Operator: Good afternoon and welcome to the Chipotle Mexican Grill's Second Quarter 2013 Earnings Conference Call. All participants are now in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. As a reminder this conference is being recorded. Thank you.
I would now like to introduce Chipotle's Director of Investor Relations, Alex Spong. You may begin your conference.
Alex Spong - IR: Thank you. Hello, everyone, and welcome to our call today. By now, you should have access to our earnings announcement released this afternoon for the second quarter 2013. It may also be found on our website at chipotle.com in the Investor Relations section.
Before we begin our presentation, I will remind everyone that parts of our discussion today will include forward-looking statements as defined in the securities laws. These forward-looking statements will include projections of the number of restaurants we intend to open, comp restaurant sales increases; timing and impact of menu price increases; trends and food cost, marketing spend and other expense items, effective tax rates, stock repurchases and shareholder returns as well as other statements of our expectations and plans.
These statements are based on information available to us today and we are not assuming any obligation to update them. Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We refer you to the risk factors in our Annual Report on Form 10-K, as updated in our subsequent Form 10-Qs for discussion of these risks.
I'd like to remind everyone that we've adopted a self-imposed quiet period restricting communications with investors during that period. That quiet period begins on the first day of the last month of each fiscal quarter and continues until the next earnings conference call. For the third quarter, it will begin September 1 and continue through our third quarter release in October.
On the call with us today are Steve Ells, our Chairman and Co-Chief Executive Officer; Monty Moran, Co-Chief Executive Officer; and Jack Hartung, Chief Financial Officer.
With that, I'll now turn the call over to Steve.
Steve Ells - Chairman and Co-CEO: Thanks, Alex. Well, 20 years ago this month I opened the first Chipotle on old space near the University of Denver. I had no idea that this little restaurant would someday become one of over 1,500 restaurants and that together with over 42,000 team members would be changing food culture in this country. When I open that first restaurant I wanted to show that just because food is served fast didn’t mean it had to be a typical fast food experience. So, I stressed over every ingredient and the team and I worked very hard every day to make sure that we served delicious burritos to every customer who visited. And today, as a team, we welcome each and every customer as if we were inviting them into our home, proud to serve the food that we have been working on so hard to prepare. And as it reflects on this journey, we've been on for the last 20 years. It occurs to me that we are bigger today with a much larger team serving many more customers in many more ways. We are doing just what we did when we opened the first restaurant 20 years ago. We still stress over every ingredient, though we have raised our expectations to expect not only fresh ingredients, but ingredients that are responsibly raised and our empowered teams of top performers in our restaurants today care just as much as we did back then about making sure every customers feel welcomed and are treated to a delicious meal every time they visit. I am proud of what we’ve accomplished together over the last 20 years, but I am even more optimistic about our potential over the next 20.
We are pleased with our performance for the second quarter of 2013, which included revenues of $816.8 million, an increase of 18.2%. Comp sales increased 5.5% in the quarter and diluted earnings per share increased 10.2% to $2.82. We are particularly pleased that the strength of our performance continues to be driven by our focus on the things that really drive our business, our unique (indiscernible) and our unique people culture. Throughout the quarter, we continued to make progress in each of these areas. We expanded the rollout of Sofritas, vegan tofu entree, to all of our restaurants in California. We are pleased with Sofritas both in terms of the taste and how they're being received by customers. As of now, Sofritas accounts for between 4% and 5% of our product mix in California. That percentage was higher at the time of launch when there was significant marketing support and we think it will creep back up in time as we gain wider acceptance since many people are still unfamiliar with the idea of a tofu entree at Chipotle.
We're expanding the Sofritas test to include our restaurants in the Pacific Northwest this month, and we're considering additional markets this fall when we expect additional supply to become available of our tofu.
Many of you have seen that Chipotle recently became the first restaurant company to voluntarily label GMOs in our food. We made this decision because part of our Food With Integrity mission is to educate people about the realities of the food they choose to eat. Most consumers don't understand how pervasive GMO ingredients are in this country and restaurants and supermarkets. But the fact is that 94% of the soybeans and 88% of the corn in this country are genetically modified.
While there is not yet a clear scientific consensus on issues related to GMO foods, use of GMO crops has been banned or restricted in a number of other countries and there is increasing debate about the issue in the United States. At Chipotle, while most of our ingredients are already GMO free, we are committed to accomplishing the difficult mission of removing all GMO ingredients from our food.
We've already made a significant progress toward our goal. We’ve completed the transition away from soybean oil to cook our chips and crispy taco shells nationwide by replacing it with non-GMO sunflower oil. We also replaced soybean oil in our Chipotle chilli adobo used to marinate our chicken and steak choosing instead to use non-GMO rice bran oil.
These are important steps for us in moving away from genetically modified ingredients altogether, and there will be significant further progress in the coming months.
Our marketing continues to highlight our food culture and how it differentiates us from other restaurants, as we believe customers are increasingly receptive to messages about where their food comes from and why that's important.
During the quarter, we hosted the first of three Cultivate Festivals planned for this year, this one in San Francisco. This event drew over 40,000 people to Golden Gate Park, where they were entertained by great bands and some of the country's best known chefs. They also had a chance to learn about some of the important difference between industrial food and food that's sustainably raised, differences between fresh and processed foods, and trivia about Chipotle's 20-year history.
With broader marketing support including advertising, PR and in-store communications, the reach of these events is significant in the host markets, giving them impact beyond those who attend. The next Cultivate Festivals will be in Denver on August 17 and in Chicago on September 7. These events are part of our big picture efforts to show how Chipotle is cultivating a better world.
In addition to our Cultivate Festivals, we are now well into our skillfully made advertising campaign and our ongoing tracking of that campaign is encouraging, with 93% of consumers saying they find the ads relevant compared with an average of 55% for advertising campaigns in general. 91% saying they are a little or a lot more interested in trying Chipotle compared with the norm of 61% for other ad campaigns, and 89% saying that they felt a lot of information in this ad was new to them. This campaign like most of our advertising is designed to help customers understand what is different about Chipotle, that our food is skillfully made and that our commitment to great ingredients is unique in the category. This is a different approach to fast food marketing, but one that very much matches the way we have built the Company.
Collectively, the components of our marketing programs are creating positive impacts on how people perceive Chipotle. We believe they'll continue to help attract and educate customers and to build more loyalty among existing customers.
In honor of our 20th anniversary, we have launched a promotion called Adventurrito, which is challenging customers to complete a series of online puzzles to be eligible to win free food from Chipotle for up to 20 years. The program began on July 13 and continues for 20 days, and provides customers a chance to win free burritos for a year, with 20 people winning this prize on each of the first 19 days and an opportunity to win 20 years of free burritos on the final day of promotion. We will award up to 20 grand prizes at the end.
During each day of the promotion, we reveal a new puzzle with video clues that feature friends or people who have been involved in Chipotle in some way over the last 20 years including chefs, athletes, actors, musicians, and political figures. Customers who correctly answer all of the daily puzzles over the first 19 days will have a chance to unlock the grand prize puzzle on the 20th day where they could win free burritos for 20 years.
This promotion was designed with our loyal customers in mind, as our most loyal customers who've contributed so much to our success over the years. And we wanted to create a program that gives back to them. Customers seem to love the promotion. And we've already awarded many daily prizes so far.
During the quarter, we opened our first ShopHouse restaurant in Los Angeles, actually in Hollywood, and are very encouraged by the first weeks of operations and the excitement this has generated.
From the beginning, ShopHouse has reminded me very much of how people respond to the first Chipotle; people love it and appreciate that we are giving them something very different than what you would get from traditional fast food or other chain restaurants. ShopHouse is reinforcing the beliefs of having a restaurateur culture. ShopHouse is reinventing the benefits of having a restaurant to our culture.
We opened the LA ShopHouse with one of our restauranteurs and from the very first day we've had tremendous crew that's cooking delicious food and providing a truly unique experience for our customers.
ShopHouse is continuing to show us that there is significant potential for our business beyond burritos and tacos. We are really encouraged by this potential.
We have two more ShopHouse restaurants slated to open in the coming weeks, one is Los Angeles and one in Washington DC. Lease has signed up for four additional locations -- all these locations in either Los Angeles or Washington DC that should open by mid-2014. As much as we see long-term potential for ShopHouse I should remind that all of our growth for the foreseeable future will be driven by Chipotle in the United States.
I'll now turn the call over to Marty.
Montgomery F. Moran - Co-CEO: Thank you Steve. One of the most significant changes we have made to our business since Steve opened the first restaurant 20 years ago was to build a people culture that is as unique and compelling as the food culture.
By bringing our people culture in line with our food culture we've been able to improve the overall experience we provide, develop exceptional leaders, strengthen our economic model, and create more opportunities for people than ever before. The cornerstone of our people culture is a Restaurateurs program. These elite managers are continuing to set new standards for the quality of the experience we provide and for our financial performance and they are also filling our pipeline with the future leaders who will need to keep pace with our growth.
During the quarter, we promoted 46 new restaurateurs out of 56 candidates we interviewed, a selection rate of 82%. While this is off a little bit from our highs but it is still a clear indication that the overall caliber of restaurateurs candidates is very strong and that our field leaders have a growing understanding of what it takes to become a restaurateurs.
Through the first half of the year we promoted 91 new restaurateurs and 36 of our existing restaurateurs were promoted to R2 and R4 positions.
This group of extraordinary leaders continues to expand their leadership influence as they move into field's leadership positions. During the quarter we promoted 10 new apprentice team leaders, 4 new team leaders and 1 new team director nearly all of these coming from restaurateurs. With the continued advancement of Managers to restaurateurs and restaurateurs to field leaders 70% of our restaurants are now seen directly or indirectly by leaders who have come through the program. The strength of our restaurant teams is not only allowing us to provide better service and a better experience but also allows us to take on exciting new challenges.
In January, we launched our catering program in our Colorado restaurants, and since then have expanded that to a dozen markets around the country. We now have over 200 restaurants offering catering and expect to more than double the restaurants offering catering by the end of August. By the end of this year, we will roll out catering to all of our restaurants. While catering is still relatively new to us it is off to an excellent start and showing great potential. Many of our customers were delighted to offer Chipotle for their recent graduation celebrations and the feedback from parents and graduates alike has been overwhelmingly positive. Overall, the restaurants that are currently offering catering – in the restaurants that are currently offering catering sales are approaching 1% of total sales and we believe that the vast majority of that is incremental. We believe catering will continue to grow as we roll this out further and as more customers get an opportunity to try it.
Recall that our catering program allows customers to essentially set-up a mini-Chipotle service line to make their own burrito bowls and tacos any place they choose. We are offering catering options that feature two or three meats, as well as chips and salsa only offering.
Last quarter, I told you I would give you an update on our efforts to improve throughput in our restaurants. Typically, the second quarter represents one of our busiest times of year, which provides a significant throughput opportunity for us.
Last year, we made great progress in this area achieving our fastest throughput ever as our crew system wide focused on the four fundamentals that lead to excellent throughput. This helps us drive comp sales during our peak lunch hours faster than the overall comp. This year during the second quarter, our Friday throughput increased by an average of two transactions per hour during our peak lunch hour, which is from 12 to 1 p.m. compared to the second quarter of 2012. So, we have managed to speed up our already fast service and make additional gains in this important area. But the truth is that we are actually disappointed that we were not able to better translate our skills into better results this quarter.
We know we can deliver even faster throughput during our lunch peak, and as we do, we know that more customers are going to choose to visit Chipotle confident that they will breach through line and receive terrific customer service. We're committed to doing all we can to maximize this important strategic advantage that Chipotle has over all of our competitors. The good news is that we know how to drive faster throughput. The answer is to make sure that we execute on what we've been calling the four pillars of great throughput. Having excellent mise en place so that everything is prepared and the line is properly setup to serve customers, making sure we have a linebacker in place to keep the service line clean and (start), which allows our team in the service line to give their full attention to customers.
Having our aces in their places, which means our best people of each station during our busiest times and making sure we have expeditors who can assist customers in moving through the cash out process quickly during the peak times.
Our internal analysis has shown we have faster throughput when all four of these throughput fundamentals are followed. But while we've been communicating the importance of this to our teams I think we've not been clear enough with the message, nor have we emphasized its importance well enough at the restaurant level.
So recently for the first time ever we have made these four pillars a key part of each managers semi-annual bonus measure, which will encourage our field leaders to diligently train their teams on these metrics. We've also provided specific goals tailored for each restaurants to track their improvements and speed of service. We're also making execution of the four pillars of throughput a prerequisite to becoming a restauranteur.
Finally, we're training all of our field operators to understand that creating a great culture around the four pillars is not just about speed of service, it also causes the entire shift to run better, make sure that our people are set up for success before the rush, improves the empowerment of the team and dramatically improve the customer experience.
As always I will continue to update you on our progress in this critical area of our business. Our development team had another very strong quarter as they opened 44 terrific new restaurants and crossed the 1,500 mark with the total of 1,502 at the close of the quarter.
Not only do we remain on track to deliver the high-end of our restaurant opening guidance for this year of 165 to 180 restaurants, but our development pipeline remain strong for the future giving us confidence that we'll able to continue with strong growth in 2014 and beyond.
The strength of our operations coupled with our unique and compelling food and people cultures have us well positioned for this second half of the year and continue to give us confidence in our ability to provide long-term value to our shareholders in the years to come.
I'll now turn the call over to Jack.
John R. Hartung - CFO: Thanks Monty. We're pleased to report another quarter of strong operating and financial results. Our focus on building a special food culture, a unique people culture and a strong unit economic model continue to deliver these strong results and we believe they also provide a compelling advantage in a very competitive industry. We know that empowered teams of top performers serving great tasting food made from high quality sustainably raised ingredients would result in an exceptional dining experience for our guests and lead to even more loyal customers visiting Chipotle.
Our same-store sales in the quarter were up 5.5% and our average sales for restaurants that have been opened for at least 12 months is over $2.1 million. Overall sales for the quarter increased 18.2% to $816.8 million driven by new restaurant openings and the 5.5% comp. Year-to-date sales were $1.54 billion, an increase of 15.9%. The quarter comp was primarily driven by an increase in customer traffic along with the benefit of one additional trading day compared to the second quarter of last year. Year-to-date comps were 3.4% driven by increased traffic.
So far in July we are seeing underlying comp trends similar to the trends in Q2 after adjusting for the extra day in the quarter. Without the extra day in the quarter the underlying comp trend was about 4.5%, which is an acceleration from the underlying 3% comp we saw in Q1. This higher sales comp trend became apparent in the second half of April when more normal spring weather arrived to most of the country and continued into May and June. In light of this higher comp trend we are raising our full year sales comp guidance to low-to-mid single digits.
We opened 44 new restaurants in the quarter and 92 for the year so far which brings our total company-wide restaurants to 1,502 at the end of Q2. We continue to expect to open between 165 and 180 restaurants for the full year and we are pleased that at the end of Q2 we are more than half way there as our development teams have worked diligently to build more inventory to support level loaded openings throughout the year. Our new restaurants continue to perform very well and are opening at or above the high-end of our $1.5 million to $1.6 million sales range.
Restaurant level margin for the quarter were 27.6%, a decrease of 160 basis points from last year and year-to-date margins were 27% a decrease of 130 basis points. Higher food cost and higher marketing cost more than offset favorable sales leverage both in the quarter and for the year.
Our food cost in the second quarter were about the same as in Q1, but were 100 basis points higher compared to Q2 of last year due to higher cost for our salsas, higher cost for cheese and from higher chicken slightly offset by the lower cost for avocados. Our freezing Mexico severally impacted our tomatillo supply increasing our cost for both red and green tomatillo. While our corn salsa cost are higher as we fully converted to serving our delicious sweet white corn which is more expensive than yellow corn. Year-to-date food costs were 33%, which is up 80 basis points from last year. We expect food cost will remain at about this level or slightly higher for the rest of this year as we expect cost pressure from higher avocado and state cost. We expect avocado cost to move higher in the coming months from increase demand from California supplied avocados and from recent hotter weather which affects the food size and the availability as well as from slightly lower expected supply from Mexico in the fall.
As a result of the relatively stable food cost and a longer term general forecast of a stable or perhaps even deflationary food cost, we do not have any current plans to raise prices for the remainder of 2013. Labor costs were 22.7% of sales in quarter; a decrease of 40 basis points from last year and year-to-date labor cost were down 30 basis points. Normally, we would not see labor leverage with an underlying comp of around 4.5% as the benefit from sales leverage is offset by wage inflation. But our wage rates in the quarter were about the same as last year as our restaurant teams have done a better job of fully staffing their restaurants with top performers thus resulting in lower overtime this year compared to last. We anticipate labor cost as a percentage of sales will move modestly higher in the coming quarters due to seasonally lower sales in Q3 and Q4.
Occupancy cost for the quarter declined 10 basis points from last year due to the favorable sales leverage. Other operating costs increased 100 basis points from last year, as marketing cost increased to 1.5% of sales in the quarter compared to about 0.7% last year and from slightly higher promotional cost. We expect marketing to be about 1.6% overall for 2013, as we continue our skillfully made advertising campaign across the country and for marketing events around our cultivate platform in the third quarter including cultivate festivals in Denver and Chicago. As a result, we expect marketing expense to be around 1.7% in the second half of the year.
In the quarter G&A was slightly higher than last year by 10 basis points, primarily due to higher legal and higher payroll, mostly due to a bonus accrual. G&A cost for the first six months of 2013 were 6.2% of revenue or a decrease of 70 basis points compared to last year. This decrease was due to lower stock based compensation expense and lower employee payroll tax as Q1 in last year included a one-time catch up adjustment for performance shares and higher payroll – employee payroll taxes on greater number of stock option exercises from last year.
We expect total non-cash stock compensation will be about $66 million for the full year 2013 or about the same as last year. We expect our G&A as a percentage of sales will be about the same as in Q2 or perhaps slightly higher as we move into seasonally lower sales periods.
Our effective tax rate for the second quarter was 40.1% and for the full year we expect the rate to be around 38.9%. The second quarter includes a non-recurring adjustment of around $1 million for changes in state income taxes that reduced earnings by about $0.03 per share. This includes about $250,000 of interest expense in the interest and other income line of the P&L, with the rest of the adjustment reflected in the tax line.
For the third and fourth quarters of this year, we expect to have a tax rate of about 39.4%. Diluted earnings per share for the quarter was $2.82, an increase of 10.2% from last year. During the quarter we repurchased about $30 million of our stock or nearly 84,000 shares at an average share price of $353. At the end of the second quarter we had nearly $120 million left on our share buyback program previously approved by our Board and over the last five years we have invested over $580 million to purchase about 4 million shares at an overall average price of $145 per share.
We finished the second quarter with about $775 million in cash and cash equivalents and short and long term interest bearing investments and no debt on our balance sheet. We continue to believe that the best use of our cash is to invest in our high returning restaurants and we will continue to develop additional growth options by planting seeds into ShopHouse and Chipotle outside of the U.S. that will provide attractive value enhancing growth investments in the future. In the mean time we will continue to opportunistically repurchase our stock to enhance shareholder value.
Thanks for your time today and at this time we would be happy to answer any questions you may have. Operator, please open the lines.
Operator: David Tarantino, Robert W. Baird & Co.
David Tarantino - Robert W. Baird & Co.: Jack, just a question on your pricing philosophy and strategy. I know you mentioned you don't have plans to raise prices for the rest of the year, yet the food/cost ratio you mentioned also is going to creep up or stay similar to where it was in the first half which is above the historical norms. So, I am just wondering kind of how you are thinking about that. Is this another delay in your price increase or are you thinking that you don't need it at this point. Maybe if you could just kind of layout your thoughts there?
John R. Hartung - CFO: Yeah, David I would. I’d call it a delay, but I think it's a delay right now that based on what we see for the rest of this year. We don’t feel compelled to increase prices in the next two quarters. Certainly, that may change but based on our current margins, based on what appears to be a tamer food inflation environment generally, based on the fact that even the pressure I talked about mostly coming from avocados on our food cost line in the next couple of quarters, those are more cyclical than inflationary. I would argue that’s based on just what we’re seeing in California and Mexico and Avocados this year so they don't feel like permanent inflationary items. And then another consideration is Steve had mentioned, we want to remove GMOs and that’s a significant challenge. There is going to be some cost associated with that as well. So, we like to be patient with that as well and so when we do raise prices, we may be able to time that when we are doing food integrity items like removing the rest of the GMOs in some of our ingredients. We also had some of our supply of naturally raised meat such as – stake this year will be a real challenge. We are working to get that back up 100. So, there is other 100, so there is things like that, that we think will add to the quality of our food, but may add to the cost as well and so, we think that it’s wise to wait until we understand what those costs are going to be and maybe time it around some of those items until. Right now, we don’t think we need to do anything in the next two quarters.
David Tarantino - Robert W. Baird & Co.: Jack, just to clarify some of the items you just mentioned, are those items you expect to happen early in 2014 and is that why your rating is just maybe a couple of quarters out from where you…?
John R. Hartung - CFO: We hope so, David, but it’s hard to pin it down, because when we’re changing ingredients like this, there are so many things to consider. Of course, cost is really just one of them. The most important is what's the impact on the recipes, what's the impact on the taste of our food, the quality of our food. We want to be very careful before we're switching out ingredients that we don't have unintended consequences or we don't have customers that feel like, gee, I don't really like the taste. We don't think that will happen, but we have to be very careful as we do this. So, it's not unreasonable to think that we can get a lot of this done, maybe all of it done in the next two quarters, but it's hard to say that with certainty.
Operator: Michael Kelter, Goldman Sachs.
Michael Kelter - Goldman Sachs: I want to ask, after your restaurant margins have gone up year after year after year for so many years, they stabilized now in this 26%, 27% range for the past three or four years. Is there any reason to believe with some of natural ceiling about what the concept will be able to achieve? Or do you think maybe this is just a pause and you may have a vision that it can move higher?
John R. Hartung - CFO: Michael, it can move higher. I don't think it's a natural ceiling. I think it depends on what our ultimate volumes are and that depends on what our comps are. We've always talked about that food cost aside, and food cost by the way the margin pressure we've seen in the quarter and for the year can be easily remedied by increasing prices. We think we've got that pricing power. We think our food cost is higher than it normally would be, and so that part we think we can sell. So then beyond that, we think we still have leverage. If we can deliver a comp that's at or above a mid-single digit comp that’s driven by transaction, we think we still can maintain or even add to our margins. In fact, we think that if we were able to drive a higher than mid-single- digit comp, we can increase our margins at a similar level to any other concept that's at a much lower level. So, we don't think our ability to raise margins has been diminished at all, but it all will depend on what the comps and what our ultimate average volumes end up being.
Michael Kelter - Goldman Sachs: And then, do you have maybe any research that suggests the majority of your customers want to pay more for GMO free foods, or is that a decision that you make more based on feel?
John R. Hartung - CFO: Customers don't fully understand GMOs. There is a small number of people, and we've seen this when we recently put information about GMOs on our website, that are really into it, really understand it and are really excited about us removing GMOs. I would say the vast majority of our customers are largely unaware of which of their foods that they eat everyday contain GMOs, what the impact of GMOs might be. There is a lot of debate and uncertainty around the real impact of GMO. So, we don't necessarily think that customers are going to want to pay more or going to visit more often, but all along the way on our Food With Integrity journey we've always done things that we thought were the right things to increase the quality of the food that was going to be more wholesome, more healthful, and more respectable to the environment. and we think GMOs follows along that same thinking. We think over time as our customers and as customers, in general, as they discover more about where their food comes from and as they discover more about what Chipotle is doing to source these higher quality ingredients, we think that does build customer loyalty. So, we think it is going to be good for our business, Michael, but it is hard to say that there is a direct correlation between removing GMOs and people paying more or people visiting more.
Michael Kelter - Goldman Sachs: And if I could sneak in one last one. Since the employer mandate in the Affordable Care Act is delayed by a year to Jan of 15, do you plan to hold-off on offering insurance to your employees until then?
John R. Hartung - CFO: We are still studying that. That is a very possible outcome. The one challenge we're dealing with, Michael, is we've been offering for a number of years now a streamlined version that our crew have had the option to elect and then pay for this coverage themselves. It's called the Starbridge program. We're trying to figure out whether we will be allowed to continue to offer that. Right now, it's possible that we won't be able to, that we'll have to remove that. So, we don't know how exactly to deal with our few thousand employees that are reelecting that. We'd like to not have to take something like that away from them. So, we're still studying that. Right now, it's likely that we will delay it, but this is the one issue that we want to get our arms around before we make a final decision.
Operator: Keith Siegner, Credit Suisse.
Keith Siegner - Credit Suisse: Just to dig into the traffic trends and the throughput issues, very, very encouraging obviously at 5.5 in terms of the traffic/mix benefit. If you think through that Friday scenario you gave Monty, and how much of this might have come from expanding throughput initiatives? Maybe breaking that down a little bit more, if you think – how much of the increase in sales on the same-store basis is coming maybe outside lunch? Are you seeing changing patterns and willingness outside those peak hours? Is it broadening out in appeal on that front? Maybe anything you can give us on comps at peak hour, how much of throughput and then comps outside peak hour as well.
Montgomery F. Moran - Co-CEO: We really focus on throughput during peak hours just because that's where there is sort of the no sands in hourglass, so to speak, and where we have the most opportunity to put people through faster and thereby avoid people walking away from the end of the line. So, one of the things we're very encouraged by in the last couple of years is our ability to drive a better comp during the peak lunch and peak dinner times then we did during even the rest of the day. This last quarter that wasn't the case. The comp that we drove during peak lunch was slower than the all-day comp. Although the comp that we drove at the peak dinner hour was slightly better than the all-day comp, so we're still achieving some really nice gains there. But the amount of additional transactions we've put through during the rest of the day were higher. So, the – sort of what we call shoulder hours between lunch and dinner we did very, very well we had unusually high comps during those hours. Now that can be caused by the fact that people choose to avoid the long lines and simply reschedule their lunch for a later time or it can be just be caused by the fact that we have a lot more transactions coming to the restaurants generally. This quarter – second quarter of 2013 versus the second quarter of 2012, we actually had 25 transactions more per day coming through in each of our restaurants on average. Like I said, only two of those occurred -- only two incremental occurred during the peak lunch hour. So we're still proud to eke out those two because it's difficult during lunch to put through – that's the name of the game is to put through more people during that busiest time. But like I mentioned, we're still little disappointed just cause we think we can do much, much better, we know we can do better because our very fastest restaurants are way, way faster than our average restaurant. And as the lines build, we really want to continue to teach and encourage our teams to focus on these four pillars of throughput, which not only enable us to put people through the line more quickly, but also just increase the quality of the customer experience a great deal as well. So, we're very pleased in our ability to drive additional transactions to our restaurants. We're very pleased to be able to do it without adding a substantial amount of labor or any additional equipment, but we know we can do a heck of a lot better as well with the knowledge we've already accumulated about how to drive throughput. So, we're excited to continue to work on achieving those gains as we get our teams more and more focused on this very important advantage of ours.
Operator: Joseph Buckley, Bank of America Merrill Lynch.
Joseph Buckley - Bank of America Merrill Lynch: Just a couple of follow up questions. Questions on the Sofritas sales mix you mentioned. Do you have any sense of how much of that is incremental of those California stores comping up better than the system?
John R. Hartung - CFO: We think very little if any of it is incremental. We've only done a little bit of advertising, a lot of that's done through tasting as customers come in. So, we don't see any evidence that it is incremental so we think it is all trade up. I think what's encouraging is that only half of the trade-off is coming from vegetarian, the other half is coming from some of our meat entrees, a lot of that's coming from chicken. So, we are pleased by that. That's got a broad appeal. So, we are hopeful that over time that as people want to be with Chipotle more often and they are looking for little change in what they are ordering that they will order the Sofritas and it will add to our comp over time. But I would say right now we are not really seeing anything that's obvious that it is incremental right now.
Joseph Buckley - Bank of America Merrill Lynch: Just a question on the marketing. Some of those statistics, Steve that you shared were very impressive. Can you tell us a little bit more – have you joined different forms of marketing in different regions. Are there any other earnings you can share with us and do you have a sense that it is – you are driving some of that nice traffic increase?
Steve Ells - Chairman and Co-CEO: We don't know exactly how much of the comp – the marketing is affecting, but the numbers I shared with you I think are significant to us because we want to make sure that what has traditionally been a more difficult message for us around food with integrity and things and marketing messages that are not typical fast food marketing messages. These different kind of messages were tough for us and we feel that we've been getting better at them over the last couple of last two to three years or so. I think we're feeling really good about skillfully made. And what we think is really important is over the long-term continuing to form a close bond with our customers, getting them not only interested in things that they haven't thought about before, there was a question about are people asking for non-GMO foods or they're willing to pay for it? Well, it's a great question. But when I think about food with integrity in general, customers weren't asking for that. This is something that was very important to us and really was around conducting our business in a way that we think is open and honest and ultimately best for customers and the environment and animal welfares and farmers and things like this. Customers aren't directly asking for that, but when you help them understand the importance of these things, I think it develops a stronger relationship. So, that's why these numbers are significant to us because they're finding this marketing as increasingly relevant to them. I think that's especially important as we go into new territory and start talking about things like GMOs. So, I'm very bullish. Again, how much of that -- how much of the marketing contributes to the comp, we're not exactly sure, but sort of we've always taken a longer term view in our market approach, and rather than put out campaigns that will spike up sales or contribute to a quick comp, we would rather ensure that we're building the business consistently and long-term. We think that's ultimately better for our shareholders and for the business.
Joseph Buckley - Bank of America Merrill Lynch: Then maybe just one more real quick on the same-store sales increase was it all transaction, was there any deviation to check?
John R. Hartung - CFO: No, it was all transactions, Joe, except for the one extra day, so the 5.5%, 1% of that came from one extra day, but the 4.5% underneath that was all transactions.
Operator: Jeff Bernstein, Barclays Capital.
Jeff Bernstein - Barclays Capital: Just two follow-ups. First is on the marketing line of question. It seems like you're very happy with the skillfully made efforts here and it looks like this quarter there was a big spike in terms of what you spent. I think, Jack, you said 1.6% for all of '13. I'm just wondering, first, if you can just layout the biggest buckets within that, I guess (in some way it is) Cultivate versus the coupons versus more traditional radio and billboard. Just wondering how you break out that bucket, and then how should we think about '14 in terms of as a percentage of sales, if you're pleased with at this point, like is there is a ceiling as to how high you would go or how much you'd be comfortable to increase it for next year?
John R. Hartung - CFO: Jeff, 2014, it's too early to tell. We haven't really done our budgeting, but I would expect that we would be in the same ballpark, kind of this 1.6%, 1.7%-ish kind of range. There is nothing that we've seen or talked about so far where we've talked about, yeah, let's really ramp it up. Then in terms of the split, it varies by quarter and it varies by year, but I would say generally it is a reasonable split between kind of what I would call traditional advertising, the billboards, the radio and things like that. We are probably putting more money into that this year than we have in the past and we've had one flight already. We are going to do more of it beginning in August, so we are probably going to spend a little more than we have in the past. We have added Cultivate and so those are nice local, really having some close contact with people in not a marketing way, but in experiential way. So we have added one and so we are spending a lesser amount on that because it is only in three markets. And then we got some other things coming up in the fall that Steve has talked about that are more similar to our Back to the Future video that we had last year – I am sorry, Back to the Start, not Back to the Future, the movie. But more in that kind of entertainment where we will have a video series where it is entertaining and there is also a message, a message about food and that's coming up as well. So, it is split up between a number of things like that; they are very, very different, some are experiential, some are traditional and some are very non-traditional. As the year comes to an end and we look at how things went, we will revisit and then decide what we do in 2014, but I would expect the overall marketing expense to be in kind of the similar ballpark.
Jeff Bernstein - Barclays Capital: Just a follow-up. I think you mentioned from commodity, I don't know if you gave us the basket per se. I think you had said it is going to be similar to slightly higher, I think you meant. Is that versus the 33%, so we should be assuming 33% plus in the back half of the year? Can you share how much is – what the basket inflation is at this point? How much is locked kind of thing?
John R. Hartung - CFO: Very little is locked, Jeff. We have beans locked. We have our corn for salsas locked just through the end of this quarter, the third quarter, and then we have to reup there. We have few other. I think we have rice locked, and that’s about it. That’s the majority of what we buy. We have no locks in the meats, we have no locks on the avocados, that’s just not possible with what we’re buying there. So, really for the most part, most of our ingredients are floating according to the market.
Jeff Bernstein - Barclays Capital: Lastly, you said the 4.5% underlying comps, it sounds like after the start of April, it was very steady through the quarter at that kind of 4.5% and it sounds like you are saying that’s what's running in July. If that’s true, the compares, is there anything unusual about the compares? I know some of your peers talked about June and July last year things really slowed down. So, I’m just wondering if you see it is very stable on a two-year basis or how you kind of read that month to month.
John R. Hartung - CFO: I would say the trends that we are seeing are pretty stable. I mean, nothing is stable when you go day by day or week by week. But when I look at the entire quarter and I look at once weather kind of return to normal weather, because in the first half of April with the Easter moving from one year to the next and then with the weather, it took a while for spring to arrive. It was hard to get a read until the second half of April. Once second half of April appeared, when I look at the entire period all the way to July, it looks like a pretty stable 4.5% underlying run rate. I would say the compares are largely meaningless, and the reason I say that is because the trends from last year was, I would call it the third year of a trend that started three years ago with a recession. If you add up all the quarters for the last three years ending in 2012, we added about 27% to 28% in each quarter to our sales, and that was done since the recession and now this is a brand new trend. The brand new trend was an underlying three in the first quarter and now it's a 4.5. It continues to feel like a 4.5 as we're into this third quarter. So, I think looking at comparisons to last year I think will not help you got diagnose the transit at all.
Operator: Mitch Speiser, Buckingham Research.
Mitch Speiser - Buckingham Research: Just a follow-up on Jeff's question. It does – the trend of 4.5% traffic you're seeing that right now, but do the traffic comparisons – I mean, do they get more difficult in August and September and you just feel that it's meaningless, but does it get more difficult for the balance of the quarter?
John R. Hartung - CFO: If you went back to last year you would see that – our comps actually were lower in the back half of the year. I think if you were going to draw the conclusion out lower comps in the back half of the year that means the compares are easier, I think that's where you would be misled. This trend that we're seeing right now is a couple months old, still very young. It feels like a 4.5% trend right now and that's I think the best way to think about it. I think any kind of compares to last year, if you try to draw anything out of it at all, you might conclude that they're easier compares, but that's not the way to look at it, those compares are really, it's the completion of a three-year trend that started three years ago. So, we kind of started with a clean sheet of paper, with this trend we're starting a brand new trend is the way I would think about it.
Mitch Speiser - Buckingham Research: A question on the non-GMO products. As a base the food cost were 33.1% in this quarter. If you were to implement this program of non-GMO product and assuming no pricing what type of food cost percent should we think about modeling?
John R. Hartung - CFO: We don't know to be honest, that's why we want to kind of hold off. We have to discover things like make sure that we get the right oil, that the oil performs the way that we wanted to, that the taste is delicious. Ideally that would improve the taste of the food. We need to study things like yield and waste and holding times and things like that. There is a whole host of factors and so we really don't know what the cost is going to be. So, we are going to take a very diligent, very thoughtful approach in this and make sure that we do it right in every single way. And idea of holding on to any price increase until we understand all that and then try to tying those we think makes quite a bit of sense.
Mitch Speiser - Buckingham Research: And if I can slip one more question in. It looks like Sofritas is on its way to go national perhaps. When we think about the kitchen and your ability to add new products you've always focused on improving the existing products Sofritas is new. Are there any physical capacity constraints in the back of the house you want to add just say one new product per year? Is there a point where you may have to do a more meaningful reconfiguration in the kitchen?
John R. Hartung - CFO: In terms of the production capability back of the house, not only is there a lot more room for more volume production but there would also be room for different items. It has never been our thought that we want to hold back on new items because they are in some way difficult to produce. If you look at our kitchen it is interesting lots of fast food restaurants employ very specific equipment to do specific tasks. We have things like pots and pans, knives and cutting boards and the grills and thing. So, you can prepare a wide variety of foods, all different kinds of foods with these basic kitchen tools. So, we are very, very well prepared, well suited to take on new tasks. The reason we choose not to, I think is twofold; one is that our very simple ordering system allows for great throughput. It’s as you know one of our competitive advantages. But I don’t know that we necessarily need to continue to add or we need to add things in order to keep customers coming. I remember 20 years ago people said Steve a menu with burritos and tacos, I mean, you are going to have to add new stuffs pretty soon, but it’s the combinations of things that people can make, not only for taste but for diet and people can vary over the years during their visits, that really keeps Chipotle fresh. So, I think it’s really, really important that we keep a simple streamlined, very efficient front line. That being said, the addition of Sofritas is really not something that we’ve noticed has any negative impact on throughput or the frontline operations. And it’s my hope – we haven’t seen this yet, but it’s my hope that we'll get more people who might not have thought about eating in the fast food restaurants who might be vegan or vegetarian or just health conscious, in general to maybe come and try us and learn that this is a new kind of fast food. So, Sofritas is a very special menu addition in that. It really not only respects our food with integrity mission in the use of this non-GMO organic artisanally-made tofu, but it also has an appeal to those who are health-conscious.
Operator: Paul Westra, Stifel Nicholas.
Paul Westra - Stifel Nicholas: Question was on catering. Should we expect some roll-out cost associated with the national rollout ramp later in the year and a related question was the breakeven level you expect with catering, you're about 1% now; you said in existing stores, would you suggest it's a breakeven level now or not?
John R. Hartung - CFO: Well the cost of rolling it out is very insubstantial. There is a pallet of equipment that's delivered to the restaurant when we roll it out to a new restaurant. And once that equipment is stored and everything -- we're ready to go and the margins on catering are favorable, so that we can comfortably begin serving it right away. In terms of a breakeven cost, no issue at all, there is zero cost on that, I think from the get-go from our very first catering order served we are achieving the margin that we would expect from it just like we would with any – that we serving Burrito Bowl or anything else that we would serve. The packaging for catering has a cost to it, but most of the cost to that – nearly all of the cost to that is rolled into the prices we charge for the catering spread and we do ask for them to come back with – we do ask folks to bring back some parts of the packaging in exchange which will give them a free burrito but that's more just because we want to be responsible and we use those aluminum parts that don't wear out. So, even if they didn’t bring that back, we'd be just fine from a margin standpoint. So, really it is something that is profitable from the very first order and there is no – really there is no roll out cost to speak of at all or very, very slight.
Paul Westra - Stifel Nicholas: And when you think about that maybe being the, obviously, national mix by the end of this year, Sofritas may be coming national even later. I want to tie that into maybe your commentary your thoughts on the marketing spend until your brand is perfectly aligned with current trends and sort of marketing toward digital and local and customizable but those are two initiatives that seem perfect for maybe some national ad spend, because I want to (indiscernible) that with what you are thinking about the same mark spend next year and maybe do you have a thought about dialing up marketing around catering?
Steve Ells - Chairman and Co-CEO: Well, in terms of the catering marketing that doesn't really – I don't think require anything different or an additional kind of spend than we already have that can easily be sort of added to what we are already doing. I would say the same for Sofritas. In our current advertising campaigns like skillfully made, we can easily replace that with pieces that would promote Sofritas. But there is a lot of local store marketing that we can employ to promote both catering and Sofritas, and I think we're getting better and better at our local store marketing tactics. I think those are the ones that are really powerful especially when there is a deeper message behind something like Sofritas.
Paul Westra - Stifel Nicholas: Just one last question, we've seen some very good commodity cost declines at least in the base commodities corn and wheat, soybean is down, is there anything -- obviously it usually takes some time 12 months maybe to show up later in the meat products, but there is nothing we should expect, I mean, obviously with these coming down and looking out for 2014 and I know you don't want to show (you folks) too much, but there is nothing we should be -- that shouldn't be translated into your relatively benign cost for '14?
John R. Hartung - CFO: No, Paul. We think the same thing that generally there is a stable environment. I would say the one thing that could potentially be different is we've had real challenges from a supply standpoint with our meats, steak in particular. We're falling below 100%, chicken we fell below 100% actual rates for a while; we're back up to 100% now. So, there is a different supply and demand formula that's going on right now that supply just seems to be tight right now. So, it's possible that we might not see the same kind of deflationary that commodity meats might provide, but we don't see the kind of inflation pressure that we saw like at the end of last year. It does seem like there is stable pricing at least or stable cost at least, but we might not get all of the advantage that the commodity everyday ingredients might bring.
Operator: Andrew Barish, Jefferies.
Andrew Barish - Jefferies: Two quick things, on the mix that had been running negative, it sounds like it's turned to kind of flattish, was that a little bit of catering and maybe some of the upgrades on the margarita side? Then secondly – or just different consumer behavior maybe. Then secondly, on stock-based comp that it come down in the first quarter and for the year was there some more favorability here in the 2Q or not really?
John R. Hartung - CFO: On the stock comp, our dollar cost this year was higher than last year, what you saw in the first quarter was kind of a one-time thing. We had $6 million – I think it was a $6 million catch up adjustment in the first quarter of last year and that was for some performance shares where it became apparent more likely than not that we would meet the performance criteria, and so we had a catch up adjustment for I think it was roughly year and a half or so worth of expense if you will. Once it became apparent in the first quarter of last year that we would reach their performance criteria, so that's why stock comp was lower Q1 this year versus last year. In the second quarter, we were up a little bit. I don't have the numbers offhand, but it was up about 10%, 15% something like that Andy. So the growth was a little bit less than sales. Then overall for the year, most importantly we're going to be at about $66 million in total, which is about the same as last year. Then your other question is on mix, we continue to see that there is a slight degradation in drinks and that's what we're seeing before, it's very modest, so it did lessen a little bit and then we saw some offsets and a few other things, particularly like guacamole for example. So, those two things just offset. You'll remember in the past the mix that we were seeing was very, very modest, but we pointed out only because there was a slight difference between our transactions and the comps that we're seeing, but in this quarter the transactions, just about exactly mirror the sales. So, no net mix of that whatsoever.
Alex Spong - IR: Great. Thanks everyone. Looks like we've exceeded our time, so thanks for joining us and we look forward to speaking with you next quarter.
John R. Hartung - CFO: Thanks everyone.
Steve Ells - Chairman and Co-CEO: Thanks everyone.
Montgomery F. Moran - Co-CEO: Thank you.
Operator: Once again, this does conclude today's conference. We thank you all for your participation.