Chipotle Mexican Grill, Inc.

Good afternoon and welcome to the Chipotle fourth quarter and fiscal year end results conference call. All participants will be in a listen-only mode. Should you need assistance, please see an all-conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one using your telephone keypads. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the comments call over to Mr. Ashish Kohli, Head of Investor Relations for Chipotle. Please go ahead.

Hello, everyone, and welcome to our fourth quarter 2018 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by taking you through our legal safe harbor and cautionary declarations. Certain statements and projections of future results made in this presentation constitute forward-looking statements that are based on our current market, competitive, and regulatory expectations, and are subject to risks and uncertainties that could cause actual results to vary materially. These statements will include commentary about our expected business strategies for 2019, including initiatives to support our digital system, as well as forecasts of expected comparable restaurant sales increases and new restaurant openings for 2019, expectations for food, labor, and marketing costs, G&A expense, and our effective tax rate for 2019, as well as other statements of our expectations and plans. Except to the extent required by the law, we undertake no obligation to update publicly any forward-looking statement after this presentation, whether as a result of new information, future events, changes in assumptions, or otherwise. Please see the risk factors in our latest Form 10-K and subsequent Form 10-Qs for a discussion of risks that may cause our results to vary from any forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation of those measures, the GAAP measures, can be found via the link included on the presentation page within the investor relations section of our website. We will start today's call with prepared remarks from Brian Nickell, Chief Executive Officer, and Jack Hartung, Chief Financial Officer, after which we will take your questions. Our entire executive leadership team is available during the Q&A session. With that, I will now turn the call over to Brian.

Good afternoon. Thank you, Ashish, and welcome to the Chipotle team. We're really excited to have you on board. Additionally, I'm also happy to share that we have hired our Chief Development Officer, Tabassum Zalatrawala, in December and therefore completing my executive leadership team. I'm confident Tabassum will make a terrific contribution to our development organization. With that, I'm very pleased to report strong fourth quarter results with 6.1% comparable restaurant sales growth That included 2% transaction growth. Restaurant level margins of 17%, 210 basis points over last year, and earnings per share adjusted for unusual items was $1.72. I'm also pleased to report for the full year, 2018, restaurant average unit volumes achieved $2 million and our digital business went beyond a half a billion dollars, representing 10.9% of sales. The growth acceleration this quarter gives us confidence that our strategy to win today and create the future is working. When we connect with guests through culturally relevant marketing focused on Chipotle's great taste and real ingredients and provide more convenient access with less friction, they respond enthusiastically. I'm excited about the momentum we've built heading into 2019. Now, before I talk about the future, let me review the many positive changes at Chipotle during 2018. by going through the five key pillars that drive our purpose of cultivating a better world. The first is to be more visible with culturally relevant communication and innovation that increases brand engagement. Our marketing mandate is to drive culture, drive a difference, and ultimately, drive a Chipotle purchase. In late September, we launched our four-wheel advertising, showcasing Chipotle's point of difference in real ingredients and real cooking techniques. We drove significant awareness of the brand through a holistic media plan on culturally relevant programming. We published our entire ingredient list for the world to see in Times Square, across numerous social and digital channels, a full-page ad in the New York Times, and in our restaurants with the headline, the hardest ingredient to pronounce at Chipotle is Chipotle. The next iteration of the For Real campaign called Behind the Foil is launching February 11th and builds on this success. It feels more like a documentary than traditional advertising and showcases our fresh ingredients, food preparation, and celebrates the work our talented team members do every day in our restaurants to provide our guests a great dining experience. Our free delivery bowl offering, which ran from December 17th to January 7th, helped expand access and was not only a great way to attract new guests to our app and delivery capabilities, but also to Chipotle. as nearly half of the guests taking part in this offer were new or lapsed users. Collectively, these marketing initiatives helped drive a noticeable lift in sales during the second half of the year. Additionally, beginning January 2nd, we launched our first menu innovation called Lifestyle Bowls for mobile and web orders that really resonated with consumers in a big way. It generated over 1.3 billion earned media impressions in the first few days of January. Overall, Chris Brandt and his team have done a great job of making Chipotle more visible in culturally relevant social and traditional media channels. For example, our 2018 overall digital impressions increased nearly 20% year over year, while social impressions increased nearly 40% year over year. This was all accomplished without increasing our overall marketing budget. Going forward, you can expect Chipotle to continue to be a part of culture, have a presence in national media, where and when it makes sense, and to have an always-on social and digital program. I'm excited about the continued evolution of our marketing strategy as I look into our 2019 plans. Our second pillar is to digitize and modernize our restaurant experience with enhanced access and less friction, creating a more convenient and enjoyable guest experience. We continue to hear the number one reason consumers eat elsewhere is because they don't have convenient access to Chipotle. In 2018, we opened 137 new restaurants with industry-leading returns, and will continue to be one of the leaders in developing new restaurants. For our existing restaurants, we completed the big fix and stayed focused on expanding the reach of our digital system to provide our guests easier access and greater convenience. The digitized make lines are now in over 1,000 restaurants and remain on track to be in all restaurants by the end of 2019. The digital pickup shelves are in approximately 1,000 restaurants, and we're moving quickly to get them in all our restaurants by the middle of 2019. Kurt Garner and his team continued to build momentum in digital this quarter, with digital sales growing 66% year over year, an acceleration from the 48% we saw last quarter. Digital sales totaled $158.6 million during the fourth quarter and represented 12.9% of sales. For the full year, digital sales exceeded a half a billion dollars and accounted for 10.9% of sales. App downloads increased 72% year over year in 2018, and we continue to see strong interest from new and frequent as well as frequent guests at Chipotle. Similar to last quarter, we saw particularly strong traction in delivery. Although off a relatively low base, delivery sales increased roughly 13-fold compared to the fourth quarter of 2017. The free delivery bowl promotion drove growth in the latter part of December, offsetting normal expected seasonality. Encouragingly, We are seeing some residual lift in delivery sales that last beyond the promotion, and I've seen very little guest overlap between our own in-app delivery and our third-party delivery partner apps. As we continue to remove friction from the digital ordering and pickup process, we expect our delivery time advantage to continue to widen. Based on data shared with us by our white label delivery partner, we are consistently among the quickest delivery times in their system, and we expect this to only get better with the addition of pickup shelves and delivery prepaid capabilities that enable delivery drivers to walk in, pick up their order, and walk out without any delays. As part of our goal to increase access, we are also exploring a new format that leverages digitally enabled convenience. Our test of the initial 10 restaurants with a mobile order pickup lane that we call Chipotle is showing promising results with a higher mix of digital sales and total restaurant sales. We'll continue to explore and learn about this opportunity by opening a few dozen more Chipotle lanes in 2019 with a mix of freestanding and MCAT building. These restaurants are a great extension of our digital system, as they help to increase convenience and access to Chipotle. We're also encouraged by our loyalty test signups and early user data. As we have seen with our app, we are seeing a nice mix of new, lapsed, and medium frequency guests, and while it's still early days, we are pleased to see changes in behavior across all frequency bands. Our stage gate process is working, and we are making changes based on the feedback received thus far and remain on track for a national launch in 2019. Our third pillar is to run restaurants with great hospitality and fast throughput in a great environment. During Q4, we rolled out several operational improvement initiatives to drive better food, feel, and flow. This includes training that reiterates our four pillars of hospitality, which are be and look your best, be guest-obsessed, surprise and delight, and make it right. In an effort to enhance our best-in-class food safety program, we adopted a quarterly food safety training requirement, which trains crew members on their role in keeping our food safe every quarter. In addition, we implemented a new prep process we call Focus Prep. Focus Prep reduces the number of people preparing our great food, which makes it more consistent as well as food safe. Ancillary benefits include better service as our hospitality teams are now singularly focused on delivering a great guest experience. And the GM is now in a position to lead the restaurant versus managing every single process of the production. Our teams have embraced this new process quickly, and we are already seeing benefits from the rollout. In the coming year, Scott Boatwright and his team are focused on team stability, throughput, and consistently great tasting food. Additionally, reducing turnover, particularly at the GM level, through better leadership training and a clear direction on career progression are critical factors to our long-term success. Internally, we're calling this the year of the general manager. We're also doubling down on throughput training and providing our teams with an easy-to-use dashboard that provides greater visibility on their throughput performance. Lastly, we are elevating our culinary prowess through chef-driven cooking demonstrations, as well as consistently executed line tastings to ensure our food is cooked to perfection every day. In the first half of 2019, we were also launching Cultivate You 2.0, whereby we bring leadership training to the restaurant general manager level to further drive in-market talent development. As a reminder, we retrained all of our field leaders during Cultivate You sessions at our corporate support centers throughout 2018. We previewed many of these initiatives at our All Managers Conference last fall, and our managers know that when I'm visiting with them in their restaurants, I'm always going to ask their team, how's the culture? And how is the throughput here? I'm going to ask our general managers about team stability, the development of our team members, and obviously the food safety seven. And of course, since we're a restaurant company, we're going to be doing food tastings. It's clear from my numerous restaurant visits this quarter that Scott and his field leadership team are making tremendous progress and are focused on the right operational initiative. The fourth pillar is to be disciplined and focused in order to enhance our powerful economic models. Our biggest lever remains sales and transactions growth. Over the past year, we've become more strategic about pursuing projects that generate sales growth and healthy returns. We're in the process of building sales growth layers for multiple years and putting them through our StageCade process to ensure we are learning and iterating prior to national launches. While we are focused on winning today, we are also cultivating our future. Last but not least, we are building a great culture of accountability and creativity. This is one of the things that I'm most pleased about as we've made significant progress during 2018 in rebuilding Chipotle into an organization with an inclusive culture that sets us up to be more innovative, more connected to what our guests want, and better at executing so that we can capitalize on the tremendous growth opportunities ahead of us. Our people are our biggest asset, and I could not be more proud of the team we have assembled. With our restructuring and relocation largely behind us, we are well on our way to building an organization with best in class, and diverse talent that is dramatically improving our ability to deliver great food and service to our guests. I love the energy and enthusiasm I see every day when I'm with our employees, in our restaurants, and in our support centers. Chipotle has always thrived by being different, by being the best version of ourselves, not another version of someone else. And we've earned the deep loyalty of our guests because we are different and deliver a unique experience. And being different means always changing. Right now, we're investing in many areas that further position us to win. So as you think about 2019, the main initiatives that ladder up to our five key pillars are digital system investments, which includes pickup shelves, digitized make lines, loyalty, and delivery, marketing programs that celebrate our real ingredients and classic cooking techniques, elevating our core menu by developing innovation that leads food culture and meets guest requests and lifestyles. And, of course, a dedication to improving operations with general manager stability and development, excellent throughput, consistently great food, all in a great restaurant environment. With that, let me conclude by thanking all of our team members for their belief in Chipotle, their dedication and passion to provide our guests with a great experience, serving real food cooked to perfection and prepared in our restaurants with fresh ingredients. Their efforts are helping Chipotle cultivate a better world. We have an exciting journey ahead of us, and while we accomplished a great deal in 2018, I believe the best is yet to come. With that, here's Jack to walk you through the financials.