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Chipotle Mexican Grill (NYSE:CMG)

Q1 2012 Earnings Call

April 19, 2012 4:30 pm ET

Executives

Alex Spong -

M. Steven Ells - Founder, Chairman of the Board and Co-Chief Executive Officer

Montgomery F. Moran - Co-Chief Executive Officer, Secretary and Director

John R. Hartung - Chief Finance Officer and Principal Accounting Officer

Analysts

David Palmer - UBS Investment Bank, Research Division

Phan Le - Lazard Capital Markets LLC, Research Division

Alvin C. Concepcion - Citigroup Inc, Research Division

Karen Holthouse - Crédit Suisse AG, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Sharon Zackfia - William Blair & Company L.L.C., Research Division

Bart Glenn - D.A. Davidson & Co., Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Operator

Good afternoon, and welcome to the Chipotle Mexican Grill's First Quarter 2012 Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Thank you. I'd now like to introduce the Chipotle Director of Investor Relations, Alex Spong. You may begin.

Alex Spong

Hello, everyone, and welcome to our conference today. By now, you should have the access to our earnings announcement released this afternoon for the first quarter 2012. It may also be found on our website at chipotle.com in the Investor Relations section.

Before we begin our presentation, I will remind everyone that parts of our discussion today will include forward-looking statements as defined in the Securities laws. These forward-looking statements will include projections of the number of restaurants we intend to open, comp restaurant sales increases, the impact of menu price increases, trends in food costs and other expense items, effective tax rates and our unit economics and shareholder returns, as well as other statements of our expectations and plans. These statements are based on information available to us today, and we are not assuming any obligation to update them. Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We refer you to the risk factors in our annual report on Form 10-K as updated in our subsequent Form 10-Qs for discussion of these risks.

Our discussion today will also include non-GAAP financial measures, a reconciliation of which can be found on the presentations page of the Investor Relations section of our website. I'd like to remind everyone that we've adopted a self-imposed quiet period, restricting communications with investors during that period. 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 second quarter, it will begin on June 1 and continue through our second quarter release in July.

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.

M. Steven Ells

Thank you, Alex. We're pleased to see our momentum from 2011 carry into the first quarter of 2012. Coming out of the recession, we have now seen 7 consecutive quarters of double-digit same-store sales growth, posting a comp sales increase of 12.7% in the first quarter on revenue of $640.6 million, an increase of 25.8% from the first quarter of 2011, adding up to earnings per share of $1.97 for the quarter. More importantly, I'm pleased that we continue to perform well by remaining focused on only those things that are the major drivers of our business, our unique food culture and our unique people culture.

During the quarter, we made another significant leap in educating our customers about our commitment to serving great food made with better ingredients from more sustainable sources when we ran our 2-minute animated short film, Back to the Start, as a commercial during the Grammy awards. Buying such a large block of time during the Grammys reached a significant number of people with this important message and sparked some very public dialogue about food issues that continued for several days in social media and mainstream media outlets.

This year's Grammys telecast surpassed the expected 29 million viewers with 40 million people tuning in. But the spot had a much broader reach and impact than that. Immediately after it aired, the spot prompted 22,000 Tweets and significant reach in social media where it produced more than 33 million impressions on Twitter in the days that followed the Grammys. According to the popular sharing platform, AddThis, which tracks the frequency with which people are looking at or sharing things in social media, our commercial was unique in that as soon as people saw it, they felt like seeing it again and wanted to share it with their friends. Running the spot on the Grammys also provided another significant PR opportunity for us.

In all, press coverage surrounding the spot generated another 150 million media impressions, giving us the kind of media attention that is often associated with Super Bowl ads. But with our Grammys spot, all of that coverage was focused only on Chipotle instead of being shared among numerous Super Bowl advertisers.

The Back to the Start film is just one part of our Cultivate marketing platform which is designed to invite people on our journey to a more sustainable world. While most other fast food companies use advertising to tell the latest discount or the latest menu item, we believe that we are creating a more loyal frequent customer by connecting with them rather than advertising at them.

Since we have such a great story to tell, our challenge is to tell it in the most compelling way possible and we have found that less traditional forms of advertising work better. The Back to the Start short film and other films and of similar nature that are in production now are a great example. Just as we did with the Back to the Start film, we'll start small with these projects and figure out the best way to use the films based on the opportunities we think they provide as they come together.

Our day-long Cultivate Festival series planned for Chicago and Denver this year is another way we're making use of nontraditional marketing, as is our Farm Team program that rewards knowledge about the Chipotle story. These programs, along with a variety of others including games, educational content and a refined approach to local marketing, are all designed to engage our customers in conversations and create an emotional connection that will last much longer than any limited time offer possibly could.

I think this is absolutely the right direction for our marketing and believe it's very consistent with our brand. We've built Chipotle in a way that's different than traditional fast food, so it should be no surprise that marketing works best for us that doesn't follow traditional fast food model. Of course, marketing efforts like this would ring hollow if we weren't so deeply committed to doing the kinds of things our marketing portrays, and our commitment has never been stronger to finding better, more sustainable sources for all of the ingredients that we use and identifying ways to improve the taste of our food by finding better ways to prepare it.

For example, we're improving our flour tortillas to make them taste better. And we use more -- and be more nutritious with twice as much whole wheat as our current tortilla and free of preservatives. We're already serving this new tortilla, which is very similar to the tortilla we're using in our London restaurants, in our restaurants in Colorado, Utah and Wyoming. Not only is this a better tasting and more nutritious tortilla, but removing preservatives and increasing its nutritional content also brings it more within our philosophy of serving Food With Integrity.

We're also working to improve our soft corn tortillas. We have developed an improved recipe for more consistent corn tortillas made from a combination of white and yellow card masa flour. These new tortillas not only taste better, but have a better texture and improved eating quality. We've begun testing these tortillas in Portland and our Chelsea restaurant in New York and if successful, we'll roll these new soft corn tortillas out before the end of the year.

We're also working to improve our beans. We're experimenting with a new process and equipment which will allow us to better hydrate the dry beans fully and consistently before they're cooked. The result will be that all of our beans, regardless of the time of year, will always be cooked exactly the same. This will allow us to make better and more consistent beans throughout the year and ensure that the viscosity and the texture are always at their optimum.

These changes are some of the examples of our ongoing commitment to finding ways to improve the quality and taste of the food we serve, whether that means finding better ingredients from more sustainable sources, new recipes to make our food more nutritious and better tasting or new cooking processes that help us serve the best food possible.

We continue to make progress with our expansion in Europe not just in terms of opening new restaurants, but also in terms of developing teams of top performers to provide us with the future leaders we'll need as we continue to grow. Currently we have 2 restaurants open in the U.K. with plans to open 3 more between now and the end of the year. Our first Paris restaurant is slated to open this spring, and we plan to open a couple more restaurants in Canada as well. Of course, development of Chipotle restaurants in the United States will remain the focus of our growth for the foreseeable future.

As we work in Europe, I can't help but notice the tremendous benefits of starting from scratch in these new markets, but built upon a solid restaurateur culture with teams of top performers who have high standards. Our initial teams in London are extraordinary and our managers are taking great care to hire only top performers who can be developed into our future managers and future leaders for us in Europe. As we work to open our third restaurant in London on Wardour Street, we have already appointed a manager who has been with us since day one at our first London restaurant on Charing Cross Road and we've screened hundreds of applicants to hire only 15. The team in London tells me that they expect to screen hundreds more to get the 25 or 30 employees they'll need to open. That strong commitment to finding and hiring only top performers for positions will help us accommodate growth in the future.

Finally, as we continue our efforts to reemphasize throughput in our U.S. restaurants, which Monty is going to discuss a little bit later, we're just beginning to emphasize this concept in our restaurants in London. Already, we are seeing the impact of these efforts there, seeing better transaction volumes and better customer service as our managers and crews are beginning to emphasize the same throughput practices we've been teaching in the restaurants in the United States.

Our commitment to improving our food culture and our people culture has never been stronger and our business results demonstrate the benefits of our unwavering focus in these critical areas. This focus will not only allow us to achieve our vision to change the way people think about any fast food, but it will also allow us to deliver strong results to our shareholders.

I'll now turn the call over to Monty.

Montgomery F. Moran

Thanks, Steve. Like Steve, I'm pleased with our results for the first quarter and I'm very proud of our terrific restaurant teams, whose hard work and dedication has led to this success. Our people culture continues to be a key driver of our business and I'm delighted with how we have developed such an extraordinary and powerful culture so quickly. As a reminder, before we created the Restaurateur program, the vast majority of our managers came from the outside and our crew people were seldom promoted to accelerated management positions. So the crew has little reason to be optimistic about their future, which meant that they were not as happy, energized or excited as they could have been and they have less of a sense of ownership over the guest expense.

Today, the opposite is true. 98% of our managers come from crew. So our crew members know that they are the future leaders of the company and for this reason, they have a huge sense of ownership and they're excited, driven, optimistic and happy and the best of them quickly move into manager positions where they lead their teams to understand and take part in our special culture.

Because of this, Chipotle is able to attract and hire a much stronger crew than ever before and they are fast becoming managers and ultimately, restaurateurs. These top performers know how to hire the very best crew. They know how to lead these people to become a strong team and they know that doing this is the surest way to create an amazing dining experience for our guests.

But the powerful effect of these excellent leaders does not stop at the restaurant. These great leaders are quickly moving into field leadership positions as well. More of our field leaders now come from restaurateur positions than ever before, and so the awareness of what a restaurateur culture looks like is better than ever. This makes the process of developing and selecting restaurateurs faster and more efficient than ever since a higher percentage of candidates that we interview for this position are accepted into the Restaurateur program.

Last year, only 74% of the candidates were being accepted to restaurateur but this year, that percentage has increased to about 87%. Year-to-date, we interviewed 42 potential restaurateurs and accepted 36 into the program, bringing our total number of restaurateurs to 295. When you include the apprentice team leaders, all of them are restaurateurs. In all, more than 60% of our restaurants are now overseen by these extraordinary leaders.

There's another exciting trend that gives us optimism that we will be able to sustain the influence of our special people culture even as the pace of expansion quickens. Specifically, we are noticing that more and more of our new general managers are able to create the restaurateur culture in only a few months after being promoted to the GM role. Additionally, these people coming up to our ranks are some of the best leaders in our company.

Currently, we have 30 apprentice team leaders, all of whom worked their way up from hourly positions in our restaurants. As a reminder, the only way to become an apprentice team leader is to first become a restaurateur and then demonstrate the ability to build excellent teams in 4 restaurants and promote at least one restaurateur from among these.

The ATL position came into existence in 2008 when we realized that some of our best restaurateurs had the desire and ability to create restaurateur cultures in more than just their own restaurants and we wanted to create a position that would allow these leaders and the company to see the greatest benefit from their leadership abilities.

Well, in the first 2 years after developing this new position, only one person was able to reach this elite level. Happily, during the following 2 years after that, from January 1, 2010 to January 1, 2012, we had 19 more making it to this position.

So what's most impressive is that we have promoted 10 more ATLs in just the last 3 months. In other words, a full 1/3 of all of the apprentice team leaders promoted during the 40 years the program has existed have been promoted since the first of this year. These ATLs are not only understanding and can teach the restaurateur culture; they are also having a big impact in the business. They quickly identify issues, diagnose the root cause of problems and have a clear vision for how to develop and promote their crew to positions of greater leadership.

Despite their short tenure, they know the people in their restaurant and they know how to quickly establish a restaurateur culture. They literally know of no other way than to identify top performers and empower them to achieve Chipotle's very high standards.

These new apprentice team leaders are truly showing us what's possible when you examine the restaurants and that they oversee and mentor. For example, when you look at the 10 newly appointed apprentice team leaders, for the 73% of the restaurants that they were mentoring at the time of their promotion to ATL were already promoted to restaurateur. When you take into account that only 21% of our restaurants system-wide are run by a restaurateur, that means that these leaders are quickly establishing patches of remarkably well run restaurants, with exceptional experiences for both our guests and the employees who join their teams.

What's more is that they're developing their people at a pace we have never seen before. We're seeing that as this newest generation of field leaders takes on new restaurants, they immediately have a clear vision and plan by which they will lead each of these new restaurants to become a restaurateur restaurant. We are also noticing a higher caliber of future leaders when we visit our restaurants and talk to our managers and crew.

In spending time with Perla Lara, who is a restaurateur who recently became an apprentice team leader in California, I was struck by the quiet confidence she has in her team and her ability to develop future leaders quickly. In asking whether she was prepared to the added responsibilities taking on a number of new restaurants, she seemed confused by my question. In short, she told me that she had no real concern because they would soon all be restaurateurs and restaurateurs take very little time of oversight to a field leader. She told me her job was easy. So I told her that it was going to get much tougher for her as she took on more and more restaurants. But she respectively disagreed with me. She told me that it's not really very hard as long as you have a strong base of restaurateurs to help you. And of course, she is exactly right. And people like Perla do not know any other way. They are the product of a culture where everyone is committed to developing the people around them and they simply do not see obstacles to developing restaurateurs very quickly. In fact, I'm optimistic that Perla will soon be a team leader in the near future.

In another case, after promoting 2 new apprentice team leaders named Carlos and Lorena in Chicago, we were discussing the 8 additional restaurants that they were now going to be asked to lead in their new positions. We asked them how many of these 8 restaurants will be restaurateurs by the end of the year and they looked at us as though we were a bit naive. Of course all of them are going to be restaurateurs, they said.

These new high expectations are wonderful for us to hear about, but even more wonderful is the fact that our people are achieving these very high expectations.

As we build more new restaurants, our managers need a reliable supply of top-performing new crew in order to develop teams in the restaurants. For this reason, we are giving our managers better tools to improve their ability to recruit, hire and bring on new people. Last quarter I spoke about our plan to rollout a new recruiting and processing tool called Taleo. We are now using Taleo in all of our mid-Atlantic and Rocky Mountain region restaurants, and we'll be using it in all of our restaurants nationwide by the end of May.

Using Taleo in our restaurant simplifies the entire hiring process. It uses a centralized database so that managers can review applications from multiple candidates quickly and easily, without sorting through individual paperwork for each applicant. Also, candidates complete all of their forms online and the system ensures that all their information is entered correctly. This information is automatically integrated into HR system which eliminates the need for additional data entry. Collectively, these benefits will save our managers a lot of time, allowing them to spend more time developing their teams.

The early feedback regarding this tool from our managers has been very positive and they tell us that they're seeing more high-caliber applicants as a result of this. This tool will allow us to better track information about the number and source of our applicants and it also allows many managers to view the same application simultaneously, so an applicant only needs to apply at one location.

In the last few quarters, I've spoken to you about our renewed emphasis on throughput and I wanted to give you an update on that as well today. Once again, we continue to see promising results on this important initiative. During our peak weekday lunch and dinner hours, we are seeing solid increases compared to last year. Additionally, we have been able to move the needle on our throughput during our busiest 15-minute periods as well.

Before we began this renewed emphasis on throughput, 2007 was our benchmark year for peak hour transactions. From these highs, our peak hour transactions dipped during the recession and we've been working diligently to restore or surpass those records. Since we renewed this effort in November of 2011, we have managed to exceed our 2007 peak hour transactions for the first quarter. Put another way, our teams are now the fastest that they have ever been for this time of year. We're also encouraged by how our peak hour transactions are making a larger relative contribution to our overall sales comp than they have in the past.

Throughout 2011, our overall daily comp consistently outpaced the comp seen during the noon to 1 hour. However, we reversed this trend more recently with our emphasis on throughput. Since December, we have seen our noon to 1 comp actually grow faster than the rest of the day. This tells us that we are on the right path and that this initiative is gaining traction. These throughput improvements come at the right time, as we're now into some of our busiest months, April and May, and we are now hoping to see our average transaction count increase even more throughout the day and especially during our peak lunch and dinner hours.

Great throughput really improves the experience we provide our customers in every way. In addition to the obvious benefit of not waiting as long for their food, great throughput is accompanied by better communication and engagement with each guest, more eye contact, hotter, fresher food and overall, a more energized crew serving each customer. Over time, it's our belief that our continued efforts in this area will lead our customers to come more often as they grow more confident in our ability to keep our lines shorter, allowing them to spend more time enjoying their meal.

Finally, I want to update you on our development progress. We are very optimistic that we will succeed in our commitment to open the 155 to 165 restaurants that we guided earlier this year and we think that approximately 30% of these new restaurants will be A Model locations. We also are optimistic about real estate trends in the coming years. We are predicting a slight increase in the amount of new construction, which we believe will lead to a slightly larger portion of our restaurants being new construction instead of remodels. Specifically, we're seeing a slight increase in landlord-built centers and pad locations which seem to be recovering a bit more quickly than large-scale shopping centers.

At the low in 2010, about 30% of our deals were new construction projects and we expect that, that number will increase to about 36% of our new restaurants in 2012 with perhaps more significant increases by 2014 and 2015.

With stronger food and people cultures than ever before, better tools to help our managers work more efficiently and continued emphasis on improving things that contribute most to the restaurant experience, as well as the continued strengthening of unit economic model, we believe that we are well-positioned to provide consistently strong results for our shareholders.

With that, I will now turn the call over to Jack Hartung.

John R. Hartung

Well, thanks, Monty. We're very proud of the results we achieved in the first quarter and while the quarter provides an encouraging snapshot of our recent financial trends, what's more important is what's driving these results, the continued strengthening of our food culture, our people culture and our business model. Our top-performing crews and managers are delighting our customers by providing great customer service while serving great tasting food made from premium ingredients, leading to customers wanting to visit Chipotle more often. It's encouraging to see these efforts lead to attractive financial results in the quarter, and it gives us even greater optimism about what lies ahead.

We're pleased to report the 7th consecutive quarter of double-digit sales comps since the economy began to recover with a comp of 12.7%. These strong comps, along with new restaurant openings drove a sales increase of 25.8% to $640.6 million in the quarter. The comp was driven mostly from increased traffic, while higher menu prices added about 4.9%. In March, we raised prices in our Pacific region by about 4.5% to reflect the higher cost of doing business in the region and to help narrow the pricing gap with other U.S. markets. This price increase was completed in March and because it laps a similar increase in the Pacific region at about the same time last year, it will have no additive effect to our comps going forward.

While we continue to believe we have pricing power, we do not have plans for any additional menu price increases during 2012 to offset expected food inflation. Our business model is strong and we're not compelled to take short-term price increases to drive quarterly results. And instead, we're focused on driving greater customer loyalty and strong transaction trends.

Our comps held up well in the first quarter despite the toughest quarterly comparison in 2011 of 12.4%. Unseasonably mild weather through much of the quarter helped transaction trends remain strong and in addition, we benefited from the leap day in February, which added about 1% to the comp. Our sales comps continue to benefit from the menu price increases taken during the second and third quarters of 2011. Of the current menu price increase run rate of 4.9%, we will lose 3.9% of the benefit over the next 2 quarters as we lap the price increases from last year with about 30 basis points dropping off in Q2 and about 360 basis points dropping off in Q3.

We also faced tough sales comparisons in the back half of 2012 as beginning in the third quarter, we will comp against 2 full years of double-digit comps for the first time since before the recession. Taking all this into account, we reaffirm our full-year comp guidance of mid-single digits.

Restaurant level margins increased by 220 basis points to 27.4% to 30 basis points shy of our highest-quarterly restaurant level margins set back in Q3 of 2010. The higher margins were driven by sales leverage including the benefit of the menu price increase and from lower promo costs due to the large promotion in Q1 of 2011. Operating margins increased by 130 basis points, lower than the restaurant level margin expansion because it increases the noncash stock comps, which I'll talk about in more detail shortly.

Diluted EPS for the quarter was $1.97, an increase of 34.9%. Food costs were 32.2% in the quarter, up 20 basis points from the first quarter of last year and sequentially were flat from Q4. We were pleased to see that food inflation was moderate in the first quarter as lower prices for avocados, produce and dairy costs helped to offset the increases in beef and chicken. We continue to expect food inflation in the mid single-digit range over the next few quarters due primarily to rising cost of beef, dairy and avocado. Contributing to these higher cost is the expectation that all of our sour cream will come from cows that are pasture-raised beginning in the second quarter and from seasonally higher avocado costs as we return to buying avocado from California this summer.

Labor costs were 23.7% of sales in the quarter, a decrease of 90 basis points from last year. Labor leverage was driven by higher sales volumes, including the benefit from higher menu prices. Occupancy costs in the quarter declined 60 basis points due to leverage from the higher average restaurant sales and other operating costs were 10.3% in the quarter, down 100 basis points compared to last year, driven by lower promo and utility costs. Promo costs were down from last year when we ran a large buy 1 get 1 promotion related to the restaurant TV show we sponsored.

Marketing was 1.3% in the quarter, the same as in Q1 of last year, with the largest part of our marketing invested in airing our Back to the Start films during the Grammys. We had an audience of over 40 million TV viewers and helped introduce Chipotle to millions of potential new customers. While Back to the Start was not created as a TV ad, the Grammys provided an opportunistic way to share our message with a larger audience about what makes Chipotle special. We feel confident that our marketing approach, which is different than the traditional approach other restaurants have taken, is connecting with customers and prospective customers in an emotional and authentic way. Overall for 2012, we still expect our marketing expense to be right around 1.75% of sales.

G&A was 7.7% in the quarter, up 140 basis points from last year, due primarily to higher non-cash non-economic stock compensation expense and a higher payroll tax expense related to the exercise of options during quarter. The non-cash non-economic stock comp expense was about $20.5 million in the quarter or $11.5 million higher than last year. About half of the increase or $5.6 million was due to a 1% adjustment for performance shares issued during 2010.

These performance shares have a 3-year vesting schedule ending October 2013 and the amount of the work can increase or decrease depending on our financial performance during the 3 years. Now that we are halfway through the measurement period, based on our strong performance during the past 6 quarters, it appears likely that we will earn the maximum award. So the $5.6 million represents the incremental expense to catch-up for the last 6 quarters for earning the max. For the rest of the performance period, the remaining charge will be amortized by about $1 million for each of the remaining 6 quarters at which time the shares will vest. We expect non-cash stock comp to total about $69 million for the full year, which will includes this incremental charge for hitting the max on our performing shares.

G&A also includes additional employee taxes of about $3 million related to the exercise of stock options during the quarter. So without the charge related to the performance shares and the higher employee taxes and option exercises, underlying G&A was 6.3% of sales or about the same as last year.

In the quarter, we also saw our average restaurant volumes increase to a record high of $2.07 million and we're confident that our strong unit economics can get even better as even more customers discover and choose to visit Chipotle. Our new restaurants continue to perform very well, reflecting the success of our real estate development strategy and the growing awareness of the Chipotle brand across all U.S. markets.

Our new restaurants are opening at or above our $1.5 million to $1.6 million communicated range and A Models continued to perform well with sales just below traditional sites, but they generate higher returns. During the quarter, we opened 32 new restaurants including one in Toronto. We expect to open between 155 and 165 restaurants in 2012 with about 30% of these being A Models. We also expect to open 1 in Paris, 3 more in London and a couple more in Canada. And as we mentioned on our last call, we plan to open our second ShopHouse in Washington, D.C. some time later this year.

Our effective tax rate was 39% for the quarter and for the full year, we expect the rate to remain at 39% or 50 basis points higher than 2011 as a result of the HIRE Act not continuing and the work opportunity tax credit and the R&D tax credit, which have expired and have not been renewed by Congress.

Our already strong balance sheet continues to strengthen and has allowed us to open new restaurants with expectations of superior returns, funded by operating cash flow while we continue to opportunistically pursue our $100 million share buyback.

Though our tax provision for the quarter reflects an expense of just under $40 million, we actually have a tax receivable on the balance sheet of $35 million. This is the direct result of an excess tax benefit, which totals $68 million related to stock option exercises. Though this $68 million is a real economic benefit and it will enhance our cash flow over the next few quarters, this benefit is not reflected in our GAAP EPS. During the quarter, we purchased around $16 million under our stock repurchase program at an average price per share of $376. While we believe that investing in high returning restaurants remains the best use of our cash, we'll continue to opportunistically and carefully repurchase our stock to enhance shareholder value.

Thanks for your time today. And at this time, we'd be happy to answer any questions you may have. Operator, please open the line.

Question-and-Answer Session

Operator

[Operator Instructions] We'll now take our first question from David Palmer with UBS.

David Palmer - UBS Investment Bank, Research Division

I wanted to ask a question about throughput. Would you mind just discussing a little bit about what you are communicating down the line in terms of beginning to get the focus on throughput? And what specific changes might be being made in prep, ordering, and the payment that -- sort of the tricks of the trade that might be going on that are helping you with the throughput?

Montgomery F. Moran

Really, what we've done is tried to focus only on those things which tend to have the greatest impact on throughput, and those are the 4 things that I've mentioned a number of times before which are the "mise en place" or having everything in its place before their shift begins or before the peak hour begins, having what we call "aces in their places", in other words making sure that absolutely everyone in every position is ready to serve the guest and that we have the best person in each position during peak hours, so that we're not training folks during that time and also having an expediter in place during all kinds of peak hour. That's the person who stands between the person that rolls the burrito and the person who -- the cashier. And so that person is the one who takes care of all the little requests like is it for here or to go, puts it in the bag, gets the drink or taking care of any other requests of the customer so that the cashier, which is typically the slowest part of our throughput, can focus completely on the task of cashing someone out. And then finally, we want to always have a linebacker position in place during peak hours, and that's -- usually it's the General Manager or a Service Manager or an apprentice, but that person is someone who stands behind the line and makes sure that all of the pans are full of food, that all the food looks perfect, that the line is clean and that all of the people working on the line have all the tools and implements that they need to do their job perfectly without looking away from the guest. So a big part of the focus has been to focus on those 4 things. In addition to that, we try to give as many tools to our teams as we think will be helpful, and recently we rolled out a throughput video that really puts in a very descriptive way, kind of demonstrated the 4 things that I mentioned to you and how they should be done properly. But also, gave a live view of what a terrifically well-run team looks like when they're executing very, very high throughput. This -- the throughput video was taken at -- on location at one of our very busy downtown Chicago locations that had a near constant line throughout lunch of people who are used to very, very fast service, demanding a very, very fast service and it's a place where the team provides over 320 transactions per hour consistently and it's hit numbers of over 350 transactions in a single hour of business. So by having all of our teams around the country be able to see that, with a commentary from one of our regional Directors talking about what they are seeing, was a real nice -- sort of a picture worth a thousand words, if you will, to help them understand and be able to really visualize what's possible in a really well-run Chipotle. And part of that lesson is how achievable these very high throughput numbers are and how it's not a phonetics or a spastic or disorganized-looking thing when we go very quickly, and in fact, it's just the opposite. When you -- if you'd look at the throughput video, you'd think that it didn't look that bad because everyone's so efficient, there are no wasted movements. There are very few mistakes made, and if there are mistakes made, they're caught and corrected very quickly. So the crew is very calm, very competent and really having a lot of fun. And so the customers feel that and enjoy that fun as well. And I guess finally, I would say that one of the important things to teach our teams that we always emphasize is the throughput is not -- speed is not the first goal of throughput. The first goal of throughput is to provide the very, very best customer service. Great eye contact, great communication, a polite and efficient way with customers, and all of those things, when done well, tend to lead to very, very fast service because the guest goes through understanding exactly what they want, getting what they want and being very satisfied with that quickly. So that gives you, I guess, an idea of some of what we're doing to increase the throughput, and it's working very, very well.

David Palmer - UBS Investment Bank, Research Division

And then one quick follow-up is that in this last quarter, do you have a sort of rough estimate as to how much throughput might have helped your sales directly if -- do you have a sense of literally how many more orders per hour you pushed through such that you helped the comp? And as you get into the peak months coming up, it looks like your sales go up 10%, 12% versus the type of months that you have in the March quarter and the coming quarters. Is it going to be even a bigger lift or how should we think about that?

Montgomery F. Moran

Well, I'll answer backwards because the second answer is quicker than the first. Yes, the first quarter is seasonally our slowest quarter from a sales standpoint, so we do believe that in the next quarter, the second quarter and, in fact, the third quarter as well, throughput is even more important then than it is now. But to answer your first question, I'd like to caution you not to too closely link an increase in comps -- increase of comp sales with an increase in throughput. Seasonally, the first quarter is one of our slowest in sales, and so typically, during our peak lunch hour in the first quarter, we average about 100 transactions. But the first quarter this year, we were about 5 transactions faster than we were last year during that peak hour. We're very proud of that. But we don't see a particular effect on short-term costs from the throughput initiative yet. But we believe it is an important part of great customer experience and that over time, it will encourage more visits as customers have more confidence that they can visit a Chipotle, get through the line more quickly and have more time to enjoy their meal. So again, in these next several months, the speed of service will be more and more important, but we can't tell you that when we increase the speed of service, that automatically yields an increase in comp sales. That's something that, we believe over time, will improve as a result of great throughput, but it's not an immediate reaction. If people want to come to Chipotle more often, we want to do all we can to reward that decision with an incredible guest experience, and a large part of that incredible guest experience is great throughput. So we believe that over time, it will lead to an increased comp, but that's not something that we can tell you that we've seen just yet.

Operator

And we'll now go to Matthew DiFrisco with Lazard.

Phan Le - Lazard Capital Markets LLC, Research Division

This is Phan Le in for Matt DiFrisco. I just had a quick question about the gap between the growth in average weekly sales and the comp. It seems to be widening a little bit this quarter compared to the past last few quarters and I understand that the new stores are doing just as well as they had in the past. So I'm just wondering what the discrepancy is there, if you can provide a little color, I'd appreciate that.

John R. Hartung

Well, I'm not sure what your calculation is for that. We're not seeing anything that's disturbing in our trends. What you've got is you've got 2 opposing forces, you've got comps that are driving our average volumes up and then you've got all the new stores that are coming that shift from non-comp into the comp base. And frankly, looking at about a $50,000 or so increase from quarter-to-quarter while we're adding new restaurants into the comp base, we think we're getting exactly the right increase in our average unit volume than we should. So we're not seeing anything underlying that's not supporting that both our new stores are opening up strong. They come into the base and they have a dilutive effect, but that's always happened. But it's being more than offset by the comps, so nothing -- there's nothing I can tell you that's disturbing in the underlying trends.

Phan Le - Lazard Capital Markets LLC, Research Division

Okay, great. And then I jumped on the call a little bit late, so I'm not sure if you touched on pricing at all. I know that in your last call, you had mentioned that you don't anticipate to take as much pricing in 2011 as you do with this year.

John R. Hartung

Yes, we don't -- yes, we did mention it on the call. We don't have any plans for any further menu price increases. We did take a localized increase just in the Pacific region. That's more a function of that's a very high-priced market for us, high-cost market to do business. The menu prices there have been lagging. It kind of -- really they've been lower than they should be forever, and so we did raise prices last month. That's not going to have a continuing positive effect on the comp because it came on -- that price increase happened about the same time that we took an increase last year, so they kind of offset each other. But we don't have any plans for any future menu price increases in 2012, not right now.

Operator

And we'll now go to Alvin Concepcion with Citi.

Alvin C. Concepcion - Citigroup Inc, Research Division

Just wanted to see if you could give us a sense of the weather benefit to comps, if there was one?

John R. Hartung

Yes, there definitely was one. January, February were terrific, from a weather standpoint. Lots of people decided they want to come out and visit Chipotle. Hard to get a really firm handle, but to the best that we can tell, it probably added somewhere between 100 to perhaps as much as 200 basis points to the comp during the quarter.

Alvin C. Concepcion - Citigroup Inc, Research Division

Okay. And have you seen a change in the underlying sales trends in April?

John R. Hartung

No. What I would say is if you factor out weather and factor out the leap day, what we're seeing in April so far is kind of a continuing of the underlying sales trends. So kind of, to the best of our ability, factor out weather, factor out the leap day, and then it seems like April is just picking up where the underlying trends in the first quarter left off.

Alvin C. Concepcion - Citigroup Inc, Research Division

Great. And then just a follow-up on food costs. You maintained your outlook on the inflation. Is it fair to say you still think food cost will be up 150 to 160 basis points throughout the year, is that still the case?

John R. Hartung

Yes, that's a fair amount. I mean right now, we think that over the next 2 quarters, it's going to be mid single-digit inflation. We think that the -- that if things go as planned, that in the fourth quarter we'll level off a little bit. So I think when you take that mid single-digit inflation and convert that into impact on food cost, I think you are looking at somewhere between 100 to 150 basis points of higher food cost over the next couple of quarters.

Operator

And we'll now go to Karen Holthouse with Credit Suisse.

Karen Holthouse - Crédit Suisse AG, Research Division

I just got a quick question with the move and development to maybe some more new construction units. Is there anything we should be thinking about when modeling that in terms of differences in square footages or bill to costs or average unit volumes in the new units?

M. Steven Ells

Well, no, no. I think that you'll see that those are largely consistent. I mean, the square footage of units is largely driven by that which we find in the field because we're leasing our space. But generally, we'll continue to do what we've done in the last many years, which is favor smaller restaurants when we can find them, but always just look at what we think will make for a great Chipotle restaurant. So no, no particular change there.

Karen Holthouse - Crédit Suisse AG, Research Division

Great. And then one quick housekeeping question. Did you give a number for food inflation in the quarter on the call?

John R. Hartung

Yes, we just reiterate it. We think it's going to be still in that mid single-digit range.

Karen Holthouse - Crédit Suisse AG, Research Division

For the first quarter?

John R. Hartung

Oh, during the first quarter. Well, sort of. I mean, what we talked about is we did a comparison to last year, but more importantly from the fourth quarter to the first quarter, we had the same food cost. So we didn't see any net effects of food inflation so far in 2012 and that's I think the most -- the best way I think to look at it is kind of sequentially from the fourth quarter. If you look at the fact that we had a -- we've got a run rate of about 5% menu price increase and our food costs went up by 20 basis points, you could just back into the fact that we have like a, call it a 6% or 7% in that kind of ballpark inflation year-over-year. But more importantly, looking at it sequentially, didn't get hit in the first quarter. We do think that the mid single-digit inflation going forward will kick in and we think it'll hit over the next 2 quarters.

Operator

And we'll now take Michael Kelter with Goldman Sachs.

Michael Kelter - Goldman Sachs Group Inc., Research Division

I wanted to ask about the 2 incremental potential growth opportunities. One question on Europe and one on ShopHouse. Maybe I'll first touch on the Europe question. You mentioned you're implementing the throughput initiatives that you'd been running through in the U.S. in the U.K., and I guess I didn't realize that they would be necessary that your store volumes were so good that it was relevant to do that. So maybe you could talk about what the sales demand or AUVs are at the current 2 U.K. locations? And if the demand is that strong, I understand 3 more for the rest of the year, but how quickly might that ramp up once you get past 2012?

M. Steven Ells

Well, so let me speak to the necessity of throughput and why now is a good time to emphasize that. It's interesting to watch a lot of new customers in a brand-new market of a brand-new country try Chipotle for the first time. There is a learning curve, and to emphasize throughput at a time when people don't really understand the menu and understand the service format, I think makes it very confusing. And so we deliberately want to allow people to go at their own pace within reason, of course. But as we see more and more regular customers in our London restaurants and as people are starting to understand the system and become very comfortable with it, we started to talk about throughput with our crews. And our managers have done a very, very good job at slowly building up the speed, and this is something that the customers really appreciate. They understand that Chipotle is more convenient now and that they have time to sit down and actually enjoy their meal because the service part of it is faster and of course, one of the benefits that we see from doing that is an increase in sales. It's interesting that we've noticed the exact same thing at ShopHouse in Washington, D.C. deliberately not emphasizing throughput when we opened up because it's, again, completely different menu offerings. Now a lot of our customers recognize the service format. They recognize that it's very similar to Chipotle, but since there's a difference in ingredients and a lot of questions about the different flavors and different spice levels and things like this, it was slower. But we've noticed more and more regular customers and have started to emphasize this idea of throughput and how to provide service to the customers, and we've seen increased sales in that restaurant also.

Michael Kelter - Goldman Sachs Group Inc., Research Division

So in those U.K. restaurants, what are the rough AUVs and what might the growth trajectory -- unit growth trajectory look like as you go past 2012?

John R. Hartung

Michael, just on the balance and I'll turn it back to over to Steve. We haven't communicated what those are but just to give you a rough idea, in terms of transactions, they're similar to what new restaurants would be in the U.S., perhaps a touch higher in terms of transactions. And keep in mind, I think the original question was kind of why throughput, are the volumes really that high. Throughput isn't just about flying as many people through the line as you can. Better throughput, our teams work better together, the food is better, the customer experience is better. When you have 5 people in line and when our teams are ready to deliver great throughput, those 5 people are going to get terrific customer service and it's just as important, we believe, if there's 5 people in line versus if there's 40 people in line, and so that's why we wanted to get this kind of into the D&A in Europe early, but that will give you an idea, at least from a transaction standpoint, where we are in the U.K. But we've not communicated actual volumes yet. I'll let Steve -- what was your other question that you wanted...

Michael Kelter - Goldman Sachs Group Inc., Research Division

Well, just generally about the pace of growth and the future in Europe, what the unit growth trajectory would look like. I would imagine that even though we're early in '12, you've already got some real estate in your mind for 2013. I mean, what's the pace of growth that you plan to pursue?

John R. Hartung

I wouldn't even call it a pace yet, Michael. I mean, it's still allowing people in London to discover Chipotle, making sure our team continues to grow. And so we're going to have a few restaurants here and there, but I wouldn't really call it a pace yet. There are still lots and lots and lots of people within the trade areas we're already in that just don't even know that we're there or don't really know what Chipotle is all about, and so we want to be patient and let that happen. And so it's going to be a similar just kind of a restaurant here, restaurant there approach for a while.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And then lastly, just wanted to follow up. As I mentioned, I had a question on ShopHouse. You were excited enough about it to announce further builds last time you had a quarterly call. Maybe you could talk about how the sales of the initial location have progressed now that the initial opening halo's worn off?

M. Steven Ells

Yes, well, so sales have continued to grow and I think that it's fair to say that the sales are very similar to the Chipotle that's across the street. In fact, I would say that the unit economic model, in general, is substantially similar to that of Chipotle, in general. So that gives us enough confidence to say that we want to open one more and there's a lot of excitement about the concept. There's a lot of excitement about the food, and so we'll be opening the second restaurant in a contiguous trade area in the late fall, early winter.

Operator

We'll now go to Sharon Zackfia with William Blair.

Sharon Zackfia - William Blair & Company L.L.C., Research Division

I wanted to talk a bit about employee turnover and just get an update on where you are on that. I know you had some issues last year when the investigations were in full swing. Are you back to more normalized turnover? And if you could just talk about employee recruitment, if you're back to kind of a normal cadence and ease in terms of getting new employees?

M. Steven Ells

And what's the last part of it, Sharon?

Sharon Zackfia - William Blair & Company L.L.C., Research Division

Recruitment of team members, if it's back to as easy as it was before ICE?

M. Steven Ells

Yes. Okay. All right. Well in terms of turnover, our General Manager turnover is stabilized and at a level that we find quite reasonable. The crew turnover, which was in sort of that 100% range a couple of years ago at the low and spiked up to sort of the mid-100, has now moderated such that it's not down to 100% yet, but it's better than it was. So crew turnover is okay. It's not down to the lows that we saw a couple of years ago before the entire immigration hiccup happened. So that sends a little bit of a sort of a shutter through the system that I think that had an effect for a while. And then now we are, with our recruitment efforts, they are going really, really well. I would say there's a few things going on. When we first implemented E-Verify nationwide, we were concerned that it was going to diminish the amount of applicants in our restaurants. And that happened in some places, but overall, our managers and crew around the country have expressed to me that they have found throughout the entire time that they've still been -- by and large, they've still been able to find really, really great candidates. In some cases, they've had to look at more people to get the top performers that they're looking for. But only a part of that is externally imposed. A lot of that is internally imposed in the sense that we have had a greater and greater focus on hiring only top performers, but we've also had a greater and greater focus on trying to define what a top performer is, and our teams in the field are getting really masterful at knowing what that looks like and so they become pickier than ever. That being said, our recruitment efforts are working really, really well and the managers are telling me that they're getting better applicants. But not just because of our recruitment efforts but because slowly but surely, the word is getting out there that Chipotle is the very best place in terms of opportunity for an entry-level person to come for an hourly position at a restaurant and have an awesome opportunity to become a manager and perhaps a restaurateur and perhaps a field leader in very short order if they're going to work hard and if they're a top performer. And so we get a lot more top performers than ever who are understanding the opportunity that Chipotle represents to them and are coming our way. Simultaneously, we've gotten loads, thousands of people who are being promoted into higher and higher positions who are, of course, telling their friends and recommending Chipotle as the place to come work. And we also increased the amount -- we created a little bit of a reference bonus for people who bring in new people to Chipotle amongst our team. And so a lot of them are taking advantage of that. So on a lot of different fronts, we're seeing that the recruitment, I would say, is now better than it has ever been in terms of the quality of the candidates we're seeing and in terms of our ability to staff really, really well throughout the country. So we're super, super pleased by the people who are now in our restaurants.

Operator

And we'll now go to Bart Glenn with D.A. Davidson.

Bart Glenn - D.A. Davidson & Co., Research Division

Just had one quick question. As it relates to ShopHouse, I was just curious what are going to be the primary constraints to ramping up the pace of unit growth if it gets to the point where you are ready to do so?

M. Steven Ells

Well I mean, by design, ShopHouse operates in a very similar way to Chipotle. It's got the same make-line, it's got the same-size kitchen, it's got the same amounts of offerings. I mean, they're very, very similar. We would look at real estate, I think, the same way. We would look at building size the same way. We think of building cost the same way. We think of staffing the same way, a similar crew size. We think of purchasing a distribution in a very similar way. So there's a lot of ability to leverage a system that's already in place. What kinds of little things here and there that might pop up, I can't really imagine are going to be a huge impediment. But it really was designed to be kind of the same thing as Chipotle. In fact, when thinking about the reason to do a different kind of cuisine, it's that you look at what has made Chipotle successful and we think it's really our focus on the kinds of ingredients that we source, classic cooking techniques, an interactive service model and these are the things that make us successful, not necessarily our burritos and tacos. So any kind of cuisine can fit into this model. So I think we're very bullish that when and if the time comes that we want to accelerate this, we can do that.

Operator

We'll now go to Jeffrey Bernstein with Barclays.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Just 2 questions. First, kind of a follow-up on the unit growth side of things, at least at the core Chipotle U.S. business. I'm just wondering, it sounds like you said that the pipeline is looking better from a real estate perspective which is a net positive. I'm just wondering now as you think about growth this year, I think you said you could do the 160 and you're fairly comfortable with that. And I know in the past, you've talked about that the team could do -- your existing team could do north of 200, so I'm just wondering some of that prior questions in terms of impediments, is it the kind of managers and leadership or is it just finding the right locations or getting them up to your specs or whatnot. I'm just wondering, if the pipeline's stronger might we see or could we see an acceleration not only the absolute numbers, but perhaps the percentage or whether if you could just talk about penetration and whether you have a rule of thumb where certain markets are already saturated or some key metrics to support the penetration, kind of the cadence of potential acceleration in growth?

Montgomery F. Moran

Yes. Well, we've said for a long time that we decide to grow when we have excellent leadership and great General Managers to open new restaurants and when we can find great real estate. I mentioned in my opening comments that we've seen a -- that it looks like there's a slight shift and a slight increase in the amount of sort of new developments that we might be able to lease and build restaurants in over the coming years. And that's a nice thing, it's a good thing. But we aren't ready to talk about how many restaurants we plan to build over the next couple of years. I can tell you that we feel very optimistic that given my conversation today about the amount of restaurateurs and apprentice team leaders that we have growing in a field of their influence and their ability to bring great -- to recruit great people in at the crew level and train them into our future leaders, we feel like that people culture is going to be able to really effectively deliver us a lot of great leadership for our restaurants. And so hopefully, that will be less of an impediment than it would otherwise be. With regards to real estate we've seen, as you've seen from our results over the last year or 2, some really high-quality real estate we've had. We've been able to broaden our portfolio by using the A Model strategy, which has allowed us to effectively take advantage of a lot of remodel opportunities, a lot of off-the-beaten-path locations during a recessionary time. And that A Model strategy is something that not only has been very effective during a recession, but there's no reason why that will not continue to be very effective as we emerge from the recession and as the economy strengthens. So when we see that the amount of new restaurants or new developments begin to increase and again, what we see now is only very slight. But if that should increase yes, I think that there's a chance that we'll be able to find more real estate. But we don't look to grow at a percentage. We don't look to seek a certain degree of penetration. What we do is we look at our markets around the country. We look at what the demand is for Chipotle. We look at how high is the quality of experience that we're offering in our Chipotle restaurants. When we're in a marketplace where the quality of the experience is very, very high, where there's a lot of people who are moving up through the ranks as employees at Chipotle are ready for management positions and our unit economic model is great and we have very high sales in these restaurants and when we can find great real estate nearby, of course if behooves us to take advantage of those opportunities to lease that additional real estate, build additional restaurants and satisfy both the customers' demand for additional Chipotle, as well as the demand for our employees to give them additional opportunities to serve guests in new restaurants. So we really look at it as sort of, we do everything we can in this company to create a huge demand for what we do. And that starts with great ingredients and food with integrity and better-tasting food through better cooking techniques, better training techniques, better people in our restaurant. We try to do all those things better, and when we do all of those things better that we focused on in our opening comments, we believe that it's a much more compelling restaurant experience. When we have a more compelling restaurant experience there's a higher demand for it, both from the crew standpoint and the customer standpoint and we are eager to fill that demand by building -- responsibly building restaurants in markets throughout the country, and of course taking advantage, just beginning to plant seeds overseas and [indiscernible] too, but we think it's going very, very well and so I don't think there's any reason to be anything but optimistic about the future. But we're not ready to decide how many restaurants that's going to yield in 2013 and so forth right now.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Understood. And then just, Jack, just one clarification. I think it's often times confusing when we talk about commodity inflation, but I think I understand when you're saying that commodity basket's going to be up mid-single digits that's still kind of a forecast for this year. I'm assuming that's year-over-year. And the pricing we know in the first quarter was 5% and it seems like that's going to ease to down to perhaps 1% or so by the fourth quarter. But I'm just having trouble having packaging them all together in terms of how we think about year-over-year the food cost line. So you mentioned it was up 30 bps this quarter, with 5 points of price and a little bit more than that of inflation. On a year-over-year basis, how would you think about the next couple of quarters in terms of as a percentage of sales? You threw out 100 to 150 bps, I wasn't sure if that was specific to year-over-year on that line or whether you were talking sequentially or...

John R. Hartung

Yes, Jeff, on most of my comments, really all of them were designed -- were talking about sequential. I think when you go year-over-year, lots and lots and lots of things have happened between this year and last year. And so to simplify it, what I'd rather do is talk about where were we in the fourth quarter, where were we in the first quarter. And we had somewhat of stability there. Now what I'd like to do is what do we expect in the summer? And we expect higher cost as we move into the second quarter and the third quarter. It's coming from 3 principal places. We continue to see inflation in beef cost. We will see seasonally higher prices, even though avocado year-over-year will be lower. As you get into the second and third quarters, they're going to be higher than they are in the first quarter because we're going to start buying from California. They will be more expensive. That's why I think it's more relevant to talk about what's it going to cost, what are avocado going to cost in the second quarter and the third quarter compared to what we're paying today, and that's going to be higher. And the third thing is we're doing things like sour cream is going to be more expensive beginning in the second quarter because we're going to move towards getting our dairy to make the sour cream from pasture-raised dairy and that's going to add some expenses. So those 3 things combined, as you move from the first quarter to the second and the third, are going to result in about that mid-single digit higher cost. When you compare to last year, now you're talking about seasonality of avocado, you're talking about the freeze with the produce last year, you're talking about the menu price which starts factoring out, and I think it gets much, much, much more complicated. So I hope that makes sense. And so when we talk about this mid single-digit inflation, it's from where we are today.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Versus 32.2% in the fourth quarter of '11, you're saying it could go up to the high 33% range by the end of this year?

John R. Hartung

That's right. And because we're talking about the fourth quarter of last year and the first quarter of this year, which had the price increase fully loaded, that price increase is in there and so you don't have to adjust for price increases as you move to the second quarter and third quarter because we don't plan on a price increase. And so what we can talk about now is just commodity inflation. We talk about food with integrity and those things, principally those 3 things, beef, seasonal-affected avocado and our dairy, we think, are going to add somewhere in that mid single-digit range to our food costs.

Alex Spong

All right. Thanks, everyone, for joining us. But we have passed over our time, so we appreciate you joining us today. We look forward to speaking with you next quarter.

John R. Hartung

Thanks, everyone.

Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation.

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