奇波雷墨西哥燒烤 (CMG) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Chipotle Mexican Grill fourth quarter 2006 earnings conference call.

At this time all participants are in a listen only mode and the floor will be open for your questions following the presentation.

It is now my pleasure to turn the conference over to your host, Sandra Curlander with Investor Relations.

Please go ahead.

Hello everyone, and welcome to our call today.

By now you should have access to our earnings announcement released this afternoon for the fourth quarter and full year ended December 31st, 2006.

It may also be found on our website at www.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 within the meaning of the securities laws.

These forward-looking statements will include projections of the number of restaurants we intend to open, restaurant comp sales trends, income from operations and other statements of expectations and plans.

These forward-looking 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 for 2005 as updated by our subsequent 10 Qs and to the 10-K we expect to file around the end of February for a discussion of the risks that could impact our future operating results and financial conditions Our presentation today will also include certain non-GAAP financial measures as defined by the Securities and Exchange Commission.

A reconciliation of those measures can be found in the supplementary information included in our earnings release which we will file with the SEC in an 8-K.

I want to make everyone aware that we have adopted a self-imposed quiet period restricting communications with investors during sensitive periods.

This 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 first quarter this quiet period will begin March 1st and continue until our first quarter release in late April.

This policy can be found on the Investor Relations portion of our website at Chipotle.com.

We appreciate the strong interest that the investment community has in Chipotle and are confident that this policy strikes the appropriate balance in allowing this management team to focus on running the business and communicating with both new and potential investors in our Company.

Steve Ells, our Founder, Chairman and Chief Executive Officer is on vacation and therefore unable to join us today.

On the call with us today is Monty Moran, our President and Chief Operating Officer, who will provide an overview of 2006 accomplishments.

Jack Hartung, our Chief Finance and Development Officer will then walk you through our financials, developments, and provide some general thoughts on our 2007 outlook.

We will then open the call for questions.

With that out of the way, I would like to turn the call over to Monty Moran.

Thank you, Sandra.

Since we have now completed a full year as a public company, we thought it would be helpful to begin today's call by reviewing some of our key accomplishments over the last 12 months.

Obviously, 2006 was a great year for us.

It began with a very successful IPO during which our management team made a firm commitment that we would not let the complexities of being a public company distract our focus on the constant improvement of our business.

I'm happy to say this continued focus has led Chipotle to be a better company today than it was a year ago.

One of the most important improvements we have made is to our food.

We serve better food today than ever before because our raw ingredients are the best they have ever been.

During 2006 we continued to serve 100% naturally raised pork in all our restaurants but we also increased the percentage of naturally raised chicken and naturally raised beef served in our restaurants as well.

Specifically 55% of the chicken and about 43% of beef we serve now is naturally raised.

In 2006 we added naturally raised meats in Cincinnati, in Dayton, Detroit, Cleveland and Northern California.

And just last month we added naturally raised chicken and beef to our Kansas City market as well.

To remind you when we say naturally raised we mean animals which are raced humanely without antibiotics or growth and fed a vegetarian diet.

We think that this may taste better giving us a critical advantage over our competitors.

But it is also better for the environment, for the animals and for the people in the supply chain.

Chipotle now serves more naturally raised meat than any restaurant company in the world and we are continuing to work to find more suppliers to reach the goal of serving only naturally raised meat in all of our restaurants.

Our commitment to Food With Integrity goes well beyond the meat we buy.

We are also constantly exploring better alternatives for all of the ingredients we use.

As of November, for instance, all the sour cream we serve is free of the synthetic growth hormone which is called recombinant bovine growth hormone or RBGH.

We have also increased the percentage of organically grown beans we use and will continue to do that as additional supply becomes available.

Over time by caring even more about our ingredients than our customers do, our food will continue to taste even better and will continue to strengthen the already loyal bond that we have with our customers.

During 2006, we also made important changes to how we develop and reward our people.

Specifically, we set out to create a new kind of culture within our Company, a culture that appeals to the highest performers.

We took a number of important steps in '06 towards achieving this goal.

We began by acknowledging that the restaurant manager is the most important position in this Company.

As such we decided our top priority has to be to attract, retain, and develop the very best managers in the industry.

Our first step toward accomplishing this was the creation of the Restaurateur Program.

I know you have all heard us talk about the Restaurateur Program.

That program makes the manager position a career.

It allows us to retain the very best managers in the restaurants where they can continue to provide excellent food and customer service.

After a careful selection process, and just to remind you, Steve and I, Steve Ells and I personally interview all of these candidates, still.

We provide these lead managers with incentive-based bonuses based on two things.

Training new managers and increasing sales.

The purpose of the program is to harness the skill of our best managers by using them to identify the most skilled crew and train those crew people to be our future managers and leaders.

This training of crew is critical, since the managers who come into our system from crew, from Chipotle crew, have a much lower rate of turnover and typically perform better than the folks that we hire off the street.

Another step we took to increase the quality of our managers in 2006 was the creation of a new staffing structure in our restaurants which provides an efficient and logical path by which our crew can reach manager positions quickly.

We also developed communication and training programs designed to create an expectation in the minds of our crew that the position of manager is easily accessible to those with a strong work ethic and a passion for great customer service.

These initiatives are allowing us to reduce the costs of recruiting, interviewing and training outside candidates while improving our bench of great managers and lowering our turnover.

Through the end of the fourth quarter in 2006 over half our restaurants have fully implemented this new staffing structure and we expect to complete the implementation this year.

So far, we're very pleased with the results of this work.

At the beginning of 2006 only a third of our managers were promoted from crew positions within Chipotle; but now over half of them come from crew.

Also our turnover among the store managers has decreased from around 40% this time last year to less than 30% today and our Restaurateur group has had very, very little turnover.

Additionally the feedback we received through recent employee surveys tells us that our managers and crew are very excited about these programs and have a better understanding and appreciation of the opportunities that they have available to them at Chipotle.

And since all of our managers, and not just the restaurateurs know that the key to their success is developing their crew they have all become more conscientious about how to interview, hire, train and retain their top performers.

We expect that this will lead to a larger pool of excellent crew people and manager candidates which, in turn, will lead to better operations and better customer service for us.

We also have had questions and heard speculation as to the impact we might experience regarding the recent increase in minimum wages in several states.

Well, through January 2007 we have made adjustments in hourly rates to less than 1% of our 13,500 hourly employees.

In fact it's exactly 74 of our 13,500 hourly employees as a result of these minimum wage increases.

So we believe this issue has less impact on us for that reason but we also believe this issue has less impact on us that many of our competitors because we typically pay hourly wages that more than exceed federal and state minimum wage requirements.

As a result we are optimistic that any effect to our labor costs that does happen as a result of this minimum wage increase will be manageable.

In 2006 we also improved customer service by increasing our throughput and reducing the amount of time that our customers spend waiting in line.

By the beginning of '06 we had already increased our throughput during our peak hour on weekdays by 10 transactions over what it had been in early 2005.

But we were able to increase our speed of service by another 10 transactions or so during 2006.

Despite these very significant increases over the last year and a half or so, we believe we will be able to continue to improve our speed of service over time through better equipment, better training and by improving the management in our restaurants.

Throughput really is no longer an initiative of ours; instead, it is a way of doing business.

All of our managers understand that good throughput is simply an important part of delivering great customer service at Chipotle.

We believe that our business model is one that will continue to drive success and build value for our shareholders.

In 2006 we looked at each and every detail of our business with an eye to getting better; and in doing so were able to improve our food, raise the caliber of our people, speed up our service, and make progress in understanding how to design and build restaurants to increase their durability, functionality and appearance.

Over time we strongly believe that by continuing to surpass the expectations of our customers, we are going to help change the way Americans think about and eat fast food.

These improvements have and will continue to require significant amounts of effort at all levels of this organization.

But they have already enhanced our financial performance on many different levels.

And so to talk about that I'm now going to turn the call over to Jack Hartung, our Chief Finance and Development Officer.

Thanks, Monty.

Before we jump into the financials for the fourth quarter let's quickly review some of the highlights for the full year.

In 2006, we grew our revenues by 31.1% to $822.9 million and that's up from $627.7 million a year ago.

We opened a total of 94 restaurants during the year and comps increased by 13.7%.

As we have expected and communicated since the beginning of 2006, our comp slowed sequentially over the four quarters.

However, the comps remained in the double digits throughout all four quarters.

We have now generated nine consecutive years of double-digit comps, which illustrates our ability to attract new customers as well as build strong relationships and greater customer loyalty among our existing customers.

We also dramatically improved margins at both the restaurant and the EBIT level which enabled us to double income from operations to $62 million in 2006 which is up from $31 million in 2005.

And, accordingly, our diluted EPS nearly doubled to $1.28 per share in 2006 up from $0.66 per share after adjusting for the onetime tax benefit in 2005.

With regard to our balance sheet we ended the year with $153.6 million in cash and no bank debt.

We generated cash from operations of $103.6 million in 2006 which was up nearly 34% from $77.4 million in 2005.

Capital expenditures in 2006 totaled $97.3 million which includes an average new restaurant investment for the 94 restaurants we opened in '06 of about $860,000.

Now back in 2004 our new restaurant investment averaged about $880,000.

In '05 the average was $910,000.

So we're really pleased that we've been able to decrease our new restaurant investment to approximately $860,000 in 2006 and this is despite construction cost inflation over the past three years.

We have done this by building fewer freestanders, by focusing on adding smaller restaurants to the mix and by disciplined focus on cost control.

In addition to decreasing our average development cost in '06, we also decreased our development timeline by over one month.

In 2007 we do expect our average new restaurant investment will return to about $900,000.

This is a result of a number of things including developing and opening more restaurants in higher cost markets such as Boston and Philadelphia, a slight increase in the mix of our freestanding restaurants in '07, and normal construction inflationary costs.

Our restaurant sales now average $1,611,000 per restaurant which is up 11.9% or about 171,000 from just one year ago.

Our new restaurant sales average about 85% of our existing restaurant sales even while these existing restaurant sales have risen dramatically over the past three years.

So, clearly, our unit economics for both our existing and new restaurants have never been stronger; and in fact as a result of the higher average investment and as the result of the higher average restaurant sales combined with our managing of the investment costs, our restaurant level ROI has increased from about 30% at the time of the IPO to roughly 38% today.

We opened 92 net new restaurants this past year, slightly above our guidance of 80 to 90 new restaurants.

We closed one restaurant in the third quarter due to structural damage in the mall that the restaurant was located in and we relocated one restaurant in Denver during the fourth quarter.

So as of December 31, 2006, we operated 573 Chipotle restaurants throughout the country, which reflects a 19% restaurant growth over 2005.

We are very proud of our accomplishments in 2006, having completed the IPO; we completed the separation from McDonald's; and we did this while continuing to invest the think we consider most important.

Like Food with Integrity and like the development of our people that Monty talked about.

Of course we're able to do all this while delivering very strong financial results

And though some uncertainty exists related to the effects of the California freeze, and know we have very tough sales comparisons in 2007 we continue to expect that we can generate 25% annual earnings growth for our shareholders over the next few years.

In terms of the fourth quarter of '06, revenues were $219.7 million which is a 26.8% increase from the fourth quarter of '05.

And of that $46.4 million increase, $29.6 million came from sales from new restaurants not yet in the comp base and $16.7 million was driven by the 10.1% increase in Comp restaurant sales during the quarter.

The 10.1% fourth quarter comp on top of the 14.3% fourth quarter comp in 2005 was once again driven by primarily by transaction growth with about .8% related to menu price increases.

Overall, the higher average restaurant sales, combined with the menu price increases in certain markets associated with our Food with Integrity initiative as well as lower fixed operating costs helped to increase restaurant level operating margins to 20.3% in the fourth quarter of '06 which is a 170 basis point improvement from the 18.6 margin we saw in the fourth corner of '05.

For the full year we achieved a 20.9% restaurant level operating margin.

Food, beverage, and packaging costs fell to 31.9% of total revenue down from 32% last year -- a modest 10 basis point improvement.

Comparing our fourth quarter food cost to the third quarter our food cost increased by 90 basis points in the fourth quarter as a result of higher commodity costs.

We're still assessing what the California or what impact the California freeze might have on our business and we expect to learn a lot more about that, both in terms of pricing quality over the coming weeks and months.

We do source lemons, avocados, lines and Romaine lettuce from California and we do expect to see additional pressure on food costs, beginning late in the first quarter or in the second quarter, though at this time it is just to early to quantify the impact or predict how long that impact might last.

We continue to invest in labor as a result of our new restaurant staffing structure but our labor did improve 30 basis points to 28% of revenue in the fourth quarter compared to the fourth quarter of 2005.

We believe strongly in empowering and developing our crew so they can become our future restaurant managers and many of our very best managers came from crew.

By continuing to invest in their development we expect to see an increasing number of future managers rising from the crew ranks.

We ended the year with a new structure implemented in over 50% of the restaurants and will continue to invest in the new structure until it is implemented in all restaurants.

Occupancy costs were 7.1% of total revenue which is a 50 basis point reduction in the fourth quarter of 2005 driven largely by fixed [rent] costs spread over higher average restaurant sales.

Other operating expenses fell 90 basis points to 12.7% of total revenue with improvements in fixed costs as a percentage of the higher revenue and lower MIT costs which are the training costs we incur what we do hire managers from the outside.

G&A as a per cent of total revenue fell 90 basis points to 7.6% for the quarter and as we added throughout 2006 in spite of the added public company costs, the incremental stock based compensation expenses, and the cost of separating from McDonald's we expected G&A for the full year to be flat or perhaps slightly down as a percent of revenue versus last year.

And in fact we were able to lower G&A as a percent of revenue by 40 basis points to 7.0% for the year 2006.

This year in 2007, we expect to see further opportunities to leverage our G&A infrastructure.

And we believe we can reduce G&A as a percent of revenue to the low 7% range over the next few years.

Preopening expenses were $2.1 million compared to $724,000 in the same period of 2005 and we opened 35 new restaurants during the fourth quarter of '06, compared to 28 in the fourth quarter of last year.

And as you know, we began expensing renter and construction including the straight line rent.

And prior to implementing this change so prior to 2006 as a result of the new accounting pronouncement these costs were capitalized.

Interest income was $2 million for the quarter.

This is primarily due to the cash balance we carried during the quarter which was $153.6 million at the end of the year.

Income before taxes more than doubled to $17.4 million compared to $7.6 million in the fourth quarter of '05 which represents a 350 basis point improvement as a percent of revenue.

And our effective tax rate was 37.7% for the quarter; and our annual rate was 39.3% for the full year and this reduction in the fourth quarter was primarily the result of truing up our anticipated state effective rate to the actual return filed on McDonald's in our behalf.

We expect this rate will continue to drift downward as we implement some tax planning strategy.

But in this regard while we don't have all of the planning opportunities afforded by many of our competitors such as dip deductions or international operations we do feel there are opportunities to modestly impact our rate over time.

Net income was $10.8 million for the fourth quarter or $0.33 per diluted share.

And that's on a diluted share base of 33 million shares and that compares to net income of $4.3 million or $0.16 per diluted share with 26.4 million shares for the fourth quarter of 2005.

So as we look ahead towards 2007 we are reiterating our previous guidance.

We expect that comp restaurant sales increases will be in the low to mid single digits and as you know we are going up against a two-year combined comp of 24% for not only the full year but also for each and every quarter in 2007.

We expect to open between 95 and 105 new restaurants during the year and we expect the openings will be spread more evenly throughout the fourth quarters unlike in 2006 where our openings were much more back end loaded.

And we expect diluted weighted average common shares outstanding will be in the 33.25 million range.

Longer-term we believe we will grow diluted earnings per common share at an annual rate of about 25% and while comps and margin expansion were the significant drivers of growth in 2006, we expect that new restaurants and G&A leverage will play a more significant role in 2007.

So thanks for your time today and now we would be happy to answer any questions that you might have.

Operator?

Please open the lines for questions.

(OPERATOR INSTRUCTIONS) Paul Westra with Cowan & Co.

I was wondering if you could give us more granularity if you could on your comments on commodity?

Obviously you know the avocado harvest is on its way and I wondered if you could just give us an idea what most of your at least experts are telling you about where you think some of the key commodities might be going in the short-term?

We expect, Paul, we saw first of all in the fourth quarter as expected and I think we were trying to give some indication of that in our last call that we started to see commodities increase really in the fourth quarter.

We saw that mainly in things like chicken and avocados.

Now with the California freeze we don't know exactly what is going to happen.

We have seen that anywhere between 20 and 30% of the California crop may have been affected.

We are hearing pretty loud and clear that there will be pricing impact, that there will be higher prices that the impact has been all over the board.

Initially we heard some very very high numbers and now we are hearing still high numbers but maybe a little bit more modest.

So it seems like it's not really zeroed in yet on what that impact will be.

We won't even, even in the normal year, we would not even begin to use California avocados until probably about April or May time frame.

So we have a couple of months here to see exactly how that plays out.

Now related to that when we do begin to use California avocados we will consider all, any alternatives depending on the quality of the fruit depending on the premium you have to pay.

We will consider things like passing on higher costs to our customers if we need to if it's high enough.

We'll also consider the quality of the fruit.

If the fruit is not to the quality standards that we expect we may consider suspending offering guacamole to our customers for some period of time.

We would rather not do that it's something that we will consider.

So we have a few months here before it really kicks in, and so we will wait until we get better facts and will consider alternatives at that time.

Just one last question on that tax rate looking out for next year (indiscernible) that to be close to that [40]% range?

No.

I would expect that the tax rate as we guided we were in the low 39% range for the full year.

We think we can drift that lower so we ended the year with the full year 39.3%.

We think we can chip away at that and so we think we will be somewhere in the 38s, maybe in the mid to high 38s and we think just each and every year we will continue to chip away at that rate.

Jeffrey Omohundro with Wachovia.

Just a follow-up on that commodity question.

I guess, first, would be on the chicken side what you are experiencing there what the outlook might be?

And as a follow-up to that how much pricing do you think your expectations would be to take in '07 in order to maintain margin?

We did see chicken prices jump.

We did see chicken prices increase in the fourth quarter and that's part of the reason why our food cost increased by about 80 our 90 basis points from the third quarter to the fourth quarter.

And we are still sensing and still hearing that there's more pressure.

The impact on the feed prices.

Corn prices, for example.

We are hearing it's likely to put more pressure not less pressure about chicken prices as well as steak prices.

We don't know what impact we may have to consider in terms of pricing.

As you know we would prefer (technical difficulties) in increased pricing when we had Food With Integrity opportunities.

And then we would look at the entire menu board at that time.

And so it's too early to tell exactly what the impact would be and what we might need to do from a pricing standpoint.

Is it fair to say the plan is to offset the impact through pricing at this time?

In the short-term I would say not necessarily.

I think if we sensed that there was long-term fundamental changes in commodity costs, and we felt like the Food With Integrity opportunities that we had, that they weren't going to happen either to the magnitude or in terms of the timing that we would need, too, to cover these higher costs, we might then consider going to the menu board but we are going to be patient in this.

We are not looking to protect our margins in any particular quarter and really most of what we are hearing, especially things like the California freeze, we think is more of a temporary thing.

In terms of the feed, we don't know if that is going to be temporary.

We don't know the magnitude so we are going to keep a steady hand with this and not move too quickly to go to the menu board to cover things that might end up being a temporary increase.

Rachael Rothman with Merrill Lynch.

Can you talk a little bit about as you grow your unit base over time, and I'm looking for kind of a longer-term comment, how we should think about the ability to get restaurant level margin expansion and where we may or may not see economies of scale in food cost or labor or how we should think about restaurant level margins longer-term?

Yes, I think what we're seeing this year is a lot of kind of this year pressure and things like the avocados, things like the increases in chicken feel like it is going to hit us this year.

We don't know how it is going to impact longer-term.

I can tell you we feel good about the 20.9% margin that we had that we hit last year.

We feel like on a longer-term basis, we may not be able to hold that margin this year because of all these pressures I'm talking about.

We feel like longer-term that through economy of scale to the restaurant level or from menu pricing ability we think that that's a fair margin for us to continue to deliver.

And then for your unit development next year, can you talk a little bit about where that is going to be centered and will it be in your existing markets or new markets or (MULTIPLE SPEAKERS)

Yes, just like the last few years.

Most of the openings will be in markets that we are already in and somewhere in the 10, maybe 15% range will be in new markets, markets we are not operating in today.

The new markets we are looking at are markets such as Philadelphia, Jacksonville, Salt Lake City and Birmingham, Alabama.

Any comments on how your new units are performing versus your overall portfolio in '06?

Well, I mean the new units in general are in that kind of 85% range.

The new markets are more variable.

But in general they are in that same kind of ballpark, perhaps a little bit lower but they are not significantly different from that range.

One of the things just on the margin, I wanted to make sure I did emphasize that we do think that, this year, the pressure on the margin will make it very difficult may be impossible to keep that 20.9% margin.

So that is something we feel comfortable with longer-term but there's a lot of short-term pressures -- some of which we've talked about already that we think will make it very difficult to keep just for the short-term.

Andy Barish with Banc of America Securities.

Just circling back on a couple of things.

On the menu board price increase, so right now you are running that slightly below 1% number?

I just wanted to confirm that.

The .8 that we saw was in the fourth quarter and what that is is that's fully lapping Food With Integrity rollouts that we did in the fourth quarter of '05.

So now we are starting fresh and so we had some additional markets that we just rolled in the fourth quarter.

Fourth quarter of last year and then early this year.

And then we think that that will Companywide have an impact of about .8% additional menu price that we expect to see in '07.

And then on Food With Integrity, anything big that you are working on or are you still kind of thinking market, market by market or several markets at a time?

Sort of both.

We are always working on finding smaller suppliers to help broaden our base of suppliers for all of our different food items.

We are also working with larger suppliers.

Certainly some of the larger suppliers we are working with, if we can come to arrangements where they will meet our protocols, then there are opportunities to make significant changes in the amount of Food With Integrity that we offer in 2007.

I would say particularly with regard to chicken.

I would be more optimistic that throughout 2007 we will be able to add chicken to some new markets but it really is too early to tell how broad that addition will be.

We feel quite confident that we are going to be able to add chicken in at least a couple of our fairly good sized markets in 2007, though.

Thanks and just one more as long as I have you answering.

On the Restaurateur Program for this year is that -- I know it moves around a couple of line items but is it a net wash or do you have some investments spending upfront for kind of Restaurateur overall in the income statement?

Yes overall a net wash would be the bottom line.

There's kind of two pieces.

The Restaurateur Program which is really the elevation of these elite managers into positions of prominence in the restaurant where they can make a career in that position and avail themselves of those significant bonuses, both from sales building and from people development.

And then there's also the new restaurant structure which I mentioned which is built to help stimulate and make more efficient the passage of crew members into management roles.

And if you look at all of that and you compare that and then you compare that and contrast that to what we used to spend on our MIT program, yes, it should be about a wash.

Steven Rees with J.P. Morgan.

Was wondering if you could provide some more color on the Restaurateur Program, perhaps how many managers are participating in that?

How many managers you think that could ultimately participate in it?

And how the economics perhaps differed from your typical store managers?

Yes.

How many, and how they differ right?

Steve and I just completed a trip last week down to Texas where we interviewed a couple more restaurateurs.

And we are pleased to accept them into the program.

We are up to 47 total restaurateurs now in the program and are receiving a lot of restaurateur resumes throughout the United States from operations directors and regional directors throughout the country suggesting that we interview a whole bunch more people.

So we will do that in the ordinary course of business as we tour the country looking at our restaurants.

We think during 2007 we are optimistic that we will be able to add a sizable addition to our restaurateur ranks.

It's unclear exactly what that number looks like right now but it will be sort of, maybe it grows by 50%, that kind of thing, in 2007 would sort of be a guess.

And the way they differ from normal managers we have a lot of excellent managers throughout the system and, unfortunately, not every one of our excellent managers is a restaurateur yet but that's really a function of identifying the top notch managers; maybe some additional training to get some of them sort of over the hump and just getting Steve and I out to meet with them and make sure that they are right for the program.

You know what we're looking for these restaurateurs is pretty simple.

We are looking for someone who can run an excellent restaurant which means everything from the very clean restaurant with top-notch customer service with good organization, with good handling of the cost and other controllables -- all of those things.

But perhaps most importantly we are looking for restaurants that have an excellent crew that sort of reflects the leadership of this restaurateur manager; and that excellent crew should be one that is being developed actively so that these crew positions, the crew folks are finding their way into hourly management roles initially and later into general management roles.

So the people who will be -- the difference between a very good manager and a restaurateur will be someone who has a lot of success at developing their people.

And giving us a deeper bench of managers for the future.

Thanks; that's helpful.

And then just on operational initiative I think you talked in the past about things like automatic team machines.

Can you just perhaps let us know where you stand on that initiative?

And if there is anything specific we should look forward to in 2007 perhaps on the technology side?

Sure.

Specifically with regard to change machines we installed those just very recently they have been installed in basically all of our restaurants.

And since the implementation was so recent it's kind of too early to fully understand the impact on throughput.

But early studies do demonstrate these machines are working.

So that's terrific.

We studied the first 200 restaurants that we put them in and we looked at the four weeks prior to and post implementation to see the effect of those machines.

And it demonstrated that on our busiest days during the busiest 15 minute periods there was an increase in throughput.

Solely as a result of adding these machines between one and four transactions per 15 minutes.

But it's important to note that these were our busier restaurants that we first put these machines into.

So that we really don't predict the effect of those change machines to be that strong across the board.

And additional transactions per hour don't always translate into net additional transactions of course; because you only see net additional transactions if people were otherwise walking away from the stores due to long lines.

There's an update with regard to what we've seen with regard to our change machines so far.

Bryan Elliott with Raymond James.

I would like to move on to the top of the income statement.

You, Jack, indicated certain reiterated the low to single digits, same-store sales expectation.

Is it -- would it be improper to infer from that, that despite all the weather you're comfortable with that as a first quarter projection?

Well, we are halfway through the first quarter and so I would not infer that that will be a first quarter projection.

I think we are comfortable, Bryan, with that as a full year projection but the weather is affecting us.

Especially the last couple of days.

We've had some pretty severe storms in Ohio and then in DC and New York.

And so we are seeing an impact.

So not knowing what the weather is going to be for the rest of the quarter, we would not and we have not in the past ever given specific quarterly guidance.

Long-term, though, for the year I mean we feel like that's the appropriate range -- the low to mid single digits.

Would it be, I mean -- want to get a little help on this I guess a little more help than that.

Let me try it this way.

If we get to once the weather washes out hopefully we are near the end of it or at the end of it with this last storm.

If we got within the range of expectations for the balance of the quarter, would we be able to see a positive quarter do you think or can you help us get some sense of where you are?

I mean it's been a tough period.

Well it has been a very tough period.

And boy, I don't know that I'm going to help you.

You're probably not going to be happy with my answer.

You know we generally don't give individual quarterly guidance.

And I think if we saw trends that were significantly different in the first quarter such that we thought we should change our guidance for the year you can expect to hear from us.

If the trends don't suggest that we need to change our annual guidance then we would stick by it.

So we feel comfortable with that for the annual but just not prepared to comment on what the first quarter might hold.

Fair enough.

Let me move on to the commodity side.

I know that there's increasing interest in investment activity from some of the larger protein suppliers out there into natural products.

Is it your sense that there will be sufficient supply increases?

That maybe the gap between commodity and natural proteins will be able to narrow some this year particularly given the commodity increases that are happening?

We really don't think so.

If anything, I would say sort of the opposite has happened in the sense that the demand for these natural meats is increasing dramatically.

And in fact that is really why is you see a lot of these bigger players really starting to look into this new way of raising meat.

Raising animals.

So we think that there will be more supply and we are very hopeful that there will be more supply because, obviously, our economic model gives us the advantage of being able to spend more on food costs than can many of our competitors.

So we will still be able to hopefully increase the spend of our Food With Integrity, but we don't think that as more supply comes on -- at least short-term -- it is going to decrease the cost over 2007.

Hopefully in years to come as the supply starts to sort of outpace the demand or at least catch up with demand maybe we will say some narrowing in the difference between commodity and the naturally raised meats.

David Tarantino with Robert W. Baird.

Just a question, Jack, to clarify the comment on the restaurant level margin.

What level of comps do you think might be needed to hold that in 2007?

It's a tough question to answer and in the past what I said is under normal conditions.

So when there aren't unusual things like the California freeze or if there aren't things like, for example, we don't think minimum wage is going to affect us.

But it that pushes the competitive marketplace for what we need to pay to attract and retain our best people maybe that will have an impact on competitive wages.

Without those kinds of unusual significant things like that we've always said we need about a 4 or 5% comp just to maintain margin.

But we're already seeing pressure on unusual significant pressure just as we went from the third to the fourth quarter which cost about 80 to 90 basis points on our food line.

And we feel that there's more pressure coming, not less.

So I think that without raising prices we would need a higher comp than that, a much higher comp than that.

We would not normally expect that we would have to cover unusual short-term swings like that.

So in terms of what comp to keep that margin, it would be higher than the 4 to 5.

And until we know what is going to happen with chicken prices and what is going to happen with avocado prices and things like that I wouldn't be able to narrow down a specific number.

Fair enough.

On the comps in Q4 if I'm reading this correctly, it looks like traffic may have accelerated slightly on a two-year basis.

If I'm reading that correctly, what do you think the driver of the healthy traffic in Q4 was?

Yes.

It probably did pick up a little bit because we lost a little bit of pricing.

We were getting 2.4% or so pricing throughout the year.

We only got 8/10 help in the fourth quarter and yet we help up.

There's not really anything we can point to that says why the traffic increased.

Weather was generally mild especially in the Midwest and Northeast and we did say some nice sales in those areas.

And so that might be part of it but it wasn't anything sudden that happened.

I would agree with you we probably picked that maybe a percentage point or (indiscernible) half or so in terms of (indiscernible).

We were really pleased with the results in the fourth quarter.

Mark Wiltamuth with Morgan Stanley.

Jack, just wanted to check in with you on where you stand on your cash on cash returns for new restaurants.

It looks like your [AUV] is running around 1.55 per store.

Just give us an update on your construction costs and how you think you are doing on cash and cash returns?

Yes actually our average restaurant sales volume for stores open 12 months or more as of the end of my December is 1,611,000 so it is actually higher than your figure and based on a cash level margin of around 20.9% and then an investment level which we finished last year.

Our 94 stores that we just opened averaged $860,000 but we expect in '07 that will return closer to that $900,000 figure.

So that puts our cash on cash returns in kind of that 37 to 38% range and that's for a new investment, based on the existing average unit volumes that we have today.

Then when we open up our new restaurants in kind of that mid 80% range it takes us a few years or so before the new stores will reach that existing store average.

I joined the call a little late so if this was already asked, I apologize.

But do you have any thoughts on why the Chipotle B shares are trading in at 6 to 7% discount to the A shares?

We would love it if you could tell us.

We don't.

All we do know is that far fewer shares of the B trades than the A. So it appears that there's a lot less liquidity but we have no answer and every chance -- every person that asks us that question we turn around and ask, "Can you tell us?"

We honestly just don't know.

We don't know what is causing the shares to trade at a much just to have much less trading volume and then to trade at a much lower value.

After all they do have 10 [boats] versus the As only have the one boat.

So we thought it would have been the other way around.

That was where I was coming out.

Well, when you figure it out could you please send us an e-mail, and let us know?

Thanks everyone for joining us today.

Thank you very much.

Thank you for your participation.

That concludes today's conference.

You may now disconnect.