Alex Spong - Director, IR Steve Ells - Co-CEO Monty Moran - Co-CEO Jack Hartung - CFO Mark Crumpacker - Chief Marketing and Development Officer.

Joseph Buckley - Bank of America Merrill Lynch John Ivankoe - JPMorgan Jeff Farmer – Wells Fargo Jeffery Bernstein - Barclays Sara Senatore - Sanford Brian Bittner - Oppenheimer & Company David Tarantino - Robert W. Baird Nicole Miller - Piper Jaffray Jason Left - Deutsche Bank.

Good day everyone, and welcome to the Chipotle Mexican Grill Second Quarter 2014 Earnings Conference Call. All participants are now in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like introduce Chipotle’s Director of Investor Relations, Alex Spong. You may begin your conference..

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 2014. It may also be found on our Web site 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, conference comp sales increases, the impact of menu price increases, trends in food costs, marketing spend and other expense items, effective tax rates, stock purchases 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 these 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 a discussion of these risks. Our discussion today will also include Non-GAAP financial measures, a reconciliation of which can be found on the presentation page of the Investor Relations section of our Web site.

I'd like to remind everyone that we've adopted a self-imposed quiet period, restricting communications with investors during that period. The 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 1st and continues 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 will now turn the call over to Steve..

The cattle spend their entire lives grazing on pastures or rangelands, eating only grass and forages.

All this beef meets or exceed the protocols we apply to our domestic responsibly raised beef, including that the animals are raised entirely without antibiotics, added hormones or other growth promoters and by ranchers whose practices are aligned with our standards for humane animal husbandry.

While our loyalty to American ranchers remains strong and a significant majority of beef continues to come from American ranchers, sourcing some grass-fed beef from outside the U.S. is an important step in Chipotle’s never ending food with integrity journey.

In the short run, the grass-fed beef we are using from Australia will supplement the responsibly raised beef we have been purchasing from around the U.S.

Overtime we hope that our demand for grass-fed beef will help provide an opportunity for more American ranchers to adopt a grass-fed program and help term grass-fed beef into a more mainstream product in the United States. We look forward to working with our supplier partners to meet this challenge.

During the quarter we also saw the beginning of the summer growing season around the country and with it the start of our local produce program. This year our goal is to use at least 20 million pounds of produce from farms that are within 350 miles of our restaurants.

Restaurants throughout the country may serve ingredients such as romaine lettuce, bell peppers, red onions, jalapeno peppers, oregano from local farms. We are also able to serve locally grown avocados, citrus or cilantro in some parts of the country where it’s possible to grow these ingredients.

Our commitment to serving locally grown produce is ultimately about serving the best tasting food we can.

Quite simply, produce from local farms can arrive closer to the time it is harvested and results in fresher produce but there are other benefits as well including a reduction in food miles and economic impact to rural communities throughout the country.

We are also making progress with the roll-out of Sofritas, our vegan menu item made with braised organic tofu. As of now Sofritas is available in about 1,000 restaurants.

When we introduced Sofritas, our aim was to create a dish that would appeal to not just vegan and vegetarian customers but all of our customers and that is very much what we are seeing right now. So now Sofritas account for about 3.5% of our entrees in the restaurants where it’s available.

And what’s exciting is that we are finding Sofritas is been ordered by people who normally eat meat. Barring any supply limitations, we expect to have Sofritas in all of our restaurants by the end of the year.

While our food culture is one of the key drivers of our business, many customers, including a number of our own customers do not fully understand the issues of the food system that still heavily influences the decisions we make.

One facet of our overall marketing program is aimed at encouraging people to be more serious about their food and where it comes from. We believe that the more people understand these issues, the more they will make better choices about the food they eat.

Through our day long food and music Cultivate festivals and through programs like our recent online satire series Farmed and Dangerous or short films such as last year’s Scarecrow, we look to draw people into the conversation about food and where it comes from in a way that makes them more curious about the food they eat.

We just held the first of three Cultivate festivals planned for this year in San Francisco with the remaining events scheduled for Minneapolis and Dallas and the response was great.

Our research shows that attendees loved the overall experience including the music, celebrity chef demonstrations, the Artisan food and brewer halls and the attractions designed to educate people about issues around food. And that an overwhelming majority of them would attend the events again.

Two of our most recent content marketing programs Farmed and Dangerous and Scarecrow were just awarded 12 Lion awards between them at the Cannes Lions, the world’s largest competition for creativity and communications.

While we don’t produce these programs to win awards, the awards demonstrate the breakthrough of these produce programs and the response customers have to them. These programs have been very effective tools for us to engage with people in way that is first and foremost entertaining but that also makes them more curious about the food they eat.

A part of our larger marketing program which also includes traditional advertising and local market programs, this approach is helping us build our brand in a more unusual way than traditional fast-food formula which relied heavily on price promotions, limited time offers and other gimmicks to bring customers in.

We believe that our approach to marketing helps us build a deeper relationships and loyalty with our customers rather than just driving transactions in the short-term. To keep our restaurants top of line, we continue our traditional advertising through the quarter.

Currently we have national and local advertising focused on communicating the use of better quality, responsibly raised ingredients that are prepared with care. Response to our advertising is encouraging with most of the recent research showing the increase in ad awareness and purchase intent during the campaign.

This advertising will continue to run through much of the summer and into the fall. The progress we are making on our journey to change the way people think about and eat fast food is defining Chipotle in terms that unique within the industry and allowing us to provide exceptional returns for our shareholders. I'll now turn the call over to Monty..

Thank you, Steve. It makes me proud to see our restaurant teams deliver these spectacular results in the quarter at a time when our customers have more dinning choices than ever before.

Yet more and more customers are choosing the Chipotle because the top performing managers and their crews provide an exceptional dining experience that keeps our customers coming back and leads them to tell others about their fondness for visiting in Chipotle.

We have amazing people culture and the foundation of that is a group of terrific people who all believe in the same dining principal, that each of us will rewarded based on our ability to make the people around us better.

Our people are committed to our mission to change the way people think about meat fast food and they understand that the only way we will accomplish this is to have a special culture, a culture of top performers, who are empowered to achieve high standards. This is the restaurant true culture.

It is the focus of every focus of every person in this company, enabling us to create a terrific dining experience and produce outstanding results.

The strength of our culture allows us to have exceptional customer service, delicious food and an inviting atmosphere in our restaurants, all of which leads us to a strong unit economic model, while also setting us up for continued success, because these top performers strictly rise into broader leadership positions within the Company.

Throughout the quarter we continued to promote new restaurateurs, the elite managers who best demonstrate what our culture is all about.

If you include field leaders who have come through The Restaurateur program, those who have been promoted to a prior team leader or team leader even team director positions, we have more than 525 of these extraordinary leaders now overseeing about 70% of all of our Chipotle restaurants.

During the quarter, we also saw some significant progress of Restaurateurs moving into field leadership positions. We promoted five field leaders to team director positions. Jason Oaks, Karen Grayhall, Ben Castillo, Peter Garllio [ph], Emily Amdares [ph].

And with these team director promotions, we also promoted nine leaders into present team leader positions. So all of us continue to build and strengthen our people culture. We’re going to host our All Manager Conference in September and as we host every two years, to help educate and inspire our restaurant managers and field leaders of teams.

This year’s All Managers Conference will include all of our GMs, restaurant stores, field leaders and many people from our support departments as well some key suppliers and partners. In all, there are around 2,500 people who will attend the conference to support our commitment to building culture of empowered top performance.

The conference provides one of the best opportunities for our teams to learn more about how we plan achieve our mission to change the way people think about and eat fast food and how they can rise up to be the leaders that are going to take us there.

This year’s conference will feature members of our leadership team discussing our vision, the importance of our people culture and unit economic model.

We also help our managers develop and strengthen their culinary capabilities, teach them to create Restaurateur cultures, teach them to recruit, hire and welcome only top performers and teach them more about why food integrity is so unique and important. We will also introduce them to the ShopHouse and Pizzeria Locale restaurants.

Finally we’ve also added an award ceremony this year celebrating some of our team members who have made outstanding contributions to Chipotle’s culture. These people continuously raise the bar in our performance and we are excited to allow their stories to be an inspiration to the rest of the audience of aspiring Restaurateurs.

If past conferences are any indication, I am certain that this will leave our more passionate about our vision, more knowledgeable about our business and more committed to developing the people around them and strengthening the culture in their own restaurant and with a stronger belief in what we can all accomplish as a team.

Over the years, I believe the All Managers Conference has been one of our best tools to educate and inspire our managers and to send all of our teams away with every new sense of purpose. While we continue to build better historical cultures in our restaurants, we are very encouraged by our teams arising to meet challenges.

One of the key operational advantages that we constantly seek to improve is our throughput. Good throughput is one way of providing great customer service and it’s also well with our team to have top performers and power to achieve high standards.

So it’s a great sign that we were once again able to make substantial gains on this important measure of great customer service during the quarter. This quarter we posted increase of eight transactions during the peak lunch hour and eight additional transactions also during the peak dinner hour compared to last year.

What’s truly impressive is that even though we have long line to both lunch and dinner, we are able to drive a 9.4% transaction comp during our peak lunch hour and a 13.3% transaction comp at our peak dinner hour through better throughout.

These are the customers who might easily walk away from our long-lines to dine elsewhere except that they know that our excellent teams are geared up and ready to serve them a delicious meal quickly. Overall, we would not be able to achieve such phenomenal same store sales without these dramatic improvements in throughputs.

We believe the improvements we are seeing in our throughput is a result of just a few key things. First, having more top performing managers and teams. We know from experience that top performance get more done in less time than low performers and hold themselves to a higher standard.

Second, by focusing on the four pillars of great throughput, using a linebacker during peak hours, proper mise en place, having aces in their places and using a dedicated expert during peak times; and third by auditing and reporting our field leaders how well their teams are executing the four pillars and how they can improve.

Of course great throughput does more than move people to our restaurants. It also translates into better customer service since the same thing that leads to great throughout also creates a very nice customer service and make our customers happy. Our performance for the quarter also benefitted from growth of our catering business.

For the quarter, catering sales were 1.6% of revenue, compared with about 0.3% a year ago same quarter and catering sales benefited by around 50 basis points in the second quarter from the seasonal nature of the stronger sales we have in May and June for special events like graduation parties.

In markets we're catering as an operator for at least a year, sales continue to build and averaged about 2% in the second quarter. We're encouraged to see catering continue to grow and that we’re building greater customer awareness and customer loyalty over time. Finally I’d like to provide a quick update on our development plans.

We remain very much on track to deliver within our guidance to open a 180 to 195 new restaurants this year and we have a very solid pipeline of potential sites going forward.

We expect that about 70% of our restaurants this year will be in proven markets, with about 15% in developing or established markets and another 15% in new markets, including locations in Duluth, Texarkana, Mobile and Charleston, West Virginia. Looking forward we have a strong pipeline of potential sites going into next year and beyond.

Overall we’re very pleased with the quarter and our performance year-to-date and believe that we have pieces in place both in terms of our food culture and our people culture to continue to deliver an exceptional value experience for our customers and strong results for our shareholders. With that I'll now turn the call over to Jack..

Thanks, Monty. We’re pleased to report another quarter of very strong financial results. In fact our second quarter results represent one of our strongest sales comps as a public company, second only to the first quarter of 2006, our very first quarter as a public company.

Back then had under 500 restaurants averaging about $1.5 million in sales and while the 19.7% comp back then was impressive, we’re even more proud of the 17.3% comp this quarter, considering we now have nearly 1700 restaurants, averaging $2.3 million in sales.

In fact on an annualized basis a 17.3% comp would result in adding an incremental sales layer that is nearly equal to our entire company sales back in 2005, the year before our IPO.

But more importantly than the comp itself is that we achieved this result by continuing to focus on building a special food and people culture and a strong business model, which results in providing exceptional dining experience to our guests and creates shareholder value for our investors.

Our comp of 17.3% in the second quarter helped to elevate our average sales volumes for restaurants opened for at least 12 months past $2.3 million for the first time, and the comp also helped push our sales above $1 billion in a quarter for the very first time.

Overall sales for the quarter increased 28.6% to $1.05 billion, driven by the comp and from new restaurant openings. Year to date sales were $1.95 billion, an increase of 26.6%, including a comp for the year so far of 15.5%.

The quarter comp was primarily driven by an increase in customer traffic, along with an increase in our average check, which includes a 2.5% benefit from our menu price increase rolled out during the quarter.

Average check in the quarter was up about 5% from last year with half of this increase coming from the menu price increase and the rest of the check increase coming from catering, an increase in the group size per transaction along with additional sides such as Chips & Guac.

Our total online catering and fax orders reached an all-time high of 6% of sales in the quarter with catering adding about 1.6% of sales. Seasonally the second quarter is now strongest for catering orders as Chipotle’s been a big hit at the graduation parties this time of year.

So while we’re pleased to see catering rise to 1.6% of the quarter, it’s likely that it will taper off in the next few quarters. Our objective in raising prices was to pass along some of the inflation we absorbed over the past three years while continuing to charge fair prices in order to remain accessible or affordable to our loyal customers.

We thought a very thorough process and reviewed our menu prices on a market-by-market and item-by-item basis, compared ourselves to local competitors in each market and considered the amount of actual and expected inflation for each of our ingredients and other factors such as the cost of doing business in each market.

Because we rolled the price increase throughout the quarter starting in late April and finishing in late June, the effective price increase of 2.5% in the quarter reflects only a partial impact. The actual average increase was about 6.25% to 6.5%, based on the assumption of little or no trade down or resistance.

Though the average increase was 6.25% to 6.5%, the increase varied by market and by menu item. So for example, because of the significant recent inflation in beef and expectation that beef prices will remain elevated for the foreseeable price, steak prices were raised by about 9% on average, while chicken prices were only raised about 5%.

We expected some customers would trade down from steak to chicken as a result of a higher steak premium and we have in fact seen some customers shift from steak to chicken.

Aside from the slight shift from steak to chicken, our customers have generally responded well so far, but it is early and we’ll continue to watch for resistance in terms of fewer customer visits as well as customers trading down. We’re pleased to see our strong underlying sales momentum continue into July.

The comparisons are tougher in the second half of the year as we compare two comps of 6.2% and 9.3% for the third and fourth quarters respectively. So we expect our underlying transaction comps be lower in the third quarter and fourth quarter because of these tougher comparisons.

But assuming we experience little or no price resistance, we still expect comps well into the teens for the rest of this year. As a result, we’re raising our comp guidance and now expect our sales comp to be in the mid-teens for the full year.

We opened 45 new restaurants in the quarter and 89 for the year so far, which brings our total company wide restaurants to 1681 at the end of Q2.

We still expect to open between a 180 and 195 restaurants for the full year as our development pipeline continues to look very solid and we continue to see an uptick in new construction with about 54% of our mix being in new construction in 2014 versus just 43% last year during 2013, and that’s helping our real estate team to find attractive new locations.

Our new restaurants continue to perform well very and as a result we now expect opening sales volumes in the $1.7 million to $1.8 million range, which is up from previous range of $1.6 million to $1.7 million.

These new restaurants opening volumes along with our current count trends and strong margins allow us to strengthen our already industry leading unit economics and returns. Restaurant level margins for the quarter were 27.3% or a decrease of 30 basis points from last year, and year-to-date margins were 26.7%, which also decreased by 30 basis points.

Higher food cost and higher marketing cost more than offset favorable sales leverage in labor and occupancy lines for both the quarter and for the year. Our food cost in the second quarter up 10 basis points sequentially from Q1 as the menu price increase had the effect of reducing our food cost by about 80 basis points in the quarter.

Despite the menu price increase, our food cost were 150 basis points higher than Q2 of last year due to higher cost for our beef, avocados and dairy.

Sale prices leveled off a day after peaking in April and May, but they remain at an elevated level compared to last year or 20% higher due to limited supply from some of the smallest herd sizes in over 60 years while demand for beef remains high. So we expect elevated steak and barbacoa price to continue for the foreseeable future.

The net food cost for 34.5% which is up 150 basis points from last year. We expect underlying food cost before the benefit of the menu price increase to remain pretty stable over the next two quarters.

But since the next two quarters will benefit from the entire menu price increase, food costs should be about 100 to 130 basis points lower than in Q2, depending on the effect of any product mix shifts. Labor costs were 21.8% of sales in the quarter, a decrease of 90 basis points from last year and year-to-date labor costs were down 80 basis points.

Labor leverage was driven by higher sales volumes, partially offset by stronger management and crew staffing ratios, which contributed to some labor efficiencies along with normal wage inflation. Occupancy cost declined 50 basis points from last year for both the quarter and the year due to favorable sales leverage.

Other operating costs increased 40 basis points from last year from higher marketing promo and fund raiser costs. Marketing cost increased to 2% of sales in the quarter, compared to about 1.5% last year, and combined promo and fund raiser costs were about 20 basis points.

We expect marketing to be about 1.6% overall for 2014 and will remain elected in the third quarter as we continue our better ingredients advertising campaign across the country in over 30 markets and 1000 restaurants.

The campaign will wrap up in most markets by October and will help customers understand that the use of sustainably raised high quality ingredients, which are prepared with care result in a more wholesome and better tasting meal.

Other marketing events will also include our Cultivate festivals that will be held in Minneapolis in August and Dallas in October. In the quarter, G&A was 7.1% of revenue, higher than last year by 90 basis points.

The increase was primarily due to higher non-cash, non-economic stock based compensation expense and to a lesser extent from higher bonus cost. Stock comp was about $34 million which is up $15 million from last year, a small portion of which is in the labor line.

The increase over last year is due mostly from higher stock price along with more of the senior management team qualifying for retirement, which accelerates the expense recognition. The second quarter also includes a catch-up for long-term incentive performance shares of about $1.6 million.

These performance shares which were issued in 2013, by now expected to be fully realized during the earn-out period based up our strong financial performance to day and where we project to finish at the end of the three-year measurement period.

As a perspective, our underlying G&A without the stock comp was relatively flat at 4.1% in Q2 of this year compared to 4% last year.

G&A costs for the first six months of 2014 were 7.3% of revenue, an increase of 110 basis points, and again was primarily due to the higher non-cash, non-economic stock based compensation expense and to a lesser extent from higher bonus cost.

Year-to-date non-cash stock comp was $62 million, which is up $27 million from last year, and again the increase over the last year was mostly due to a higher stock price and more of the senior management team qualifying for retirement.

Stock comp is still expected to be around $98 million for the full year, which means it will decline significantly over the next two quarters. As a result, although G&A year-to-date is 7.3%, we expect to finish the full year under 7% of sales.

The third quarter will include our biennial All Manager Conference event, which will cost about $9 million and will include around 2500 Chipotle employees, including all of our GMs and all of restaurateurs.

Our effective tax rate for the second quarter was 39.1% for the full year and we expect the rate to also be around 39.1% and that compares to the 38.7% rate in 2013.

This rate increase is the result of the expiration of the work opportunity tax credit and the R&D credit that benefited us in 2013 and is partially offset by a lower estimated state tax rate.

Diluted EPS for the quarter was $3.50, an increase of 24.1% from last year, but our underlying economic earnings growth is stronger than implied in EPS growth as our net cash provided from operating activities grew by 35%.

And of course of earnings growth potential is even greater considering we have absorbed three years of food cost inflation, while less than half of the recent menu price increase has flowed through in the current quarter.

So we're pleased that our business model is stronger than it’s even been and we continue to have the ability to add significant additional shareholder value in the future. During the quarter, we repurchased over $37 million of our stock or over 72,000 shares at an average share price $517.

This is more than triple the number of shares purchased in the first quarter as we were opportunistic when the share price declined early in the quarter. At the end of the second quarter we had nearly a $140 million less than our share buyback program previously approved by our board.

And over the past five years we’ve invested over $650 million and purchase over 4.1 million shares at an overall average price at about $159 a share. We finished the second quarter with over $1.1 billion in cash and cash equivalents along with 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’ll continue to develop additional growth options by planting seeds including ShopHouse, Pizzeria Locale and Chipotle outside of the U.S.

and we expect each of these proceeds will provide attractive value enhancing growth investments in the future. In the meantime we’ll continue to optimistically repurchase our stock to enhance shareholder value. Thanks for your time today and at this time we’ll be happy to answer any questions you may have. Operator, please open the lines..

Absolutely. (Operator Instructions) We will take our first question from Joseph Buckley with Bank of America Merrill Lynch..

I guess the question about the transaction can increase being so strong, I know a couple of quarters ago you spoke about new diagnostic tools to help the multi-year supervisors analyze restaurants and help the managers become restaurateurs faster.

Is that kicking in in a significant way, or are there other factors that you'd point to when you look at the tremendous transaction growth?.

Thanks Jo.

I’d say it is kicking in, in the sense that when -- if you look at my opening comments, I talked about how a number of things are moving throughput and as we always say that the most powerful thing we’re doing to move throughput along is just having more restaurateur teams and more teams of really top performing teams that were super-super empowered and so that’s kind of number one.

I would say that the restaurateur diagnostic tool that we rolled out is one of the very powerful tools that's helping our field leaders connect very directly with managers and helping those managers understand very clearly what they need to do in order to develop those teams with top performers that are very, very empowered.

So the teams in our restaurants are getting stronger as a result of that tool and are much more aware of what the opportunities are for them and as they build stronger teams, that's the number one thing adds horsepower to our ability to generate great throughput.

But on top of that, we continue also Jo to measure the incidents by which we’re achieving the four pillars of throughput in our restaurants. So we have reports to go out to our field leadership that let them know how their batch of restaurants is doing in terms of achieving the four pillars.

And that continuous measurement and awareness on the part of our field leadership has really helped them to continue to move the needle on transactions. So I would say those two things are the things that have helped us the most in continuing to improve and feed up in terms of that very important aspect of our customer service..

Is your peak hour throughput at all-time record levels now?.

Yes, it is. We’re the fastest we've ever been at lunch time and at dinner time but the average throughout the entire day are speeding up as well.

So we always talk about lunch and dinner because that’s the time that it’s hardest to speed up but the reality is the percentage comp that we’re getting at the other times of day that aren’t peak lunch and aren’t peak dinner are actually better.

So during the shoulder hours, after lunch and so forth, we’re actually getting a better comp than our comp during those periods of time, but we’re very pleased that lunch and dinner are still moving on at a clip that's very near our overall comp..

We’ll take our next question John Ivankoe from JPMorgan..

If the question was on advertising and promotion; firstly if you think you have the optimal spend or it might be a potential for you spend more money in the future -- it's hard to imagine but you get an even bigger sales lift than what you’re currently getting.

And that's a question not just in terms of the awareness of what makes Chipotle special differentiated to your existing customer but how big of a addressable customer market do you see out there that currently maybe hasn’t experienced Chipotle, which presumably might do so under the influence of marketing..

If the question was on advertising and promotion; firstly if you think you have the optimal spend or it might be a potential for you spend more money in the future -- it's hard to imagine but you get an even bigger sales lift than what you’re currently getting.

And that's a question not just in terms of the awareness of what makes Chipotle special differentiated to your existing customer but how big of a addressable customer market do you see out there that currently maybe hasn’t experienced Chipotle, which presumably might do so under the influence of marketing..

John, we have our Chief Marketing and Development Officer, Mark Crumpacker here today who can answer that question directly..

Sure John. With regard to the marketing spend, I think it’s pretty well optimized but our marketing doesn’t rely on typical promotions and new menu items like most fast food restaurants do.

So the type of advertising that we do is just top of mind awareness which we do at about 34 of our main markets around the country and that’s done through billboards and radio ads and there's really only still much of that type advertising that’s needed to raise the awareness to the level that we want.

The real heart of our advertising lies in the other activities which are our local marketing program which are getting people into the restaurants through fund raisers and our cultivated better world marketing, which is where we’re really connecting with people on a more emotional level that really creates long term brand value.

So we really like the balance that we have between those things with regard to the spend. To answer the second part of your question, we think there is a big market of people that have not either been to Chipotle or don’t come to Chipotle regularly.

When we do our research, we find -- it always surprises us because the brand enjoys really high general awareness.

We're always surprised at how few people really are regular customers and so there is a tremendous amount of upside for us but as I mentioned earlier our strongest marketing is the type that connects with people emotionally and so we're going to continue to invest in the type that we think is going to create word of mouth, so that one customer tells their friends and so on and so forth and that we really think is the best approach..

We will go next to Jeff Farmer from Wells Fargo..

Just following up on that theme there, I was curious if you guys could share with us how your demographic has changed over the last several years across age and many other relevant metric and just along the same lines, getting to John’s question, I’m just curious if you guys have an accurate read on our frequency trends from some of these core guests? Are they doubling down on their visitation? How should we think about again some of the heart of that traffic increase over the last couple of quarters?.

Well, with regards to our demographic, we haven’t seen a large shift. At Chipotle of course, we have a very, very wide range of folks that come in to the restaurant. One thing that I have noticed in the research lately is that we've had an improvement in the team market across all different economic backgrounds.

So we have strengthened and are actually according to our Piper Jaffray survey, the most popular brand with male teams, which is up from the same quarter a year ago.

So of course we are really happy about that because those young kids become lifelong customers and they bring their kids and their parents and their friends and their parents to the restaurants as well.

What was the second part of your question?.

I am sorry, read on frequency in terms of core customer.

What that's looked like over the last several years if you're seeing that number increase pretty materially?.

Actually we haven’t seen a huge increase in frequency of our core customer. What we have seen is increase in the types of customers that are coming in as I mentioned earlier. We are doing better with the team market.

And we think what’s happening is we're actually just expanding our customer base overall and I can’t contribute to significant increase in frequency from a core audience..

We take our next question from Jeffery Bernstein from Barclays..

Just a question as we think about the units and talking about the strong pipeline in ’14, I think you said 70% of those units are going to be proven markets. Just wondering as you think out, now that we're more than halfway through ’14, as you look to ’15, it sounds like that pipeline continues.

I’m wondering whether as you look at it, what the limitation might be or if there is none at all? Obviously you want to maintain a steady pace but I’m just wondering whether people or real estate that would be the gating factors just as you consider, the strong acceleration and traffic trends that we have seen?.

Well, yes. Those are both the gating factors and we actually talk about it more than you would imagine in terms of which might be the gating factor and I think that we feel really good about that type of real estate we're seeing out there.

Like Jack said we were staying at 53% to 54% of our restaurants are now in new construction and that number has been ticking up over the last I would say prior eight to 12 quarters. And that enables us to find more real estate.

And that being said, there is more competition for some of those new sites that are coming out and so that's something that we're always watching.

But I think another thing that we keep finding is -- and we found this to our A model strategy but we find it now as well, is that Chipotle is welcome more places, in more locations than we ever would have though before and so we are able to take a little bit more risk in going into some trade areas that are a little bit off the beaten path.

And so when we look in the outer years, I think we are at a higher confidence level than we have ever been in terms of Chipotle’s ability to be successful in all of the markets throughout the country and beyond, even places where -- that just weren’t on our radar screen a few years ago, some of which I mentioned in my opening comments as some of our new markets for the next year, excuse me, for this year and the next year.

So, we are able to go further and further afield, and of course, that brings up the issue about how we're doing on the people pipeline and right now our ratios of field leaders to restaurants is lower than it's been before and what I mean is that each field leader has fewer restaurants they're overseeing.

I think for a while our field leaders got stretched a little thin and now we've reversed that trend by promoting a lot of people from within and also hiring some others on to that team and so that’s been I think a good move which is helping get more attention to the development of managers from crew positions who will be able to help carry us forward.

So it’s a constant struggle to make sure that we're pushing forward responsibly on the development of leadership which we're always doing as best we can and also sort of pushing to find the very best real estate we can, but not pushing so hard that we would compromise our standards in terms of the type of restaurants we like to open.

But I think given the new unit volumes that Jack referenced in his opening comments, those new store opening volumes are very, very impressive, higher than they've ever been.

And that gives us -- that along with the kind of teams we're seeing in our restaurants gives us confidence that we're developing Chipotle and opening new restaurants at a very responsible pace.

So while we won’t say what we're going to do in the outer years yet, we feel very optimistic about our chances of continuing to build growth in a very strong way..

We will take our next question from Sara Senatore from Sanford..

I just have a couple of follow-ups. The first is on sort of thinking through the comps. You talked about some of the marketing and clearly I think the catering and also obviously throughput. So people are coming because the lines are shorter.

But one of the things that I think we heard from Jack is this idea that it's compared to a tougher sales momentum. Adjusted for that we wouldn’t expect transaction comps to be the same.

I think we have kind of heard something similar in many of the recent quarters and I'm just trying to understand if it’s kind of natural conservatism or if we should be thinking about a driver that is somehow different in the coming quarters versus what we have seen really accelerate traffic in recent quarters, be it marketing or may be the ability to just improve throughput, maybe it gets somewhat diminished.

So, just trying to understand if you could drill down a little bit more into the transactions and how to think about them?.

Yes, I will start with the last part of your question where you said -- where you sort of made this assumption that the gains and throughput might diminish over time. I tell you, I don’t accept that as being something that’s going to be true in the near or even medium term, perhaps not even in the long term.

And we've been able to continue to improve throughput now consistently and I think that as I said earlier in response to your question, the things that drive throughput the most are more restaurateur teams and better teams in the restaurant and also really measuring and teaching our field leadership about which aspect of the four pillars of throughput they might be missing out on.

So, I think there is a lot of room to grow that and one thing that gives me confidence about that is when we measure our 15 minute transaction counts, that which we can achieve in our restaurants during a 15 minute period rather than a whole hour, that number is higher.

If you multiply that times four to cover a whole hour it’s much higher than our average throughput number is, which shows that every restaurant basically has a skill to deliver throughput at a much higher level than they are currently doing.

And so the fact that our restaurants have that skill and the fact we continue to see those numbers increase makes me confident that throughput is something we can improve on for a long, long, long time but that’s only one aspect of what makes up our comp and certainly an important one but you mentioned other things, catering, marketing.

May be Jack can talk about the rest of your question..

So, I think the essence of your question is, is our comp forecast too conservative because we're saying that we would expect the underlying transaction to decline as we go up against tougher comparisons in the next two quarters.

The challenge with predicting what our sales are going to be, what are transactions are going to in the future, is as Mark mentioned we don’t have things like limited time only. We don’t have special promotions. We don’t have new products.

So we don’t have anything that we say okay, in the third quarter, in the fourth quarter, we're going to do something, some kind of a gimmick or some kind of marketing emphasis to try to get people in. So we would tell you that we'll continue the momentum.

And we don’t spend a ton of time, I will tell you, trying to predict what the sales are going to be.

We spend most of our time trying to engage with our customers, trying build the strongest teams we can to create empowered cultures in our restaurants, so that when marketing encourages people to come in to restaurant, when a friend say hey, you ought to try Chipotle and when new customers show up at Chipotle, that they have an extraordinary experience and if that happens they are more likely to come back.

Now, I hope that we end up talking a quarter or two from now and we look back and say, yes, it turns out it was conservative. But for us to say that we will continue momentum on top of the 6.2% in the third quarter, the 9 point something percent in the fourth quarter would be difficult to do at this time.

But it’s more of a math challenge because of the way we do our business than anything..

Okay, and just, what if I could throw in one question about ShopHouse and Pizzeria Locale.

Does the fact that your core Chipotle business is so strong and you are working so hard to get the right people in place, does that have any impact on your ability to grow those or if they can all be kind of grown at the appropriate pace at the same time?.

It really doesn’t impact our ability to grow the teams at those restaurants. When we opened the first ShopHouse and subsequent ShopHouses, we did initially seed them with some of our very talented restaurateurs and crew from Chipotle.

But really most of those people hired as brand new employees to ShopHouse other than a few of the top management people. The same is true with Pizzeria Locale. It’s a group of people who, for the most part have never worked at Chipotle.

And so these concepts like Chipotle Europe as well are all seeded initially with a few Chipotle people but really are growing it completely in an organic fashion, all striving towards that restaurateur culture and all trying to hire top performers who they believe can be the future of their restaurants.

So, you can look at every single restaurant we opened. Each and every one is a potential sort of people thump to create leadership for the rest of the organization and so growing more restaurants really doesn’t diminish the amount of leaders we have but gives yet another opportunity to increase the amount of leadership we can choose from..

We will take our next question from Brian Bittner from Oppenheimer & Company..

Jack, you talked about the opportunity to accelerate EPS growth as the pricing, the full effect of the price increase rolls in starting in the third quarter. You’ve got a bit less than half of the benefit from your pricing rollout this quarter. Obviously, you start getting the full benefit starting in the third quarter.

And you talked a little bit about the food margin dynamic. I think you said 100 basis points or more benefit in the third quarter versus the second quarter.

But can you just walk us through the other line items within the four walls? And as we think about the 27% restaurant margin you put up this quarter, maybe you can help us craft and understand how that changes as the full effect takes place starting this quarter?.

Yes, it depends Brian on if we see any resistance. So if we see any resistance in fewer customers coming or if we see customers trade down, where they're not buying as many sides, now buying as many drinks, not buying Chips & Guac. So far we're pleased with what we’ve seen. We haven’t seen much trade down.

We’ve seen -- in my prepared comments I talked about the fact that we’re seeing some -- a slight shift from stake to chicken. But if that continues, we still have another -- I guess it’s between 3.75% and 4% additional effects of the menu price increase.

So if there is no more trade down and let’s say at that 3.75%, you could see another 250 basis points, maybe 275 basis points in additional margin. So if you take all the rest of the line items, you could see some significant additional margin. I mentioned in just the food alone.

But the rest of the P&L is leverageable as well as the rest of the menu price increase flows through..

So not to be overly bullish here, but you do see an opportunity in the past to get to 30% restaurant margins, sometime in the second half, possibly by 2015?.

If all goes well. Right now our projection is that we’re not going to see much more food inflation that we're not going to see much more in terms of trade down, either loss transactions or trade down because of the price increase.

And so if we don’t see anything unusual that happens over the next few quarters, yes, just the pure math of allowing that price increase flow through is going to push us up close to if not at 30%. That’s definitely a distinct possibility..

We will take our next question from David Tarantino from Robert W. Baird..

My question is really about some of the commentary you made earlier on the unit growth and Monty, I think you mentioned that you are finding new places that you never considered going in the past that are working now. So I was wondering if you’ve given any recent thought to what the long-term unit opportunity for the Chipotle in the U.S.

is? I now you had stated some goals around the time of the IPO, but it sounds like you might be thinking something higher than that at this stage..

Yeah, David, afraid to bore you with my answer because you've heard it before. It really hasn’t changed much and that is that given the numbers we came up with, just extrapolating from how we view the top 150 metropolitan statistical areas even at the time of the IPO, those numbers get pretty quickly up in that sort of 104,000 sort of restaurants.

And we do believe that we can build a lot of restaurants in the market that weren’t on that top 150 metropolitan statistical areas that we started to do so. But we don’t spend a lot of time modelling exactly how many there could be because that number of 4,000 plus restaurants, that’s a number we guided towards this year of 180 to 195.

That's sort of 15 to 20 years out. So obviously there is a lot of room for growing at that pace before we’d ever get near that number. But I would tell you that I have a level of confidence without having going out and done a study as to whether that number is another 500 or another 1,000 more than we used to think it was.

I think we that we have a lot of confidence that as we approach -- as we get closer and closer to that number that will be a moving target because the acceptance of Chipotle’s brand has exceeded all of our expectations and I would say that in terms of -- if you look at some of the markets that we used to call developing markets and in fact the markets that we even thought were failing markets to be quite honest like California some years ago, California went from a developing market to a never mind we won’t build in California market and then overnight became a proven market and now is the state in which we have more stories than any others -- far more stores than any other state and it kind of feels like shooting fish in a barrel.

We seem not to be able to miss in California. So that surprise was wonderful.

But we’ve seen that same thing happen in a lot of other markets throughout the country that used to be relatively weak for us, markets like Indianapolis and some of the markets in Ohio that are now on fire that we used to think were mediocre and in Indianapolis where we now have better than average unit volume restaurants which was something that we used to think was not really working for us because among other things Qdoba had gotten there many years before us and had quite a few restaurants before we put our first.

And so it's just every market that we’ve been concerned about historically has with the passage of some time and often not much time become a market that not only aren’t we concerned about but becomes market that becomes a huge development market for us and obviously Californian being the most powerful example but there are dozens of others.

So rather than model exactly how many restaurants that can be, we derive huge confidence in going into these markets that used to be developing markets and just hitting the ball out the park and having great volumes markets, like Philadelphia I’m just thinking, where we went in sort of a little nervous at first and now doing really, really, really well.

So, yes we feel good about where we’re going and we don’t feel like there’s anything in our way in terms of being able to grow at a sensible but also speedy pace over these next years and we’re excited about what we can accomplish..

We’ll take our next question from Nicole Miller from Piper Jaffray..

I was hoping you could touch on the new formats or format that you have, the opportunity to open some equipment improvement you’re making, lead certifications, things of that that nature.

I’m trying to understand if you view those as defensive maintenance like investments or if potentially there's a consumer facing nature to those investments and maybe that’s also helping drive traffic.

Can you help us think about that please?.

Nicole, this is Jack.

So when you say new formats, can you clarify what you mean by that?.

For a while now you could have a smaller format, different configurations, upgrades, things of that nature..

You mean like a model?.

Yes..

We’re giving a lot of thought to that and I think one thing that’s generated some of those thoughts is some of the higher occupancy costs that we see in Europe and how it may be prudent for us to try to take some much smaller pieces of real estate in France or England where the occupancy cost is super, super high.

And we’re looking at some sites right now in the United States as well where these stores would be really, really, really small and where we’d very-very seating and I think that there’s a number of reasons why we think that that is a good idea, one of which is that, whereas we used to be mostly a dine-in restaurant 14 years ago, and I'd say about eight years ago we were 50-50 dine-in, take-out, now we’re about two thirds take out.

So I think that the seating component of what we do has become a little less important as more people know who we are and also we’re more comfortable with it now, now that the brand has been more established.

So we aren’t as worried about -- we aren’t as concerned about someone coming in and not getting ‘the full Chipotle dining experience’ of being part of the restaurant atmosphere.

So, we feel good about the idea of going out and building some really, really small scrappy restaurants and we will continue to experiment with that in the future and see how those might give us yet another way to grow sensibly and quickly in some of our markets where other real estate proves difficult to find..

And then just kind of as a follow up or a part B, maybe just to clarify the other part of my question is do you get credit; for example having a lead certification.

I’m just picking out one thing but much like food with integrity, do you see building with integrity as something that’s influencing customers that you could point to and say we see this as something that they care in helping us drive trends.

Is it something that shows up yet?.

Not really. I think that we do a lot of these things, from food with integrity to the way we think about -- the way we build our buildings and to the way we think about just doing the right thing by way of our people culture and the way we select our leaders for our company.

All of these things are things we do because we know that they’re the right thing to do. Food with integrity was something we put a lot of effort, a lot of investment, lot of passion into, way before there was any evidence that anyone cared about it -- or was it a majority of people cared about.

And I think that to the extent we got research back from our marketing team, it still shows that there are a whole bunch of people, probably the majority of people who come to Chipotle who, while they might think it’s nice to have, it’s not central to their decision to eat with us.

But this is why our marketing team has worked so hard I think to just start to celebrate some of these points of differentiation and start to generate more and more conversations about where Chipotle’s going, and what we’re doing differently than other companies.

And so while we don’t get credit on any given -- I don’t think on any given day for all of a sudden, hey they’re doing great with lead certification, they’re building their buildings more carefully and even food with integrity.

We think it’s the right thing to do and we think as people get to know us in a deeper and deeper way and our marketing team’s done a great job of accomplishing that, it’ll be something that either causes more word of mouth about Chipotle, which will lead to additional visits or will just delight some of the people who have already loved Chipotle because it tastes good and they think it’s a good deal.

As they find out that we’re doing things that are really special, it will just generate even more loyalty from them and even more excitement when they talk to other people who maybe haven’t tried Chipotle before. So I would say we don’t do any of those things because we think it drives immediate benefit to us in terms of sales.

I think we do them because they’re the right thing to do and I think we’re getting better and better at having Chipotle and our core values understood more broadly and as that happens I think that we will see more and more people coming to us for that reason..

And we will take our final question from Jason Left with Deutsche Bank..

Just a couple of cost related questions, first with some of the shifting of the beef supply overseas, can you talk about how that may affect your cost structure on the food side and there’s more products that you’re looking at to move to international markets and then secondly on the outlook for incentive comp, if we should be planning for that to be somewhat different next year in a way that’s structured at maybe lot lower costs or is it too early to say on that?.

No, I think what we're really doing on the beef side of things just trying to get the right beef into our restaurants that we feel good about from the Food With Integrity standpoint and the move that Steve discussed during his opening remarks with regard to getting an amount of Australian grass-fed beef as they move towards sustaining and increasing our ability to have beef that we’re very, very proud of in light of not being able to enough that meets our protocol domestically.

So it is not going to cost more at this point if there is not increase cost from that. So we would not suspect that'd be something that would give us pressure..

And Jason on the comp for the next year, our comp, that’s in hands of our comp committee. They have been meeting to consider the vote from last year and what they would like to do with that. So that’s in their hands. So nothing to report at this time..

All right, thanks everyone. We have exceeded our time for the call but we appreciate and thank you for joining us and we look forward to speaking with you net quarter..

Thanks very much..

This does conclude today’s conference. We thank you for your participation..