating within the state. We will rely on pricing, margin improvement initiatives, and unique guest loyalty in California, where both brands have been beloved for over 60 years. Switching focus to expanding our reach. 2023 was a big year for building our restaurant pipeline, which is critical to our story. Since launching our Jack development program in mid-2021, we have signed a total of 90 agreements for 389 restaurants at Jack. This includes our market entry into Mexico in mid-2024, as well as Florida, Arkansas, Montana, and Wyoming thereafter.

The latter two markets also include Del Taco commitments and were part of refranchising transactions completed earlier this year. Sentiment for growth remains positive from both existing and new franchisees, despite increasing costs, permitting, and construction delays. Let me briefly discuss our two newest Jack markets, Salt Lake City and Louisville, which were the first new market openings at Jack in the Box in over a decade. We view both of them as indicative of how we are approaching development related to prototype design and building brand awareness before and after entering the market. We have a strong playbook for how to open new markets so that the brand thrives. In fact, I am pleased to report that the four restaurants opened throughout 2023 in Salt Lake and Louisville with our new craved image prototypes, have outperformed expectations.

These four restaurants have averaged over $100,000 in weekly sales per restaurant since opening. While we are already focused on sustaining this performance for the long term, this certainly confirms that our approach to successful new market openings is seeing very strong results. We now have 3 locations open in Salt Lake City, including a drive-thru only prototype, and plan to have 15 total restaurants by the end of fiscal 2025. We previously discussed our record-setting sales and are seeing sustained performance, even with the digital channels and late night not yet fully activated, as will be the common practice for the first few months of restaurant openings.

In Louisville, our first foray into the true white space territory in many years, we have one restaurant open, another opening within the next two weeks, and plan to have five total restaurants by the end of fiscal 2025. I am pleased to report that the restaurant is outperforming our expectations. We also recently announced that an experienced franchisee within our system has already committed to enter Louisville, which will follow a similar strategy in executing a blend of company-owned and franchised restaurants as we assertively build out the markets. The strength of new restaurant performance isn't only limited to those two markets. In fact, outside of Salt Lake and Louisville, new restaurants opened in fiscal 2023 averaged $2 million in AUVs.

While new markets are certainly a focus, the outperformance of all new restaurants, including those opened in current territories, is key to our overall growth potential. Del Taco development, aided by refranchising, also had a historical year of commitments, generating 138 total in 2023, while closing the year with net positive unit growth led by 14 restaurant openings. We made outstanding progress toward Del Taco becoming asset light, refranchising 111 restaurants last year. There is a clear, demand-driven path to refranchise approximately 120 restaurants over the next three years, which would get Del Taco to over 90% franchised by the end of 2026. We will continue to utilize refranchising proceeds to create shareholder value via share buybacks, debt reduction, or other high-return investments.

To sum up Q4 and fiscal 2023, we had very solid results, and I'm proud of our team for how they executed against our strategy and plan for growth. I want to sincerely thank our restaurant-level team members, franchisees, corporate teams at Jack and Del Taco for helping make this possible. There is still plenty of work to do, but I am more confident than ever in our strategy and the outstanding people we have to help us reach our growth ambition. I will now turn the call over to Brian.

Brian Scott (EVP & CFO)

Thanks, Darin, and good afternoon, everyone. I am very excited to be part of this outstanding company and working with such a talented and passionate team. My time here thus far has only enhanced my confidence that we have a tremendous growth opportunity, and I look forward to working with Darin and the team to clearly articulate our strategy to deliver meaningful and sustained shareholder value. I look forward to working with our investment community and seeing some of you at upcoming conferences and events, most notably ICR and our 2024 Investor Day taking place in late January. I'll begin by reviewing each of our two brands individually, followed by details in our 2023 consolidated performance and 2024 guidance.

Beginning with Jack in the Box, our fourth quarter system same-store sales growth was 3.9%, consisting of company-owned comps of 4.4% and franchise comps of 3.8%. This included a 7.6% increase in pricing, partially offset by a decrease in transactions and negative mix due to fewer drink attachments and items per check. Turning to restaurant count, for the full year, there were 20 Jack restaurant openings with 15 closures, resulting in Jack delivering positive net restaurant growth for the first time since 2019. We ended the year with 2,186 restaurants and have started off 2024 strong, with 6 openings since the start of the quarter.

There are currently 77 restaurants in the design, permitting, and construction phases, and we anticipate approximately 25-35 restaurants to open in fiscal 2024. Jack restaurant-level margin expanded year-over-year by 450 basis points from 16.2% up to 20.7%, driven by menu price increases as well as the change in the mix of restaurants. This was partially offset by increases in commodities, wage inflation, and utilities. Food and packaging costs, as a percentage of company-owned sales, declined 180 basis points to 30.8%, driven by menu price increases and a positive shift in sales mix, partially offset by an increase in ingredient cost. Commodity inflation was 3.4% for the quarter.

Labor costs, as a percentage of company-owned sales, decreased 200 basis points to 30.9% due to sales leverage and the benefit of refranchising Oregon and Nashville. This was partially offset by wage inflation of 3.8%. Occupancy and other operating costs, as a percentage of company-owned sales, decreased 70 basis points to 17.6%. Franchise-level margin was $71.1 million, or 39.9% of franchise revenues, compared to $74.6 million or 42.4% a year ago. The decrease was mainly driven by fewer early termination fees in the current year, as well as higher franchise costs for technology investments, partially offset by franchise same-store sales growth. Now, turning to Del Taco.

Systemwide same-store sales declined to 1.5%, consisting of company-owned comps down 1.4% and franchise comps down 1.5%. This was driven by declines in both transactions and mix, more than offsetting a 6.6% price increase. We anticipated a tough year-over-year comp in the quarter with a heavy media spend in the prior year supporting the tortas promotion, and that proved to be true. Although this negative trend continued through October, we've had meaningful improvement in November with consistently positive comps. This more recent trend, along with the announced changes to our Del leadership and a revised marketing strategy, gives us confidence in our ability to drive positive same-store sales growth this year and unlock sustained long-term growth for this strong brand that serves an expanding market.

Del Taco's average check amount was up year-over-year, and the average check number of items per check were down slightly. Staffing improvements resulted in operating hours running above the prior year, with more opportunity remaining on the franchise side, running a full hour below pre-COVID levels. For the full year, there were 14 restaurant openings and 13 restaurant closures. Del Taco ended the year with a restaurant count of 592. Del Taco restaurant level margin was 14.8%, compared to 15.9% in the prior year. Food and packaging costs decreased 220 basis points to 27.2%, due primarily to commodity deflation of 2.2%, as well as menu price increases. Labor costs increased 210 basis points to 34.7%, primarily due to 3.4% wage inflation.

Occupancy and other costs increased to 110 basis points to 23.3%, driven primarily by higher utility and property insurance costs. Franchise level margin was $6.3 million, or 32.5% of franchise revenues, compared to $5.2 million or 42.5% in the prior year. The decrease as a percentage of revenue was driven by the impact of increased pass-through rent and marketing in connection with the refranchising transactions. Shifting now to our consolidated results. SG&A for the fourth quarter was $43.7 million, or 11.7% of revenues, as compared to $37.5 million or 9.3% a year ago. The biggest drivers of the expense increase were higher incentive compensation and litigation accruals, along with a prior year benefit from the chicken settlement.

Consolidated adjusted EBITDA was $68.4 million, down from $81.9 million in the prior year, due primarily to the impact of Del Taco refranchising, higher SG&A, and the lower Jack franchise level margin. GAAP diluted earnings per share was $1.08 for the quarter, compared to $2.17 in the prior year. Operating earnings per share, which included certain adjustments, was $1.09 for the quarter versus $1.33 in the prior year. Our effective tax rate for the quarter was 33.1%, compared to 29.1% in the prior year quarter. The primary drivers of the higher rate was the impact of nondeductible goodwill on the sale of the company-operated restaurants.

The non-GAAP operating EPS tax rate was 29.7% for the fourth quarter and 27.2% for the fiscal year 2023. During Q4, we repurchased 400,000 shares as part of our ongoing share repurchase program. For the full year, we repurchased 1.1 million shares for $90 million. With the recent expiration of our prior share repurchase authorization, the board of directors has authorized a new share repurchase program for up to 250 million of the company's common stock. We generated $215 million of operating cash in the fiscal year and ended the year with an unrestricted cash balance of $157.7 million.

These amounts were favorably impacted by a federal and state tax payment deadline extension, which shifted fiscal 2023 income tax payments of approximately $50 million into fiscal 2024. Correspondingly, our uses of cash flow in the first quarter of fiscal year 2024 include the $50 million of tax payments and a $25 million final payment for a previously announced litigation settlement. At the quarter end, we had available borrowing capacity of $175.5 million, net of letters of credit. Our total debt at year-end was one point seven five billion, with our net debt to adjusted EBITDA leverage ratio at 4.6 times. Our capital allocation plan includes investing in our growth strategy and technology initiatives, along with opportunistic share repurchases, while also returning cash to shareholders through dividends.

To that end, last week, our board of directors declared a cash dividend of $0.44 per share, to be paid on December 28, 2023. Lastly, I'll cover our current outlook for 2024. On a consolidated basis, we are expecting the following: capital expenditures and other capitalized investments of $110 million-$120 million, which includes investments in new restaurant openings, our reimage remodel program, franchise TI allowances and incentives, and increased investments in technology initiatives such as our new POS and enhancing our digital platforms. SG&A for the full year of $165 million-$175 million. This SG&A guidance excludes any potential impact from COLI gains or losses and any Del Taco refranchising that occur in 2024.

SG&A, which excludes our selling and advertising costs, is expected to be 2.3%-2.5% of system-wide sales. Company-owned commodity costs are expected to be higher than prior year by 1%-3%. Company-owned wage rates are expected to increase by 10%-12% versus 2023, and are impacted by California's new minimum wage law, AB 1228, effective in April 2024. Excluding the impact of AB 1228, we anticipate wage rates will be higher by 3%-5%. Depreciation and amortization is expected to be in the range of $61 million-$63 million. This D&A guidance also excludes the impact of any Del Taco refranchising that could occur during the year. Our adjusted tax rate is expected to be approximately 27%.

We are currently assuming share repurchases during the year of $70-$80 million. Adjusted EBITDA for the year is expected to be $325-$335 million, and operating EPS is expected to be $6.25-$6.50, and excludes any dilutive impact from refranchising Del Taco restaurants. At the brand level, Jack in the Box expectations include same-store sales growth in the low to mid-single digits, 25-35 gross new restaurant openings, with net positive unit growth for the full year. Company-owned restaurant level margin of 21%-23%. This assumes price increases of 6%-8% over prior year, which includes additional price take needed to offset the impacts from AB 1228.

Without the impact of AB 1228, we expect price increases of 3%-4%, and we expect Jack franchise level margin of 40%-42%. For Del Taco, we are expecting same-store sales growth in the low to mid-single digits, gross new restaurant openings of 10-15, with net positive unit growth for the full year. Company-owned restaurant level margin of 14%-16%. This includes price increases of 6%-8% over prior year, and without the impact of AB 1228, price increases would be 4%-5%. And finally, we expect Del Taco franchise level margin of 29%-31%. In summary, we are very pleased to have delivered another quarter of positive performance and made meaningful progress in our strategic pillars. And with that, we'd be happy to take some questions.

Operator, please feel free to open up the line for Q&A.

Operator (participant)

At this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We ask that you please limit yourself to one question. We'll pause for just a moment to compile any questions. Again, if you'd like to ask a question, please press star one on your telephone keypad now. Our first question comes from the line of Brian Bittner with Oppenheimer and Company. Please go ahead.

Brian Bittner (Managing Director & Senior Analyst, Restaurants)

Thank you. Good afternoon. I have a question on Jack and Del Taco. So I'm going to ask two quick ones, and hopefully you can take them. On Jack, your two new markets in Salt Lake and Louisville are trending at over $5 million AUVs, which is very impressive and I guess surpassing your expectations. So how does this potentially reshape the near-term strategy on powering into new markets for the Jack in the Box brand? And on Del Taco, the business clearly seems to have hit a soft patch, and it's happening at a time, Darin, where you're reshaping the management team at Del Taco with trusted partners that you've worked with in the past, and Tom and Sara.

Can you just unpack these changes a little bit more for us, and how quickly you expect these changes could impact brand performance? Thanks.

Brian Scott (EVP & CFO)

Good afternoon, Brian. Good to hear from you. Overall, on Salt Lake City, let me just start there. We're incredibly happy with the performance in Salt Lake and in Louisville. As we've said on the call, we've averaged over $100,000 in weekly sales among those four restaurants, and on average, they've been open 11 weeks for those four restaurants. So, you know, some opened longer than others, but it is over or outperforming our anticipation. In Salt Lake City, we have 15 locations that we should open by fiscal year 2025. So we're aggressively going in and developing the market alongside with two other franchisees.

In Louisville, we're opening 5 by fiscal year 2025, and that's just the start of the pipeline, as we've recently signed one of our existing franchisees at Jack to partner with us to also develop that market. So what we like is we've put together a specific playbook of how to enter the market, everything from operations, how we're going to build awareness before and after coming to the market.

... how we wanna ramp up into digital sales and late night sales and without any LTOs. So, you know, recently, one of the first stores that we opened in Salt Lake City, that has been one of our highest volumes, we recently turned on digital, overnight sales went up 16%. So, you know, we're gonna pace ourselves into these markets, but we're very, very excited about the way we've entered it. We're excited about the playbook that we've used to enter the markets, and we're gonna continue to look for new opportunities like this. So let me transition now to your question on leadership. You know, let me talk about our business at Del Taco. We saw it becoming soft in our guidance last year in this fourth quarter.

We knew that we were overcoming a torta promotion late last year. That was basically we overspent on marketing to promote a new product line, and that marketing carried over into this year, so we almost doubled the marketing we would normally spend on a window on a new product introduction. So we knew we had a very tough lap in our comp, so we weren't surprised by the negative comp. Now, what I would say is the good news here, and then I'll talk about our leadership team, is that we are now in a place of positive same-store sales and transactions at Del Taco in November.

So we're seeing with the new product, Birria, the way we've entered, the way we've lapped now, that double spin in marketing, that we're having, you know, positive same-store sales and transactions with some of the moves that we've made at Del Taco. Now, I'm excited about the team we've put in place at Del Taco. We went through our integration. Tom is a long, trusted partner that I've known in this industry for years, who comes in and is an operator by heart, rolls up his sleeves, and is one of the, he was, at one point, one of the largest KFC franchisees, so he knows this business inside and out. And I called on Tom when I knew this opportunity existed and said, "You're the first person, the only person I want in this role," and he accepted, thankfully.

I'm confident in his leadership in engaging with franchisees and driving operational performance, fixing the menu that we have at Del Taco to be even more profitable. Then I wanted to partner him with two outstanding marketers. Same thing, a person I have immense trust in, Sara McAloon, who came from Pizza Hut in my days at Cici's, where we worked together. I made that call, and she quickly accepted. Again, two calls, and they both accepted, so I was very grateful and thankful that they did.

Partnering Sara with Tom, a marketer and a great operator, and then putting Ryan in touch with them to help execute what we've done at Jack from a brand strategy point, I think we've got a really strong team now to focus on sophisticating the Del Taco business, simplifying it, and really driving a marketing calendar that can be effective like we've done at Jack. Last thing I would say about it is the segmentation study is the first one we've done in over five years at Del, so we're really starting to understand our customers like we did at Jack. We think that we are—we have an opportunity to position ourselves with high-quality food in the QSR Mexican space, where we can compete effectively.

Jeff Bernstein (Analyst)

Thank you.

Operator (participant)

Our next question comes from the line of Lauren Silberman with Deutsche Bank. Please go ahead.

Lauren Silberman (Director, Equity Research Analyst, Restaurants)

Hi, thanks so much. I wanted to ask about traffic. So the guide for next year for low single to mid-single digit comp seems to imply negative traffic in 2024. So can you just talk about how you're thinking about traffic next year and what you're seeing in the environment, and any additional color on what you're seeing with consumer and tech management would be helpful. Thank you.

Darin Harris (CEO)

Yeah. Good question, Lauren. This is one that we, we really contemplated. Do we provide guidance here on price or not? Because what we did is we decided to guide price for company only, and the same-store sales guide is for the system. And as you know, we wanted to try to give some better visibility on what the company impact would be, because we have such a large presence in California with AB 1228. And the reality is, the reality of it is, and I think most in the industry are not exactly sure how it's going to perform. So although we're guiding 6%-8% pricing for the company because majority is California, what we're sharing is we need that to overcome the wage inflation. That's really the story there.

So how transactions respond, we'll continue to keep you updated, you know, if we think there will be some transaction decline. But when we're guiding system sales, it was more for the system versus just for the company.

Operator (participant)

Our next question comes from the line of Gregory Francfort with Guggenheim Securities. Please go ahead.

Gregory Francfort (Director, Equity Research Analyst, Restaurants)

Hey, thanks for the question. Maybe just a follow-up to that. Darin, can you talk a little bit about what price elasticity has looked like more recently? My understanding is you've taken 4 or 5 points less versus 2019 compared to McDonald's, and so you've underpriced them pretty substantially. But looking at even extra California increase, 3%-5% next year, what gives you confidence that consumer is maybe not pushing back to that? Or how would you adjust, if the environment changes at all? Thanks.

Darin Harris (CEO)

You know, we've really invested in our pricing team over the last year and a half, and our tools and technology to go in and be surgical and data-driven in how we price. So I think we at Del and Jack, Del will also take on this in 2024, the same toolkit and playbook. But the bottom line is, we've proven that we can surgically take price and find out where there's opportunities by store, by market, and really try to find how we reach our guests in the right way. And so, you know, it's challenging in an environment that's unknown. We definitely have seen you know, some softness at Del Taco in the lower income consumer.

We're still performing on the higher income consumer. At Jack, we're also seeing more of an even performance across all deciles of income. And so overall, you know, what we believe is that with the AB 1228 and what's happening in California, that's where the real price elasticity concern comes in. And we believe that our loyal guests in our home-based state will continue to come back to Jack and Del, and we believe that to be the case.

Andrew Charles (Managing Director, Senior Research Analyst, Restaurants)

Thank you.

Operator (participant)

Our next question comes from the line of Andrew Charles with TD Cowen. Please go ahead.

Andrew Charles (Managing Director, Senior Research Analyst, Restaurants)

Great, thanks. Wanted to learn a little bit more about one of the missing pieces around the refranchising activity for Del Taco that's expected next year. I know, I know you guys are on track to get 120 more stores refranchised to return to 90% franchise mix by 2026. Can you help shape up what next year will look or this year will look like, you know, relative to what you did in 2023, or just any other guideposts as we think about the cadence of refranchising for Del Taco?

Darin Harris (CEO)

Yeah. We've guided to, you know, 120 over the next three years, because, you know, right now, we have very strong demand, even with the external environment, you know, with interest rates and AB 1228. Jack franchisees and even outside franchisees have shown real interest in Del, and so we feel really good about that. You know, and we're going to continue to update you, just like we did this year. We'll use our proceeds accordingly as we've laid out with for share repurchase or debt repayment. But we believe, at a minimum, there's somewhere in the neighborhood of 30-40 that we'll do this year. And the real lever here is, do we find the right operator that's well-capitalized, that wants to develop?

As you saw us do last year, if we find that, we'll go faster. If not, we've given you guidance that we'll pace it out over time and keep you updated along the way, as we did in 2023.

Andrew Charles (Managing Director, Senior Research Analyst, Restaurants)

Thanks, Darin.

Operator (participant)

Our next question comes from the line of Dennis Geiger with UBS. Please go ahead.

Dennis Geiger (Director, Equity Research Analyst, Restaurants)

Great, thank you. Darin and Brian, thanks for the commentary and the details on development and how the pipeline looks right now. Just wondering if you could talk a little bit more about the development growth plans, latest on franchisee development sentiment, which I think you said it was favorable. Anything on sort of how that's trended through the year? And I guess, you know, importantly, anything on sort of, you know, timing updates as it relates to pressures on development? Has that done anything from a timeline perspective, over the next couple of years as you think about that growth trajectory? And sort of ask so many, but just the last point, anything on closures next year, so we have a better sense to think about, what net development looks like in 2024? Thank you.

Darin Harris (CEO)

Yeah. So let me start with the last question on closures. You know, we're not providing guidance there. What I would do if I'm in your shoes is look back over history, and I think Jack has been pretty consistent over time at the number of closures. We limited some of those in 2023, but overall, I think that's a fair estimate as we try to anticipate future closures as you look, you know, somewhere in that, you know, 14-20 range. As you think about historical closures, it's always ranged somewhere in that neighborhood. And so that's not a guide, that's just to tell you that's just history. And then, as we look at our guide into next year, we're guiding to 25-35 Jack openings and 10-15 Del openings, and we now have a pipeline.

You know, 90 development agreements with 389 commitments at Jack, 77 of those in design and permitting. You know, we can actually see the pipeline now and what's in design and permitting versus three years ago. So we're actually able to manage a pipeline. And now at Del, with the number of refranchising transactions, we added 109 commitments just from that alone, and now we have 138 commitments at Del for future development. That also helped us build a pipeline and get visibility into it for 47 locations now in design or permitting and construction phases. So we feel good that we have a pipeline now that we can actually manage, and we will continue to build that over the next year.

I think you, the last thing I would add is, I think the entire industry has been pretty consistent in the statement that we have seen costs rise, so we, we, you know, have a value engineering program in place to reduce, you know, the 20 or 30% that we saw increases. Some of that's from size of the building. And then also, we've got to figure out ways to take and make this process more efficient, because we've definitely seen through COVID and post-COVID, you know, that some of the delays and some of our miss this, this quarter on the guide, those, those stores just got delayed from, you know, supply or labor and, and pushed into this year. So we definitely saw that happen, and we, we've opened quite a few at the first, first month of this year.

Dennis Geiger (Director, Equity Research Analyst, Restaurants)

Thanks, Darin.

Operator (participant)

Our next question comes from the line of Sara Senatore with the Bank of America. Please go ahead.

Sara Senatore (Managing Director, Equity Research, Restaurants)

Thank you. I just wanted to ask about the investments that you're making in terms of improvement allowances and incentives. So I was just wondering if you could quantify, I guess, in terms of the amount, the total $110-$120, you know, if the difference between 2024 guide and the CapEx from 2023 is those incentives? And then maybe talk about the impact on franchisee returns. Are you targeting, like, a specific payback period, or you have thoughts on maybe, like, what growth would look like if you didn't offer the incentives? Just trying to sort of understand the philosophy behind that. Thanks.

Brian Scott (EVP & CFO)

Yeah. Hi, this is Brian. On the increase in our guide for kind of overall CapEx and investments, it's across a few different areas. As we looked at that new store openings, guidance for 2024, part of it is driven by our investment in new stores. And so that, as that's ramping up, both with, you know, our own operators and with internally and as well with our franchisees, that's an increase. We also mentioned that we're investing more in technology, with our new POS, expect to start rolling out in 2024, continued investments in digital, rolling out our ERP. So there's a variety of different, really important technology investments that we think will generate material returns over time that's stepping up.

Then there's some increase in the TI allowance incentives, but it's not the bulk of that increase. But we do think those are important to be able to, you know, keep our franchisees not only investing in remodels, but, you know, also keeping them focused on, like, development as quickly as possible.

Darin Harris (CEO)

You know, to add to your question about payback, I mean, what we're seeing right now in our build cost, you know, we wanna get our build cost to around $1.8 million-$1.9 million. And with some of the value engineering, we anticipate that occurring in 2024. And so from a payback standpoint, our target is always just try to stay under five years, and it's really gonna be dependent, as you know, on sales and, you know, what it costs to build. And we've seen some of that escalate cost-wise, and we've brought that down into 2024. So we think that'll help our returns.

And then with what we've performed in, say, Salt Lake and Louisville, and the sales outperforming, we've seen outperformance in all of our openings, not just in Salt Lake and Louisville. We've seen it north of, you know, $2 million in the stores that we've opened, so we've had successful openings as well. So we think we're in a place to have, you know, continued to attract franchisees to grow, even in this environment as we navigate last 2022's, you know, inflationary environment that we're still working through.

Operator (participant)

Thank you. Our next question comes from the line of Alton Stump with Loop Capital. Please go ahead.

Alton Stump (Managing Director, Equity Research)

Great. Thanks for taking my question. You know, I was pretty encouraged by your guidance for low- to mid-single-digit, you know, Jack in the Box, you know, comparable sales for this year, given the fact that obviously, you're up against some pretty tough compares. Yes, you know, how much of that confidence is coming from the fact that you obviously are gonna have to take, you know, higher pricing, mainly in California, with AB 1228 versus, you know, underlying, you know, transactional improvements in your business?

Darin Harris (CEO)

Yeah, I think for us, what we've really focused on is, do we have the right calendar in place? Do we know how to reach our customers in the right way? And because right now, with what's going on in California, it's really hard to predict what really will happen with sales. So we're focused on how do we reach our customers, how do we provide them service in the way that we need to? And really, that's about... We've seen things like speed improve year-over-year by 9 seconds. That helps sales. Our alerts are down since Q3. All of that will help us. Now, to add color, what I would say is, we think we have a good pipeline of products coming in this year.

To get better, what we have to do is be able to reach our breakfast customers better. That's a little, a bit of the category this quarter that we struggled in, both breakfast and value. So we'll make sure that we have the right offers for those that are looking for checks under $8, and we'll have the right offers to drive some transactions there, in addition to really focusing on how do we, how do we continue to bring back breakfast. And breakfast was our slowest day part. I'll add some color here in this last quarter, mostly because we deleted items. We were, you know, simplifying the menu and but although it was good for margins, it hurt sales.

And it helped simplicity and margins, which we wanted to do for our franchisees, but by removing biscuits, a burrito, a sourdough sandwich, and some salads, we definitely, we impacted sales this quarter.

Alton Stump (Managing Director, Equity Research)

Great. Thank you, Darin.

Operator (participant)

Our next question comes from the line of David Tarantino with Baird. Please go ahead.

David Tarantino (Analyst)

Hi. Hi, good afternoon. My question is coming back to the pricing philosophy that you have. I know, Darin, you mentioned that the price increase you're assuming for this year is what you need to cover the inflation. But I guess with traffic running negative, I wonder if you could just share your philosophy on your thoughts on protecting the traffic versus covering the inflation. I know it's a tricky balance, but you know, why not, for example, take less pricing in order to protect the traffic and maybe the long-term business model? I guess, could you just kind of walk us through your thought process on that?

Darin Harris (CEO)

Yeah. I think the real answer is it's balance. So we wanted to provide you a guide on what we need to just purely cover, you know, the cost of the wage inflation in California, and that's what we tried to guide to. We will be watching it, as I said, with our pricing discipline, to understand where is the right place to take price at the right time, so that we can limit as much as possible any traffic declines.

Brian Scott (EVP & CFO)

Yeah, on top of that, we are aggressively continuing our efforts to drive other operational improvement. So anywhere we can, you know, create more efficiency within the stores, whether it's labor or food costs, that will also help reduce the need to increase price as well. So... And we're just really excited about the innovation in our menu and making sure, you know, we- our consumers want to come to us. And so I think as we look at our calendar and some of the innovation we have coming out this year, we feel very confident we can continue to drive improved traffic as well.

Darin Harris (CEO)

Yeah. One of the things Brian mentioned that I'm most proud of in this quarter is RLM. We improved it by 400 basis points. Our franchisees have seen three quarters straight of improved margins. So the initiatives we've been rolling out, the 200 basis point initiatives, have been starting to take hold in the stores. And so, you know, the next step is to continue with pricing, watch traffic, make sure we have the right calendar, but also help our franchisees make more money by following through with what we call our financial fundamentals plan. And now that Tom is at Del Taco, he follows the same playbook that we follow at Jack in the Box strategy, and he's putting in place the same initiatives that are particular to Del Taco, so that we can balance all aspects of this, of the business, not just top line and transactions.

David Tarantino (Analyst)

Got it. Thank you.

Operator (participant)

Our next question comes from the line of Chris O'Cull with Stifel. Please go ahead.

Chris O' Cull (Analyst)

Thanks. Good afternoon, guys. Darin, you mentioned product innovation is gonna play an important role again this year or next year, I guess. And I believe the company has indicated a new major product may be introduced next year. Is that still the case? And if so, is there any kind of prior new product that may be a good analog to think about for this product? And maybe help us understand what aspects of it make it a good comparison.

Darin Harris (CEO)

Yeah, the core of Jack, you know, historically is innovation, right? We were one of the first breakfast, first drive-thru, and so we've got a lot of things in test. We're getting closer to rolling out that product that I think is differentiated in the market, and we're excited about it coming, but we're not ready to announce it yet. But we have plenty of new items in our calendar coming for this year. And the first one I'll say is things like we just rolled out boba this week, and I think we're the first QSR to roll out boba, and it's a great product. We're excited about what it's done in test, and it just over the weekend was just the first entry of boba into our calendar.

We'll continue to do that as well as introduce really, really good innovation to the marketplace on things that fit Jack specifically.

Chris O' Cull (Analyst)

Thanks.

Operator (participant)

Our next question comes from the line of Alexander Slagle with Jefferies. Please go ahead.

Alexander Slagle (Equity Research Analyst)

Hey, thanks. I wanted to ask a question on the operations side of things with speed of service, which has always been a big driver, same-store sales for the brands, and you made some good progress in recent quarters here. So trying to figure out kinda where you think you stand now versus peers, where you think it can go, and, you know, where, where the biggest catalyst could be to make that happen. I'm not sure if it's coming from lower tiers of stores, where a bigger source of improvement could come from, or just broadly across the whole system.

Darin Harris (CEO)

Yeah, I think things like, you know, performance at the ops level. I think there's two key areas that we have still opportunity to improve, and it's with our staffing, which we're now at pre-COVID levels at Jack. Almost there on the franchise side of the business. It's really, you know, an area of late night, make sure we're staffed appropriate at late night, so that we can drive out, you know, speed of service and at the right times. And then, you know, it's how we balance our labor scheduling. We've got a new way that we're scheduling labor so that we can be most effective at the times where we need the labor, so we can hit our speed of service numbers.

Then what I would say from an alert standpoint, both speed of service and alerts are things that are indicative of same-store sales performance. We have an opportunity in our third party and our online orders to get better at execution of our business model. And so we'll look to say, you know, how can we, now that we're about 12% of sales in digital, you know, four years ago, we were at 1%, so we've got to figure out better ways that we can execute on that digital business, and those two are the key areas from a performance standpoint that we can improve on.

Alexander Slagle (Equity Research Analyst)

Great. Thank you.

Operator (participant)

Our next question comes from the line of Jeff Bernstein with Barclays. Please go ahead.

Jeff Bernstein (Analyst)

Great. Thank you very much. As we think about the initial fiscal 2024 guidance, specifically on the, the earnings side, I'm just wondering, you know, where do you see the greatest uncertainty? Darin, I think you mentioned the California pricing is kind of a big unknown from an elasticity perspective, but I'm just wondering where you think you're most conservative and maybe more aggressive, how you think about that guidance. And then just to clarify, I think you mentioned, Darin, that your franchisee profitability has improved consistently over the past number of quarters. I'm wondering whether you ever share, now that we're starting a new fiscal year, whether you would share the annual franchise-level profitability at each of your two brands for this year versus this, well, fiscal 2023 versus fiscal 2022, just so we could have a gauge for expectations going into fiscal 2024.

Thank you.

Darin Harris (CEO)

Sure. I think, you know, from our standpoint, I think the thing that we have to look at is really focused on, you know, how do we support our franchisees in California during AB 1228? And then, like Brian said, that's not only price, it's operational direction, and how do we help them take margin opportunities and improve on their business? And so that's where I think, you know, in our guidance, that gives us the, you know, the most, I would say, to your question, discomfort or, you know, not as knowledgeable about what's truly the outcome.

Then from a standpoint of margins, you know, at Investor Day, we'll consider, you know, exploring communicating our margins and, you know, what's happening with franchisees' P&L and what we anticipate new store returns to be, especially after last year in 2022, having so much inflation and not fully recouping all of that yet. We're still on pace to do that, but, you know, at both brands, we have not fully recovered from all the margin loss in 2022. And so, you know... But our franchisees' P&Ls have improved. They're making the same dollars that they were making, you know, two years ago, just not the same percentage yet. We wanna be able to do both and actually improve their margins.

Brian Scott (EVP & CFO)

Yeah, I would agree. I'd just add... Again, the top line is the one, obviously, that we'll continue to monitor and that price traffic mix. Outside of that, you know, we have really good line of sight on our G&A, got good controls there, and I feel like we've got a really good strategy as we continue to integrate Del Taco and gain more synergies in 2024. On the commodity side, we've got good line of sight there, and the same thing on the wage side. We have a good sense, improving labor markets, so kind of outside of AB 1228, we're seeing improved ability to staff in the stores.

And so I think we feel really good about our ability to control kind of everything, you know, below the top line, and then we're gonna obviously do what we can to make sure we maximize our sales.

Operator (participant)

Our next question comes from the line of Jake Bartlett with Truist Securities. Please go ahead.

Jake Bartlett (Managing Director, Senior Equity Research Analyst)

Great. Thanks for taking the question. And mine is really a clarification on the guidance. And, you know, I believe, and just correct me if I'm wrong here, but I believe the guidance specifically says, you know, excludes the impact of refranchising. So it assumes no Del Taco refranchising, but you do think there's gonna be some refranchising? You know, I think you mentioned a minimum of, you know, 30-40. Just to make sure I got that right. And, you know, maybe if you could help us, you know, in terms of SG&A per store, you know, or SG&A per store, how should we, if we were to kind of build in the refranchising, you know, any kind of, you know, guidelines or guideposts as we try to do that?

Darin Harris (CEO)

So I'll start, and I'll let Brian finish. You know, our focus, as I said, is 120 restaurants with the right in three years and get to 90% franchised by the end of 2026. And so although we think, you know, this is not a guide, we think we'll do at a minimum 30-40. If we're not finding the right operator or the right deal, you know, we'll slow it down. But, you know, the other thing is, like we did this year in 2023, we sped it up because we had great deals, great operators, and the right prices, and these transactions were accretive. So I'll let Brian add to that.

Brian Scott (EVP & CFO)

Yeah, like you said, we, we did not, as Darin said, we did not include it in the guide because we just don't have, you know, perfect line of sight to the timing and, and the magnitude of the impact. So I, I need to get back to you on the G&A impact, so I'll make sure we try to circle back on that before we finish the call here, so we can give you some color on how that may influence it. So, you know, as we've, I think we've talked about in the past year, when you think about the refranchising, it's that trade-off of obviously selling the EBITDA. We pick up royalties. If we use the proceeds to repurchase shares, we, you know, we pick up earnings benefit from that. We reduce our field G&A over time as well.

And then, you know, what's really important is that we have strong operators that we're refranchising with, whether existing or new, so that we can add more development agreements that we think is really important to driving long-term accretion to the business beyond the benefits of being asset light. That's a really important strategy. So I'll circle back with you in a minute on the G&A, just as an estimate. It obviously varies by store.

Jake Bartlett (Managing Director, Senior Equity Research Analyst)

Great. I know there's a little bit of guidance in terms of what you provided ICR last year in terms of the first 100 stores, but I guess, is that relevant for the next 100 stores, or is that, you know, something we should kind of use as a guide?

Darin Harris (CEO)

Yeah, we'll update it. I think that's the basic guide I would use until we update it at ICR.

Jake Bartlett (Managing Director, Senior Equity Research Analyst)

Okay.

Darin Harris (CEO)

All right.

Jake Bartlett (Managing Director, Senior Equity Research Analyst)

Thank you so much.

Operator (participant)

Our next question comes from the line of Chris Carril with RBC Capital Markets. Please go ahead.

Chris Carril (Senior Equity Research Analyst)

Hi, thanks for taking the question. Brian, I think you briefly just referenced this, but could you provide any more insight on synergies from Del Taco? Is there anything you could point to with regard to opportunities around G&A, supply chain, or any other areas you could point to? Thanks.

Brian Scott (EVP & CFO)

Yeah. On the G&A side, we are, you know, still working through some areas where we can consolidate. We'll get more operational efficiency through consolidating more of our systems. So there, there's a lot of work that's already been done that in the back half of fiscal 2023, that you'll see the flow-through into 2024. So I'd say the, you know, the biggest work efforts have already actually been accomplished. It's just it'll. You'll see it in the full year 2024 numbers. And then maybe I'll, Darin, on the kind of on the commodity side and other, I think maybe you can cover that.

Darin Harris (CEO)

Yeah. What we've seen is, you know, obviously, we've guided to commodity costs, and you know, those commodity costs include some of the benefit from our purchasing and scale that we've received at both Jack and Del Taco. So those synergies numbers are in there. We will exceed our synergy numbers that we targeted when we made the Del Taco acquisition in 2024. You know, but we'll be north of $15 million in EBITDA benefit as a result of that. And a lot of that has been picked up in commodity costs already, but some of it is in overhead and other areas like, you know, public company costs.

And then we still think there's a benefit as we finish our enterprise system in the IT area, and we get shared systems, and POS over both brands over the next couple of years.

Brian Scott (EVP & CFO)

Yeah. The one last thing I'd mention is, if you actually look at our G&A guide, we just get the full year. We actually expect to exit 2024 on a slightly lower run rate of G&A than we're starting. So it's just a good example of how we're still extracting more benefits from integrating the companies.

Chris Carril (Senior Equity Research Analyst)

Great. Thank you.

Operator (participant)

Our next question comes from the line of Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour (Senior Equity Research Analyst, Restaurants & Food Distributors)

Yes, thanks. Good afternoon. I just had a clarification question on the pricing. I think that the number you said for Jack in the Box for the fourth quarter, I think it was similar to the prior quarter, if I heard that correctly. I thought there was kind of some pricing roll-off. So I guess my question was just, you know, did you already take kind of some new layer of pricing? And then, you know, as you think about that, that 6%-8%, is that gonna, you know, all come right when the wage change happens, or how should we think about that from a timing perspective?

Darin Harris (CEO)

Are you asking on the company-owned side or the franchise side, Brian?

Brian Harbour (Senior Equity Research Analyst, Restaurants & Food Distributors)

... I believe the number you gave was on the company-owned side?

Darin Harris (CEO)

Just company, okay. Yeah, I mean, we've balanced it, you know, we typically balance it, and we've taken, you know, pricing throughout the year. And so, you know, we will continue to do that and take it over time, except for in California, we'll ramp it up a little more aggressively, you know, prior to April. So we've definitely, you know, we'll look at taking price at the right times across the board, you know, during... Last year, we took price more frequently. Typically, we take it quarterly, but we'll take it when we need to, as we do that over the next year.

Brian Harbour (Senior Equity Research Analyst, Restaurants & Food Distributors)

Thanks.

Operator (participant)

Our final question comes from the line of Jon Tower with Citi. Please go ahead.

Jon Tower (Director, Restaurant Equity Research)

Great. Thanks for squeezing me in. I guess just going back to the breakfast conversation earlier, it does sound like, you know, Darin, you're emphasizing the need for checks under $8 there, and it, it sounds like in the period, some items being removed hurt the sales. So one, was that specific to the fourth quarter, meaning it, it didn't happen in the prior periods, so it'll persist going forward? Then two, you know, how do you think about balancing the need to drive traffic at that day part, without compromising profits at, at that day part? Is there something else you can do with respect to labor management, during that, that time of day in order to, ensure that profits don't, continue to kinda sink during that day part?

Darin Harris (CEO)

Yeah, I think that's one of the reasons why we removed items. We actually had a margin lift by removing some of those items, and even though we had a sales decline, so that's exactly part of the strategy we're looking at. I think we're taking a look at where are some other ways that we can increase value during that day part. I know often in times when the market gets tight economically, breakfast is one of the first things that may disappear quickly, and so we wanna make sure we're offering the right value offers at the right time. And for us, we also saw...

Last year at this time, we ran French toast sticks, which is always a hit for us, and we tried to do a new breakfast rollout with our breakfast taco, and quite frankly, it didn't, it just did okay. It really didn't move the needle. And so between removing items, having the breakfast taco, and some innovation there, we just didn't have the right offer at the right time, and so, but margins did improve even though we were down or we were flat in sales at the breakfast day part.

Jon Tower (Director, Restaurant Equity Research)

Great. Thank you.

Operator (participant)

I would like to thank our speakers for today's presentation, and thank you all for joining us. This now concludes today's call, and you may now disconnect.