奇波雷墨西哥燒烤 (CMG) 2005 Q4 法說會逐字稿

Good afternoon and welcome to the Chipotle Fourth Quarter Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

I would now like to introduce Mr. Chris Arnold, director of public relations.

Please go ahead sir.

Hello everyone and welcome to our call today.

By now everyone should have access to our earnings announcement, [inaudible] to the fourth quarter and full year ended December 31, 2005.

It may also be found on our website at www.chipotle.com in the investor relations section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward looking statements.

These statements are not guarantees of future performance and are subject to material uncertainties.

We refer all of you to our recent filings with the SEC, for a more detailed discussion of the risks that could impact the future operating results and financial condition of Chipotle.

One the call with me today is Steve Ells, our founder, chairman and CEO.

Steve is going to provide some introductory remarks for existing shareholders and those who are new to our story.

Monty Moran, our president and chief operating officer will offer additional comments about our operations.

After Monty's remarks, Jack Hartung, our Chief Finance and Development officer will walk you through our financials and development and make some comments or the full year 2006.

Then we will open it up for questions.

With that out of the way, I'd like to turn the call over to Steve Ells.

Thank you Chris.

I would like to thank all of you for participating on today's call.

It's been an exciting past few months and there is lot that we are proud of.

We are excited that our customers and our investors are buying into and are passionate about Chipotle vision.

I built the first Chipotle around this vision, the vision that just because it is fast doesn't mean it has to be a fast food experience.

There was no fast casual segment at the time and nothing to bridge the gap between traditional fast food and sit down dining.

We did this by purchasing great quality, fresh ingredients, preparing them according to classical cooking methods in front of the customer and serving them in an interactive way that gives the customers exactly what they want.

And doing it all in an atmosphere that says something about the food.

Customers found this to be very relevant.

And that first restaurant was successful beyond my expectations.

So I opened another and another and so on.

Five hundred restaurants later people are still finding Chipotle to be relevant.

And I'm convinced that our best days are still ahead of us.

You'll also hear us talk about an idea we call "food with integrity."

When I opened the first restaurant we used fresh ingredients.

But today we know that fresh is not enough.

We want to understand how animals are raised and how produce is grown.

Because we know that directly relates to serving the very best possible food.

The most important accomplishments we've made in our journey toward providing "food with integrity is our naturally raised meat.

Meat that comes from animals raised on a pure vegetarian diet and without the use of added hormones or antibiotics.

Today 100% of the pork we serve is naturally raised and that's nearly, and nearly half of our chicken and about a third of our beef.

And we're continuing to purchase new sources of naturally raised meat, exploring similar alternatives for all the ingredients that we use.

As Chipotle continues to grow, we remain at the forefront of creating larger markets for these higher quality ingredients making them accessible to everybody.

And as customers become better educated about these differences we believe they will choose higher quality foods.

By staying at the forefront of this movement we believe we can some day change the way all people eat and think about fast food.

So how does all this affect our business?

Quite simply better raw ingredients mean better quality food, more customers and better financial performance ultimately.

Switching to the restaurant itself, the design reflects our focus on simplicity and is also sympathetic to the food we serve.

We use a limited selection of basic building materials such as veneered plywood, steel, concrete, corrugated barn metal but use them in unusual ways to create an environment that's distinctively Chipotle.

And all of our restaurants have open kitchens demonstrating our commitment to cooking fresh food and showing that there is nothing to hide.

Before I turn the call over to Monty, I'd like to say how thankful I'm to be surrounded by team of people who bring a mix of restaurant and business experience to Chipotle and who are as committed as I am, to making our vision become a reality.

We realize that our IPO is not an end but only the beginning.

We look forward to working with all of you as we move forward.

Now I'll turn the call over to Monty Moran, our President and Chief Operating Officer.

Thanks, Steve.

While you'll always hear us talk about our food, we're equally passionate about our people and the restaurant experience they create.

So I thought I'd spend some time on both.

Let's start with our people.

Every day when our managers and crew unlock the doors of our restaurants, they see a professional kitchen and walk in to our refrigerator full of fresh ingredients.

Then using knives, wire whisks, pots and pans and other utensils for actual cooking they have to turn these raw ingredients into the delicious food that we serve.

So our crew actually knows how to cook.

And since they're the ones who cook the food they're proud of it.

And they know that it tastes good.

This makes their work meaningful and it makes it work that they can be very proud of.

Preparing our food and delivering a restaurant experience that we're proud of requires that we have the right type of people working in our restaurants.

This is especially true with restaurant manager role.

And I'll speak more to that in just a minute.

The people who work in our restaurants have cooking skills and a passion for food and service.

But beyond that they're passionate individuals.

And one reason for that is that we don't hire people for their experience, we hire them instead based upon their passion and their individuality.

This is important to us because we encourage our employees to express their own personality and individuality in how they operate our restaurants.

Of course we have guidelines in place to ensure that things are running properly but personality remains the key driver of the overall restaurant experience.

That brings me back to the role of the restaurant manager.

Quite simply the manager's job is the most important job in our company.

Our managers set the tone for everything that happens in our restaurants and all facets of experience that makes Chipotle so unique.

They recruit and train our crews.

They make sure all the food we're serving is properly prepared and taste great.

They help connect us into the communities that we serve.

And they set the tone for customer service in our restaurants.

They are the ones who really make it happen.

As we begun to explore the role of the manager and the ways by which we can find the very best managers possible, we've started looking increasingly inward.

What we found is that our best future managers may already be working for us.

They're, they're now among our crew.

When we promote managers from our crew or from within the company rather than hiring new managers from the outside of the company our turnover rates are as much as four times lower than with managers who are brought on from outside of the company.

Also on average, our internally promoted managers get better performance reviews than those who we hire from the outside.

Those variables and others suggest that promoting managers internally is the better choice.

And that's exactly what we intend to do.

In fact, we've made it a goal to promote all of our managers from internal candidates within the next few years.

To help us keep our best managers in the restaurants rather than promoting them out into the multi-unit types of positions, we've created what we call the restaurateur program, a program that offers our top performing general managers a career in the restaurant with better rewards and better incentives.

Managers who are accepted into this restaurateur program continue to draw a salary but they can also earn bonuses based on the performance of the restaurant and can earn bonuses based upon the success at developing crewmembers to become managers as well.

We've already accepted our first managers into restaurateur program and are adding more as quickly as they can be identified and approved.

Getting this program up and running properly is so important to us that Steve and I are personally interviewing all the restaurateur candidates so that we know we're beginning the program with exactly the right people.

When we have the right people in place in our restaurants, the whole operation improves dramatically.

An example of this is the improvement to our speed of service, which we call throughput.

As you know throughput is being an important focus for us in the last eight months or so.

Since that time we've created new companywide awareness with the importance of throughput and it's helped our teams understand some of the techniques by which we can speed up our service.

Specifically we have redeployed labor so that all hands are on deck, on the front line during peak hours.

We've also expanded our use of fax service lines and begun to implement our new online ordering system, which we call DSL which stands for "Don't Stand in Line."

Available in all of our restaurants, these ordering methods allow us to accommodate more customers and to accommodate larger orders without disrupting the restaurant traffic.

Better throughput also has a positive impact on the customer experience.

We find that our restaurants which have the quickest throughput also have the best communication and interaction between crew and customer as well as the best customer service overall.

But in addition to throughput, we also intend to draw more transactions from new customers as we feel we're quite efficient in drawing new people into our restaurants.

We do this primarily through local marketing and through word of mouth instead of relying heavily on advertising which remains just 2% of our net sales.

In fact, word of mouth has always been our biggest source of new customers.

And to keep that word of mouth coming, we're going to remain focused on having the best customer experience in each restaurant every day.

So our operating guidelines for success are pretty simple.

We start by giving our employees fun and meaningful work, while treating them with respect.

We think this makes them happier.

And we believe that happy employees make new and existing customers much more comfortable and more likely than not to tell their friends to come to Chipotle.

And before I turn the call over to Jack, I'd like to address one question Chipotle gets all the time.

And that is how many restaurants can there be?

To be honest, we've never provided a specific number.

But I can give you an illustration that you might use to draw your own conclusions on the subject.

Our most mature market, Denver, has one Chipotle for every 48,000 people.

And even with that relatively high level of penetration, we opened five more restaurants in 2005 in Denver.

And despite the impact that -- that happened to our existing restaurants, we still had positive comparable restaurant sales growth in 2005 in Denver.

We certainly think we can open more restaurants in Denver.

But in the rest of the country, our ratio of restaurants per capita is significantly lower than it is in Denver, which gives us the confidence that we have a lot of room to grow.

I'll now turn the call over to Jack Hartung who will review our 2005 results and make some comments on 2006.

Thanks, Monty.

Before I discuss our fourth quarter and full year results, I thought I'd briefly review our recent IPO.

On January 25th, we offered just over 6 million shares of our common stock while McDonald's sold 3 million shares including the underwriters over-allotment.

As a result of the offering, we received net proceeds of just over $121 million, which we'll use to support the growth of our business, maintain our existing restaurants and for general corporate purposes.

We expect these proceeds along with cash flow from operations and the tax receivable from McDonald's to fully fund our growth at the current operating pace for the foreseeable future.

As it stands today, McDonald's now beneficially owns common stock representing 87% of the combined voting power of our outstanding stock and [65%] on the economic interest and our outstanding common shares.

McDonald's has informed us that at a future date, it may sell all or a portion of its ownership interest or make a tax-free distribution to its shareholders of all or a portion of that interest.

We understand that no decision has been made by McDonald's to this point.

So let's talk about our results.

In the fourth quarter of 2005, revenues were 173.3 million, a 36% increase from the comp quarter in 2004.

Of this nearly $46 million increase in revenues, about 18 million was due increased comps while just under 28 million was related to the impact of new restaurants.

For the full year revenues increased 33.3% to 627.7 million.

We opened 28 new restaurants during the fourth quarter of 2005 and 80 for the year.

That brings our year-end total to 489 restaurants, including 8 franchised.

As of December 31, '05, we're in 21 states in the District of Columbia.

For the quarter, comp sales grew 14.3%, mainly driven through transaction growth, although we did take a small price increase in certain markets when we rolled out natural beef or chicken, which added about 1.6% to the comp in that quarter.

We believe our focus on throughput has helped drive the accelerated the fourth quarter trend in comps and contributed the full year comps of 10.2%.

And we define comp restaurants as those open at least 12 months but do not include the sales during the partial month in which the restaurant opens.

Our restaurant level cash margins before depreciation were 18.6% for the quarter and 18.5% for the year.

This increase in our margins represents an improvement over last year of 380 basis points for the quarter and 220 basis points for the year.

This improvement was largely driven by higher average sales and the leverage that we get on fixed or partially fixed expenses including such expenses as labor and occupancy costs.

And we also benefit from lower commodity costs, including lower cheese as well as lower tomato and green pepper prices both of which spiked in the fourth quarter of 2004 as well as menu price increases in certain markets in the second half of 2005.

We're especially pleased that fourth quarter margins, which are historically lower than the rest of the year due to seasonality and due to the impact of opening a lot of new restaurants in the fourth quarter, were slightly above full year margins as a result of the higher comp and as a result of the higher menu prices in those certain markets.

We also continued to lower our G&A infrastructure as G&A is a percentage of revenues was 8.5% for the quarter and 8.3% for the full year and this is down from 12.3% for the fourth quarter of 2004 and 9.5% for the full year 2004.

And just as a reminder, the fourth quarter '04 did include a $4 million reserve for the possible credit card exposure.

Though we expect to be able to continue to leverage our G&A over time, we do expect to see little or no G&A leverage in 2006 as a result of the added public company costs that we'll absorb as well as the cost of separating from McDonald's.

These strong restaurant level sales and margins along with G&A leverage draw our fourth quarter operating income to 7.7 million from a $3.8 million loss in 2004 and drove full year operating income to 31 million up from just 6.1 million in 2004.

Net income for the quarter improved to 4.3 million from a loss of 3.7 million in 2004.

And full year net income was 37.7 million in '05, which includes a one time tax benefit of 20.3 million versus a net income of 6.1 million in '04.

We did have a loss on disposal of assets of 1.3 million for the quarter, 3.1 million for the year and these write-offs relate to investigating potential restaurants sites that we subsequently decide to reject.

It also includes write-off of computer equipment as result of software upgrades and then the normal replacement of restaurant equipment.

Turning to operating cash flow, net cash provided by operating activities nearly doubled from 39.7 million in '04 to 77.4 million in '05 which allowed us to fund most of the 83 million in capital expenditures for the year.

And we expect to incur capital expenditures of about 95 million in 2006 relating primarily to the construction of new restaurants.

And we believe that our cash flow from operations will again fund most of these capital expenditures.

In terms of 2006 development, we plan on bringing the Chipotle experience to more and more people through a thoughtful and disciplined growth plan that includes adding restaurants in both existing and new markets.

On top of the 80 restaurants we opened in '05, we plan to add between 80 and 90 restaurants in 2006.

Most of those openings will be in existing markets although we will have several openings in markets we were not in at the end of 2005.

And we've already opened our first new market this year just outside of Detroit with 2 restaurants and the early sales results are very strong.

Our restaurant investment has averaged right around 900,000 excluding pre-opening rent for the past few years and our new restaurants include a mix of end caps, freestanding restaurants, in line and urban locations. with freestanders in urban locations being the most expensive to build out.

As Chipotle's national brand awareness has grown our end caps and in line are now performing nearly the same sales level as our freestanding restaurants.

But at much lower investments.

So we expect our mix of freestanding restaurants to drift lower.

Also although our average restaurant site today is around 2,700 square feet, we plan to look for more smaller locations as our smallest restaurants, those at 2,200 square feet, or lower consistently perform at or above the gross sales of our largest restaurants.

So both of these efforts we think will help us maintain or improve our unit economics.

Looking to 2006, the sales momentum that we saw in the fourth quarter of 2005 has continued, driven by continuing focus on throughput.

We're also benefiting from a soft comparison to the first quarter of 2005 as well as mild weather and a higher awareness throughout any IPO related publicity.

So as a result, we've increased our full year comp guidance for 2006 to the mid to the high single digits.

We expect higher comps early in the year when benefiting from the soft comparison and then declining sequentially throughout the year as comparisons get tougher.

Longer term over the next few years, we expect to be able to increase our income from operations at a rate similar to many of the other high growth emerging restaurant companies, in the ballpark of 25%.

So thanks for your time today.

And we'll be happy to answer any questions that you might have.

Operator, please open the line.

[OPERATOR INSTRUCTIONS]

Our first question comes from Mark Wiltamuth of Morgan Stanley.

Hi, good afternoon.

Congratulations on the fourth quarter.

Wanted to explore the throughput initiatives a little bit.

Could you just tell us how far through that initiative you are?

How many stores have really started trying new things?

And how much could that add to comparable store sales growth over time?

Yes, Mark, as you know we've really being involved with the throughput initiative for about eight months.

And during that eight months, we have seen a steady increase in the throughput and, and I guess the thing that I'm most optimistic about is that increase has been spread throughout the United States.

So it hasn't just been in one, one market or another.

Although certain markets sort of caught on to the initiative earlier than others.

But we have seen and across the board every single region of Chipotle has gotten faster in terms of their service.

And we have been able to relate increasing comps, which we associate, with those increases in speed.

In terms of how far we can go with the initiative?

We feel that there is still a long way to go.

Our fastest restaurants still remain -- or should I say our very fastest restaurant remains three times faster than our average restaurant.

And we continue to pull all the restaurants gradually upwards hopefully something closer to that mark someday.

Okay.

And just one follow-up question on commodity costs.

We have seen some declines in the chicken markets in particular.

I'm curious how much of an opportunity you might have to capture some of that in the year ahead given that a lot of your contracts are kind of contracted for the naturally raised chicken?

Yes, Mark.

This is Jack.

Our naturally raised chicken has held steady really for the past couple of years.

And with commodity chicken when you see those fluctuations either up or down, we havve not seen that.

And so we don't expect to really see volatility in our naturally raised chicken.

And just about approaching half of our chicken sold today is the naturally raised chicken, so yes, if the commodity chicken prices drift lower we should see some benefit there.

But only on, only on a little bit more than half of the commodity chicken that we sell.

Okay.

Thank you.

Thanks, Mark.

Thank you, sir.

Our next question will come from Steven Rees of JP Morgan.

Thank you.

I just wanted to drill down a little bit further into the new entrepreneur program.

Specifically if you could just address what are the key differences between the new program and the existing program?

And what exactly is the financial proposition to the managers?

For instance, how much more could they potentially make with the new program?

Yes, Steve thanks.

Yes, we call it the restaurateur program.

It's, as I said it's a program by which our general managers have an opportunity to, to basically forge a long term career in the restaurant.

Right now it's available only to our top restaurant managers throughout the country.

Essentially, the way the program works is that our managers are given a small sign-on bonus to come on board the program.

And once they come on board, they're being rewarded in a new way.

But they're being rewarded for the things that all of our managers throughout the country should be focused on anyway.

Specifically, they should -- they're rewarded for increasing their companies sales.

And what we do is we pay bonus based upon the percent by which they increase their companies revenue over a stated plan for that particular restaurant.

And that plan varies restaurant by restaurant.

In addition to that bonus, we also pay a bonus based upon each person that they successfully train to become a manager from, so, if they train someone from an hourly role to a manager role and that manager goes out to successfully manage another Chipotle restaurant and gets a certain level of performance review, as soon as that person gets that review then the restaurant tour is entitled to a bonus based upon that successful training.

Okay, thanks.

And then if you could just remind us the, the hourly turnover was at the manager and store level employee in both in 2005 and 2004?

I can tell you that are turnover for 2005 like I talked about during the road show, for our hourly folks is hovering around the 90th percentile.

And for our managers, the turnover is around the industry average, for 2005 is around 43%.

Great, thank you.

Thank you, Mr. Rees.

This time we will take question from Jeff Omohundro from Wachovia

Well, thanks.

Just wanted to follow-up the store development guidance and maybe if you could breakdown a little bit in terms of the first half, the second half?

Is it a one-third/two-thirds type of spread still or has taty changed?

No, Mark, we're not going, oh , Jeff, I'm sorry.

We haven't and we're not going to give specifics quarter by quarter.

But if you looked at, at what we saw last year, I think you'd see just roughly kind of a similar distribution last year.

I think we're, last year of 80 we had 35 open.

In the first half of the year.

I'd say we would be similar to that of the 80 to 90 in that, in that range.

Great.

And then is it going to be an acceleration of pace of additional proteins bought into the "food with integrity program" given thesuccess at that?

Can you repeat that?

We're having a little trouble hearing you.

It is a little muffled.

I'm sorry, I'm in an airport.

Just on the pace of the expansion of additional proteins into the "food with integrity" program, expanding for example that chicken mix.

Yes, okay, all right.

Yes, I mean, as, as you might know from the Road Show during 2005 we made great strides on the amount of food with integrity that we're using apecifically with regard to increasing the amount of naturally raised chicken and naturally raised beef that we use. 100% of our pork is still naturally raised as it has been for years.

And our chicken is up to, we're serving nearly half of the chicken across the country that we serve is naturally raised and about third of the beef.

As Steve stated during the road show a number of times, we're committed to increasing that amount just as much as possible in the coming years.

And but we can't give you an exact figure as to how much, what the percentage will be at the close of 2006.

Thanks.

Thank you, sir.

Our next question will come from Robert Darrington of Morgan Keegan.

Yes, hi, thank you.

Couple of questions if I could.

Jack, could you help us the, or maybe, Monty, you might be better to handle this.

We're trying to figure out as we look at a new store coming in the production after it opens.

How does the flow of the margin affect the overall results?

In other words, is there, does it take up a certain period of time before which the margins get to an expected run rate?

How should we look at a store?

Hi, Robert.

This is Jack.

I'll take that.

It really varies depending on the markets.

It depends on how high the sales start out.

Whether it's an existing market where we've already got infrastructure and we've already got economies with our distribution, depends on occupancy cost, New York would be much more expensive than, than other markets.

But on average I'll give you kind of on average.

Typically our new restaurants open up at lower than our overall average, but it would, it would typically open within maybe 15% or so of our existing -- in our existing restaurant average.

And then from a profitability standpoint, on average, we expect to turn profitable within the first few months.

But it will take probably a couple of years before the store fully matures.

Maybe 2, 2-1/2 years, maybe 3 in terms of fully matures in terms of both sales volume and in terms of margin.

Okay.

All right.

That's good.

And can you also, Jack, give us some color on how did the average unit sales in the fourth quarter?

How were those numbers?

They were good.

Well, you gave us the annual, are you going to provide us anything in the way of quarterly?

No, no.

We're not.

But I can tell you they were, they were good.

We saw no change in the trend in the fourth quarter openings than we saw during the rest of the year.

Okay.

Can you give us anything in the way of say operating weeks in a given quarter?

Oh God, we don't know.

We really don't have that.

Okay.

And we're not going to disclose that.

Okay.

All right.

Fair enough.

And then as we go forward there is obviously quarters against which your future results will compare.

Will you be able to provide us, either in the 10-K or on some filing, past quarterly results that we can kind of fill out our model with?

In terms of new store?

No, no.

In forms of just the operating results on a quarterly basis?

The separate line items, sales, cost of sales, labor cost, et cetera, each quarter's results?

In the 10-K?

Yes, that will be in the 10-K.

I'm not, I mean the normal information that you find in the 10-K.

And there is quite a bit of information in the release.

I think the line items you just mentioned are in the release.

No, no.

Yes.

You're correct.

For the fourth quarter, the numbers were there.

But basically we're looking at Q3 of '05, Q2 of '05 and Q1 of '05?

We'll determine that as we, as we do the individual quarters.

So I would expect that in terms of comparison, we'll give you similar information to what we include in the release for the fourth quarter last year.

Okay.

Thank you.

Thank you Mr. Darrington.

At this time we'll take a question from Paul Westra of Cowen & Company.

Great.

Thanks.

Good afternoon to everyone.

Hi Paul.

How are you?

Question for you really on a seasonality question trying to gauge first on the margins seasonality.

You mentioned how first quarter margins certainly were impressive.

Do you still expect fourth quarter margins generally to be the lowest of the year like they were in '03 and '04 or is seasonality smoothing out, trying to put that 18.2% lower margin number in the context as we look out going forward?

Yes, I think it's a good question, Paul.

I think there is probably a combination of both.

What I mean by that I think sales results, the sales comps were so strong in the fourth quarter that I think it did smooth out the seasonality a bit.

So we, we did see that the average daily sales of our restaurants in the fourth quarter were pretty close to the rest of the quarters.

And so largely that seasonality was leveled off quite a bit.

On the other hand though as long as we continue to open up restaurants near the back half of the year I think that will a drag effect on those restaurants.

And then we also got, really received in the fourth quarter we received more of a benefit from those price increases that we pushed through through certain markets that we didn't get to see through the rest of the year.

So I think the answer is we did close the gap somewhat in seasonality.

But I still would expect there will still be some seasonality there at the close of '06.

Great.

And then, a related question I mean AUVs as well, I mean, you looked at your comp outlook, or AUV outlook in '06.

So you strength should still be in the summer months as far as seasonality?

Yes.

Yes.

Yes, we still expect that.

Even though it took the comparisons are toper, we still expect the second and third quarters to be our strongest.

So then the follow-up question is as you look out on your comparisons, on a one year basis does your first quarter clearly is the toughest but on two year basis all the quarters are roughly the same.

So that should we be, I know you guided that you expect smoothing down of your comps, just trying to --?

Yes, I just, I think the same answer, Paul, on the fourth quarter and, and not last year but the year before we saw that the seasonality in the first quarter smoothed a little bit because we had a very strong comp two years ago.

We had a 20 something percent comp in two years ago.

And we saw like a smoothing of the seasonality then.

We're seeing continued momentum as we mentioned in the release in the first quarter this year and so I'd expect we'll see some smoothing.

But I still think the first quarter is likely to at least lag the second and third quarters, at least a bit.

We still think the winte' months still arne't as friendly as the summer months to us.

Great.

And then, and moving on to a question on your G&A outlook you mentioned that you expect little to no leverage and even given your higher comp outlook I mean, even with the new stock comp expense and some public company expenses.

Any other investments going on there where you wouldn't expect a little bit more leverage?

No, no.

I don't think so, Paul.

What I was saying before the revision of the comps was that we expect to see no leverage.

And now we're, we're expecting to see some leverage.

So I think in the release we've said little to no.

So I think we could see a little bit.

But may be we will see a little bit more depending on how the sales up but.

No, there is nothing unusual going on.

It's really just the public company costs and separation from McDonald's.

And now that you're public obviously for a little while no, no spiking or changing your outlook for those cost or anything like that.

No, no.

Not that we've seen so far.

We're still early into it, but no, no surprises yet.

And then last question on your pre-opening expenses.

What should we be looking for going forward as far as your --?

Well, pre-opening typically was about 20 to 25,000 per restaurant.

With the new accounting change, we expect to see in total of about an extra $2.5 to 3 million of extra expenses.

And that's, that's just the expensing now of pre-opening rent set we used to capitalize.

Including roughly two-thirds of that or more than half of that is non cash.

It's the straight line rent calculation that you make and then you have to expense that.

So I'd say our pre-opening expenses, Paul, are going up by about 2.5 to $3 million.

But on the non-cash, obviously on a cash basis no material, still looking at that 20-25K?

Yes, yes.

Okay.

Great.

Congratulations everyone.

I'll talk to you later.

Bye.

Thank you, Paul.

And our next question comes from Nicole Miller of ThinkEquity.

Good afternoon.

Hi, Nicole.

Hi, I was just hoping, we get a nice update I think on kind of the profitability by type of location, if it's end cap or inline.

Now I was wondering if you could give a little bit color behind the markets.

Not necessarily numbers but like when you either look at profitability or same store sales, is there any one market that's different from another?

Well, first on the profitability, Nicole.

What we found, we used to see that our freestanding restaurants used to be much higher in volume.

This was probably about three or four years ago.

And so we used to get higher returns and higher, better results from the freestanding restaurant.

As our national brand awareness has grown over the years, what we've seen the end caps and inlines have really lifted up.

And those, those restaurants, that development type is generating just about the same sales as our freestanding restaurants.

But the investment is much, much lower.

From a, from a margin standpoint there is not a big difference.

There is a slight difference between freestanding and then end caps and the inlines.

You have things like maybe higher real estate taxes and maintenance and you've got your own lot to take care of.

But generally, the margins are similar.

Now the sales are getting similar.

And so really what you have left is just the investment is different.

And the investment is much higher in freestander, so that's why we're going to, we're going to see our mix of freestanders drift lower over the next few years.

And anything by market for example, with Denver being your home base and your most maturedmarket.

Do you see same store sales, for example, different in that market versus other markets by a large margin or everything is pretty comparable?

Really it varies significantly by market but we have, we have great performing markets in the Midwest.

We have great performing markets in the West.

Great performing markets in Northeast.

But some are averaging well above our million 440 average.

Some were averaging a bit below.

So there is, there is nothing, Nicole, consistent that says that certain markets will perform at a certain level versus another.

Okay.

And one thing on the same store sales, you walked through the price and the traffic in the fourth quarter.

How do you -- what is your strategy and theory on pricing going forward?

Our philosophy is that we really would rather not raise prices until we have an opportunity with food with integrity.

And so, virtually all those price increases that we refer to coincided with the rollout of natural chicken or natural beef.

And what we did at that time, Nicole, was we not only looked at our beef and chicken, we looked at, we looked at our drinks and we looked at our guacamole and we took an opportunity to adjust the menu at that time.

And that's the philosophy and the strategy that we plan on continuing going forward.

Perfect.

And just a couple of things to get some numbers straight.

Could you on talk about your lunch and dinner mix, your percentage takeout?

Yes, it's pretty easy.

We're still hovering around 50% takeout and 50% dine-in and 50% male and 50% female.

And what was the other question, Jack, your, lunch and dinner 50% and 50%.

That is easy.

And one last question.

We try to keep it very simple.

That's right.

But to give you a little more texture, I mean, our lunch sales used to be higher than dinner.

And the trend just kind of very nicely and very gradually has favored dinner increasing as a part of our mix, and that's kind of nice, since dinner is obviously more hours than lunch and there's , more opportunity to spread the business out, so we're very pleased with that.

And one final question.

Can we get the cash and debt balance as of year end, please?

Yes well, cash was about 61,000 at the end of the year.

We didn't have a lot of cash at the end of the year, and then that we really had no real debt to speak of.

We had about $3.5 million of landlord financing, that's really related to the capitalized leases.

We had a handful of leases that we capitalized for accounting purposes.

We had no bank debt at the end of the year, and we did not owe McDonald's any money at the end of the year.

Okay, perfect.

Thank you so much for the update.

Right.

Thank you Ms. Miller. [OPERATOR INSTRUCTIONS]

We'll take our next question from Larry Miller of Prudential.

Yes hi.

If I could just follow up first on the G&A, just to make sure I understand.

You were saying, including the stock options and the separation costs, little to no G&A leverage in '06?

Actually, you will get some leverage, we should be planning flat, is that correct?

Yes, I would plan flat.

Okay, that's great.

Okay, and then I didn't know if you wanted to take the opportunity, since you did talk about the comp being stronger, to kind of provide any color on that, maybe where you are, relative to plan?

No, I would just say that we saw the same amount from the fourth quarter roll into the first quarter, and that's what causes increase to our guidance for the year.

Okay.

And then just one question on just market share.

Clearly you guys have grown units and comps well above the industry rate, if you look at the whole entire restaurant picture, even above maybe a competitive set, so where is it that you think maybe you're taking share when you look at the -- what the data says?

Yes, I think we're taking it from a lot of different places.

I think people who eat traditional fast food, are eating at Chipotle.

I think people who typically wouldn't eat fast food are attracted to Chipotle, because of things like "food-with-integrity."

I think that when folks look at other fast casual dining options, they appreciate what Chipotle has to offer, because we're cooking whole fresh raw ingredients right in front of them.

And again, I think the "food with integrity" message is becoming more relevant.

So, I think it's exciting that we can't pinpoint one particular example, but that is coming from a bunch of different places.

You know, also high school students and even younger are really latching on to Chipotle.

So, we're excited that it's pretty broad.

Speaking about the younger consumer, any thought to kid's meals, or kid's entrées?

Yes well, you know the beauty of the Chipotle system is that, really you can get whatever you want, just by making different combinations of things.

We do have a great option for kids, in that we'll serve them whatever it is that they like.

You know very young kids - you know parents will come in, I mean like sort of pre-toddler even will come in, and parents will get little cups of rice and beans and things like that.

Toddlers seem to love quesadillas, and as they get older, they can move from cheese quesadillas to things that might have a little bit more spice.

And then sort of the younger junior-high set, we see them becoming more adventurous and experimenting with hotter sauces and that's kind of a cool thing for them, and no pun intended.

And so, we really see our flexibility of our service line, as being able to offer a variety of kids, exactly what they want to eat.

Okay, fair enough.

Maybe I can ask one more question?

On the NOL, you made the reversal, I think $20 million something, is there anymore to come or is that as much you're going to be able to realize?

That's all we will realize.

So going forward, you'll see us being a full paying tax there.

Okay, thank you very much.

We'll take a question from Mark Kalanowski of Buckingham Research.

Hi, just wanted to ask about the tax rate going forward, what types of efforts is the company making to get the tax rate down?

Also in terms of the average unit volumes, do you have any quantified long term goal for the system?

Thanks.

Yes Mark, on the tax rate, I can tell you, some of the items in there are permanent differences that would just naturally drift away.

So we've got a piece related to restricted stock that will go after three years.

We've got a piece related to, state tax true-ups as we're kind of separating from McDonald's that we expect that will go away as well.

And then you've got the meals and entertainment piece which won't go away, but it'll drift into a number that you won't even see anymore.

So, we will drift down more naturally to kind of 39 to 40% tax rate, just really without doing anything.

We are in active discussions with some outside tax consultants to help us look at the way we're organized and look at the different -- it's really in the state tax area that you have state tax planning, and we're going to look at different alternatives and see what we can do.

Sounds good.

And then the other question was on the AUVs.

Mark, we don't have specific targets, you know what we will do is, we make an - really investment decisions every time we open up a new restaurant, every time we open a new market, and we make sure we're comfortable that we're investing our capital wisely and that we're looking for the [inaudible] of returns to add to shareholder value, but we don't have in mind a specific volume target.

I can tell you that we're pleased to say that we've got a lot of restaurants, and a lot of markets that are doing extremely high volumes.

And so we're very optimistic about our potential.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]

We'll take a question from Samuel Snyder of Renaissance Capital.

Hey guys, great quarter.

Got a question for Steve.

Could you guys speak to any additional like menu initiatives, since you've had so much success, with like the focus on meats, naturally raised organic?

Are you going to expand this to possibly your bread products?

Absolutely Samuel.

In fact, we started with meat because we think it's -- meat is most important to the customers.

There's a lot of talk about the interest in naturally raised meats that have no antibiotics, that have an all-vegetarian diet, and that are not given any added growth hormones.

So, we started with meats because we think this is most important to the customer.

But, we've also looked at produce, about 20 to 25% of the beans that we purchase today are organic, and we'll continue to increase that.

We're looking at other produce like lettuce and tomatoes and corn and things like that.

And also we've been working with the folks who make our tortillas talking about how we can get more sort of organic flour and things like that and things like that.

So, "food with integrity" is really about looking at all of our raw ingredients, and making sure that we're sourcing the very best quality of raw ingredients that are not only better for flavor, but are also better for the environment, that are sustainably raised that consider animal welfare and things like that.

Great, thanks.

Thank you.

At this time that does conclude our questions.

I'd like to turn the call back over to Mr. Ells for any closing remarks or additional comments.

Well, thank you everybody for being on the call and thank you for your questions.

We look forward to speaking with you next quarter.

Ladies and gentlemen, that does conclude our presentation for the day.

We do appreciate your participation.

At this time, you may disconnect.