Good day and welcome to the Chipotle Mexican Grill Second Quarter 2007 Earnings Call. At this time all participants are in a listen-only-mode and the floor will be open for your questions following the presentation. Also today's call is being recorded. It is now my pleasure to turn the floor over to your host, Ms. Sandra Curlander, Investor Relation for Chipotle Mexican Grill. Please go ahead ma'am

Thank you. Hello everyone and welcome to our call today. By now you should have accessed our earnings announcement released this afternoon for the second quarter ended June 30th 2007. 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 within the meaning of the securities laws. These forward-looking statements will include projections of restaurant comp sales trends, the number of restaurants we intend to open, earnings per share, certain expense items and other statements of our expectations and plans. These forward-looking statements are based on information available to us today and we are not assuming any obligation to update them. Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We refer you to the risk factors in our annual report on Form 10-K for 2006, as updated by the 10Q which we expect to file this week for a discussion of the risks that could impact our future operating results and financial condition. I want to remind everyone that we have adopted a self-imposed quiet period restricting communications with investors during sensitive periods. This quiet period begins on the first day of the last month of each fiscal quarter and continues until the next earnings conference call. For the third quarter, it will begin September 1st and continue until our third quarter release in late October. On the call with us today are Steve Ells, our founder, Chairman and Chief Executive Officer, Monty Moran, our President and Chief Operating Officer, and Jack Hartung, our Chief Finance and Development Officer. After their comments, we will open the call for questions. With that out of the way, I would like to turn the call over to Steve.

Thanks, Sandra. We are very pleased that we are sharing more great news with you this afternoon. Our 11.6% comp for the quarter and 10% comp for the first half of the year are obviously really exciting and our margin expansion is quite an accomplishment during a time when the market place has been concerned with pressure on major items such as labor costs and food costs, so obviously we are very pleased. What is of the most comfort is that these results are gained through applying the same discipline and strategy that I have talked about in previous calls. The discipline to focus on just a few things and try to do them better than anybody else, which means cooking great quality raw ingredients according to classic book cooking techniques in an open kitchen, in front of our customers and in an atmosphere that’s relevant to the dining experience. And it means providing a level of consensus service that is usually unknown in a fast food or quick service environment. And we are proud because we think we do these things better than anybody else; we believe our continued focus is central to maintaining a strong unit economic model. But conversely, it’s this unit economic model that allows us to focus on these things in a way that would be very difficult to replicate, which gives to portray a rather unique advantage. For instance, because of efficiencies elsewhere on our P&L, we are able to invest more in our food, buying increasingly high quality ingredients. We are also improving how we prepare our food, designing more efficient equipments and optimizing elements of our restaurant design that help our managers and crew deliver a better food and better customer experience. As I withdraw to this focus, restaurant level margin increased…

Thanks Steve. Having great results is obviously rewarding and I feel really good about this quarter. So what's most satisfying is that these strong business results are flowing from doing what we believe in. But doing what we believe in means such things like striving for Food with Integrity, as Steve already discussed. They also mean creating a culture that empowers our employees to be at their best personally, professionally and financially. Building this kind of culture excites us as it results not only in a better experience for our customers but also strong financial performance for our shareholders. We are pleased to see that our performance this quarter and year-to-date is been a result of our continued efforts to build such a culture. At the center of any discussion culture has to be the restaurant manager and restaurateur positions. They are the ones who must directly and profoundly effect not only the customer's satisfaction, but also the success of our unit economic model. Since we continue to realize that the restaurant manager is the most critical position in the company, our first job is to identify talented crew with the potential to become managers. Next, we need to develop them along with our existing managers, so that they can deliver Chipotle's high standards in our restaurants. Once we've done that, we need to identify and remove any obstacle that may inhibit their ability to deliver the best restaurant experience possible. So, from the people's side, our formula for success is based on these four fundamental principles: identifying talent, developing managers, ensuring high standards and removing obstacles. And these efforts are working to develop better managers and crew. We see this in the quality of the food served, and by the great service that we're seeing in our restaurants. We…

Okay. Thanks Monty. And of course we are developing great restaurant managers and crew along with our pursuit of Food with Integrity is creating an extraordinary dining experience, which continues to attract new customers and build stronger loyalty with our existing customers; such result is comparable and restaurant sales increased 11.6% for the quarter and above 14.5% last year, along with the 32 new restaurants opened this quarter and the contribution from our non-comp restaurants opening in ’06 in the first quarter of ’07. Total revenues increased by 33.9%, to $274.3 million in the second quarter. For the six months ended in June, comps were 10% and total revenues increased 30.2%. Our unit economic model continues to improve with average restaurant volumes now at $1,674,000, for the over 500 restaurants that have been opened for at least 12 months. This is up from $1,545,000 at this time last year, and up from under $1.4 million just two years ago, and our higher commodity cost has pressured our margins this quarter. Restaurant level margins still improved at 150 basis points to 23.2%, the highest quarterly margin yet. And this is a credit to our restaurant managers and the talent they are developing in the restaurants. We announced restaurant managers and fire to hire and develop talents in the restaurant. And when given the tool to effectively manage the business, our restaurant can support high volume, that's a throughput. The higher cost of Food with Integrity all are providing an extraordinary customer experience and all are delivering superiority margins and returns. This 11.6% comp was mostly driven by increased customer visits, as menu price increases related to the rollout of naturally raised meat contributed only 2% during the quarter. On the development side we are right on track to deliver the 110…

(Operator Instructions) We will take our first question from Jeffrey Bernstein with Lehman Brothers.

Great, thank you very much. Two questions actually. First on pricing. Just wondering if you can talk about your expectations for the back half of the year? I guess, based on your expected roll out of natural meats, just wondering and how we should expect on the menu by year-end perhaps? And then obviously, contrary to your prior expectations, would you now expect the restaurants over the margin expansion to remain at these levels or perhaps what level do you see the restaurant level margins reaching by year-end? Thanks

Okay, hi Jeff. We had a couple of things. One on the menu prices, really we don’t have an expectation specifically in terms of what additional roll off will happen between now and the end of the year. What we can tell you though is, in the second quarter we had a full 2% menu price increase impact for the full second quarter. We did roll natural chicken into Dallas and that late in the quarter. And once that’s fully factored in, we had run rate of right around 2.5%, 2.6 %. And we expect with that kind of rate 2.5% to 2.6%, that’s really run through the rest of the year. And as soon as we have an opportunity to roll out additional Food With Integrity needs, we will of course increase prices at that time. But, really we don’t have any specifics to add to that right now. In terms of margins, there are really a lot of moving pieces with margins. So let me try to hit on some of them. First of all, keep in mind that our second quarter traditionally from a seasonality standpoint is our best quarter from our margin standpoint. We have highest average daily sales during the second quarter. And so if you go back and look over the last two, three years or so, you will see the second quarter is always our highest margin. So, I would not expect just based on seasonality alone, our margins to remain at this very, very high level. We still have the wild card related to food costs. We’ve seen a pretty dramatic increase in commodity costs. We lost 100 basis points year-to-year second quarter this year versus last year. We would have lost more, frankly, if we didn’t have additional control at the store level and if we didn’t have the menu price increases. And we don’t see commodity costs belief really in sight and so that's a wildcard sort of this descending commodity continue to increase, will continue to have pressure. And then labor, we did frankly a nice job of controlling labor during this quarter. And as we move into lower seasonality months and the sales standpoint, we think this labor at 25.9 will be hard to sustain and there is about 30 basis point of non-recurring catcher related to the fact that we are now self-insured and our health insurance and we have the benefits in the second quarter and that the labor line that we would not see going forward. So the short answer is this would probably be our high point and we would expect in terms of margins then we got number of wild card set that we have that to play against for the rest of this year.

Great, could I ask you just one follow up on -- obviously the comp has been very impressive considering most of your peers suffering significantly, just wondering if you could talk about perhaps the disparity across the country whether there are better or worse markets obviously within that blended number. Just wondering whether you are seeing any market, let’s say a pinch from consumer pressures or perhaps any signs of cannibalization or whether there are other factors perhaps that are pressuring some markets more than others, such as competitions or what not? Thanks.

Yeah it’s a great question and really our comps are remarkably consistent across the country. Of course they are not the same, we have some high, some low. But I can tell you there is not one market that we look at and either because of economic reasons or any other reasons that we see is suffering. They are remarkably consistent, we’re really having great success throughout all of our markets throughout the entire country.

Tremendous, thanks very much.

We'll go and take our next question from Jason West with Deutsche Bank.

Yeah thanks a lot. Great quarter. I was wondering if you guys can talk a bit about what the ramp looks like on the store model as you get it to year one, two, three? Have you ever given numbers in terms of what the comps look like as you progress in terms of surety?

We've not given specifics Jason, but what we have said and we continue to stick to this, is our new stores open up at right around 85% of existing and I think the thing that we're most proud of is our existing mature stores, stores open more than 12 months, is now at $1.674 million. A year ago it was about $1.560 million or $1.570 million. Few years ago it was $1.4 million. Our new stores have continued to open up at about 85% of their constant increasing number and that kind of relationship continues today. So we feel very good that by opening up 85% we're within a couple of years of some of the reasonable comps to get up to what our average stores open 12 months or more would be at. And then in terms of comps, typically our new stores will comp at a little bit higher level than our existing stores. So they can easily close the gap from 85% to a 100% within a couple of years.

Okay, that's helpful. And just one other one, could you guys give us any color on what you are thinking about '08 store development plans I mean, are we looking at another year in the 20% kind of range or would it be materially higher next year?

Too early to tell, I would say no to materially higher. I would say that we'll continue to look at our ability to build the pipeline and our ability to develop great managers; both of those are going well, that's why we stepped up the development this year to 110 to 120. We will be in a better position after our third quarter release to maybe give the range at that time but I wouldn't expect any material changes.

Okay, thanks a lot.

Next from Raymond James, we'll hear from Bryan Elliott.

Good afternoon, can you hear me okay?

Yeah. Hi Bryan.

Hey, I had a question on -- back to the sales. I wondered if you could update us on sort of what you saw from a throughput standpoint, particularly given that this is the highest sales quarter. And also if you're seeing anything from a shift, lunch to dinner, anything of a material nature going on from a day part standpoint?

Did you hear -- I didn't hear the first one?

I think the first question was on throughput brand.

Yes, throughput and then once dinner split.

Once dinner split. Yeah on the throughput we are happy to say we continue to see gains during the second quarter when our sales reached higher levels, our throughput went right along with them and in fact we used to talk about 90 transactions per hour sort of mid 2005 and by the time of the IPO we were talking about a hundred and then some time later we are talking about 110. Now we saw our transactions still -- sort of another 10 transactions faster over the year before, so sort of 118 range over about 107 or 108 during the second quarter of 2006. So now we do these transactions in comp stores, but during the peak hour on weekdays between 12 and 1. So anyway, our throughput has continued to speed up and we are delighted by that. We are continuing to measure it in 15-minute increments as well as the hour to make certain that we are gaining efficiencies not just in the key lunch hour, but also in dinner and in other hours during the day. So that's going very well. In terms of a shift from lunch to dinner, dinner to lunch, no it remains basically constant. We are still at sort of a 48% ,49% lunch and sort of 50, well 51% ,52% dinner which is roughly the same over a year to anyone.

Great, thank you.

Our next question will come from Nicole Miller with Piper Jaffray

Good afternoon, great quarter.

Thanks Nicole.

Thanks Nicole.

I just wanted to go back to the price in your [project] but it was about 2% in the second quarter and then what I couldn’t reconcile was were you suggesting 2.5 for the back half of the year?

Yeah we are running Nicole, based on everything we have done today and that includes Kansas City earlier in the year, it includes few markets late last year. The Colorado market in April and then we rolled Dallas and a couple of smaller markets, Omaha and Wichita during the second quarter. With all those fully loaded in the third quarter and in the fourth quarter we would expect about 2.5%, 2.6% run rate.

Okay. Thank you for the clarification. Did you also mention pre-opening was 90,000?

Well, it was more like about 80,000.

Okay.

For the 32, that we opened. We were low in the first quarter. We were about -- typically our average has been around 70,000 or so. We were low in the first quarter at about 64, we were at about 80,000 per store in the second quarter, but the two kind of average out at 73. It's not unusual for a pre-opening to kind of bounce up and down. And that’s really a function of ramp. Our cash pre-opening cost, that is the marketing and the training has remained constant. Our rent is down around a little bit quarter-to-quarter. But for the year for the 60 restaurants so far this year we are at right about 73,000 and that’s pretty normal.

Okay. And in terms of the AUV up close to 1.7. It’s often difficult to understand because it doesn’t seem that given the rate of growth that we are not talking about maturity here yet. So, can you pick apart either the number one unit you and why -- or pick whatever is that base of mature units and talk to us about their AUVs and the like?

Well, it's a great question, but a tough question to call. I think your question deals with -- have we seen kind of a limit, have we seen a restaurant that maybe hit a sales level and then stopped. And we haven’t, we have market, entire market that are averaging $2.2 million. We have individual restaurants that are averaging well over $3 million. And these restaurants that are doing $3 million and the markets that are averaging $2.2 million, they look like any Chipotle restaurants that you would visit throughout the country. And so, we don’t see really a limit to what we are capable of doing with the Chipotle restaurants that we are building today and that we built over the last several years, you know a lot it deals with just the awareness of Chipotle. It deals with the loyalty of some Chipotle customers, Chipotle just has more loyal customers for example and so we are not seeing really a pattern, we see some markets that set up slower than others but the slow market will eventually catch on and then they will comp higher, so really we are delighted to say that we are seeing success in given geographies in different markets really across the country, there is not something that seems to be limiting us in any way right now.

That's exactly what I was trying to get at and actually that's helpful, and actually beats me to ask the question in just the reverse way -- if you look at those markets that you are above two or units that you are above three and then stores are opened like they were at the 85% -- if you look at those markets is there anything you just couldn't heard of and those markets meaning it has a good demographic but not a 3 million demographic or has a good population but not at 3 million population, or is it more -- I am not sure what it may be, but have you looked at it that way?

Yeah, we haven't seen -- I think what your question was, do we see demographics that, so we should do 3 million and only do two and do we see some that so we should do a million, thousand or two. I think we do look at every cycle, look at demographic for every single site, I would say Nicole the only thing that we see is we see sometimes the timing difference. And then in some markets where the awareness is in as high where the loyalty level isn’t as high, that may be relative to the demographic. We might get there maybe more quickly or little bit more slowly but there hasn't been really a pattern. We do great in the west and we do great on both coasts. Occasionally the market effects are slower but again based on history our confidence is that those markets and those trade areas with the demographics we are talking about do come on strong. I am not sure that answered your question, I hope it does?

No it does, it’s actually -- that's very, very helpful. So then there is a last question regarding this issue, when are you targeting new markets in a different way are you being more aggressive with advertising? Are you being more aggressive with advertising to quicken that ramp or are you okay with the ramp the way it is? Which is successful?

I mean, I think the answer is we're pretty happy with the ramp, the better it is the happier we'll be, but no we're not targeting advertising in specific areas much differently than others, unless we think there is some real opportunity on the local level to get involved from a marketing standpoint.

And then my last question. Just as it relates to efficiencies, it's always interesting to try to digest how the margin could improve from here. Do you consider expanding day parts or drive-throughs or anything of that nature at this point?

Yeah. Nicole, it's I think really important to understand that the success that you've been tracking over the past quarters, the improvements have come from being really consistent with our approach to keeping things focused and just knowing the few distinct drivers of the business and trying to make those better and better and better. And for instance, I mentioned the Tortilla press which seems like an insignificant piece of equipment, but by making that much better, not only are we making food taste better, but we're also going to help throughput. I mean, adding a drive-through would in my opinion probably not increase our volumes now. We have a lot of a line right now and so making that line go faster, increasing throughput is really the key. Adding to drive-through also changes the experience dramatically. I mean people don't view Chipotle as typical fast food for a number of reasons, the high-quality food, the interactive customer experience, the open kitchen, the environment that says something about the food, all these things go towards creating experience that people think is different, and by employing traditional fast food methods of increasing the business I don’t think we are doing our customers any favors and don’t think we are doing shareholders favors either.

Thank you very, very much and again a great quarter.

Thanks Nicole.

Thanks Nicole.

We are going to take our next question from Glen Petraglia with Citi.

Thanks, good afternoon. I was hoping maybe you could address Food With Integrity, obviously you are making progress. How long do you think it takes to get to a 100% on both the chicken and the beef front? And then if you would disaggregate pricing without Food With Integrity, if you just look at market that you didn’t roll out to do with Integrity in the last 12 months, what sort of pricing would you be seeing there?

Well first on, to get to a 100% naturally raised meat means we will -- I believe I said it would take two years and that was about a year ago. So we have maybe another year or so to go and I think we will be there, right around there. But really once we have a 100% naturally raised meat, it doesn’t mean we are finished investing in better quality meat, because the definition of what makes a good quality meat product is going to change. Perhaps we will want outdoor raised chickens, perhaps we will want grafted beef, perhaps, I don’t know there are a lot of different improvements that could be made. So the idea the velocity behind Food With Integrity is that you are never there. You have never reached the destination. You are always striving for something better. However, to answer your question about considering our protocol right now for naturally raised meat our definition right now, we should be there within a year or so. And as far as price increases…

Yeah, and the reality is, we rarely increase prices without the opportunities to roll out Food With Integrity. And two great examples of that, when we rolled out natural chicken in Colorado this past April we raised prices at that time, before that price increase we had not raised prices in Colorado for over three years. And it’s a similar scenario in Dallas where we just rolled out natural chicken and we hadn't had a menu price increase for Dallas for at least two or three years. We don't think we are always going to be able to do that. But the 2.5% or the 2.6% run rate that I just told you about is really -- they are virtually, are 100% associated with the roll out of natural meats in specific markets.

Okay. And then in terms of your occupancy cost, I think it was 6.7% of revenue this quarter, I am curious going forward is there any reason why that shouldn't stay at that level or you shouldn't be able to continue to see that leverage considering that your growing transactions is up for single digits?

Well, I think you can expect that to see at about that level. But keep in mind the seasonality in terms of sale might cause it to bump up a few times here and there as we move to the third quarter and fourth quarter, so just pure seasonality and I would look to previous years to see that. The only other thing that could cause it to (inaudible) wouldn't be able to keep this number, would be we are going into some higher price markets. We really haven’t entered Boston yet, we have got one site at [Deltie] Boston and we think Boston will be a very strong market for us. Occupancy costs are very high there. We are about to enter Philadelphia as well. And so, we are doing very well on board and we have great opportunity there unless, and rents are high there. So, there is lot of high rent market that we’ve barely started to service. So, that would cause that line item to tend to push up through.

And then lastly, Monty. Just talking about throughput, if you can maybe address some of the things that you have done, obviously you are seeing very meaningful transaction account growth. I know you've done change machines and put an expediter in, what other sort of things do you see as potential things that you can do to continue the trend?

Yeah I mean there remain a lot of things to do, but even though it may not be effective to talk about it, the single greatest thing is still training, and keeping better and better people. As we pick and identify more talented crew people and as we train them to be more talented managers, these talented managers are much better at knowing what it takes to speed up our service and make our service better in all respects. There are some things, just sort of from the purely equipment side that we can do to make things faster and one that you mentioned was the change machines and that did help. Another thing is the Tortilla warmer which Steve mentioned, the reason that speed throughput is, it is more consistently hot and it’s easier for the crew people to operate the machine and so it might save a couple of seconds at the Tortilla station, which is a pretty critical station for us and allows that person to pass bread onto the next station more quickly. Likewise, we think that there are number of ways that we can increase the speed of our point of sale system, not only the screen we use, but perhaps even the piece of equipment there and how we can make it more efficient, because the cash handler, the handling of cash continues to be the slowest part of our line. Some of that's taking care of itself to some degree because credit cards has become an increasingly large percentage of our business and they are faster than cash so -- and that's thanks to some of our procedures around the credit cards such as not requiring signatures and thus not waiting for verification before we can hand the card and the receipt back…

Thank you.

(Operator Instructions) We will go and take our next question from Mark Wiltamuth with Morgan Stanley.

Hi, good afternoon it's actually Scott Schroepfer for Mark. Quick follow up on commodities. Could you give any color on maybe the specific head wins you saw from your key commodities as well as -- I guess I am wondering if you have any sort of contractual protection and how long that would run for typically?

Yeah on commodities. The three things that had the biggest impact on us this quarter versus last year and in this order are the cattles, chicken and beef. And in terms of contracts we don’t contract any of those items really. Our intent is to -- with the meat is to try to move more towards naturally raised meat and there is a great ability, the contract will naturally raise meat and so we don’t have that ability. We do contract -- when I say contract we have an agreement with our supplier, a cheese for example where our cheese prices we have agreed to a fixed price for the full year of 2007. So mostly cheeses prices have spiked up quite a bit and we have not felt the impact of that as a result of those increases. We were expecting to feel the increase next year when we trying to renew a new agreement with them.

Okay great. One more quick follow-up on unit growth. You talked about the developing management candidates, but I am curious to know kind of like what your pipeline is looking like in terms of target locations. I mean, is that any sort of constraint for you or is the pipeline looking pretty good in terms of your growth through‘08?

We are just now working on our '08 pipeline and we are just now about to start our 2008 strategic plan. We will identify exactly which markets, exactly how many restaurants etcetera. So, it's too early to tell. I would say that the pipeline building for the last 12 to 18 months has gone well, that's really what's supporting our 110 to 120 openings. That’s also supporting why we are able to open more evenly throughout the year. There is a nice healthy pipeline that we have got. So the pipeline is good, but too early to tell exactly what that means for 2008.

Great. Thanks.

Okay now we will take our next question from Rachel Rothman with Merrill Lynch.

Hi, good afternoon. Just a follow-up on the real estate question, given the soft real estate, are you guys starting to see rental prices or real estate price declining in price at all?

No, not at all. And that’s because of the market we're in -- that’s because of the trade areas that we are in. Prime real estate in prime markets are not declining whatsoever.

Okay. And we heard from Tyson yesterday on their conference call talking about their intent to kind of enter into focusing more on all-natural chicken or antibiotic-free chicken. I realize that they are your supplier, but do you feel like having the big participants entering that market may increase the supply of more naturally focused products and thereby lower cost, providing you some margins list over the next coming years?

Well, we certainly hope so. And we have thought larger suppliers were getting more interested in doing the right thing. As the supply has expanded, we have also seen that there is more demand for it. So it's very hard to predict that there would be a downward trend in our ability to -- and the cost of naturally raised meat because of some of those larger players getting involved.

Just as an inside question, if the price of the naturally raised meat is somewhat tied to the price that we would see in the regular commodity market that's used?

They are not necessarily, it’s essentially much more stable because on the naturally raised meat what the user is looking at is the cost of feeding the animal. Whereas with the commodity meats often times we are talking about sort of international fluctuations and market pressures that don't affect the naturally raised meat so much because there it is dealing with how much it is costing to feed the animals and of course that's affected pretty dramatically by things like the increase in price in corn and other grains that are usually fed, but not so much on the international whims that may affect commodity ingredients.

And then finally on the G&A, can you talk about maybe, down on any particular quarter but over the next 12 or three years or five years, do you think the opportunity to continue to leverage G&A as a percentage sales or how we should think about where that would kind of level out or where we would begin to see less dramatic leverage in that line item?

Yes Rachel, I would expect that G&A leverage will decline pretty significantly, in other words, the gains that we've gotten over the last two years -- or so its kind of a low hanging fruit and I think that was a significant leverage that I would expect to see level up now in the short medium turn I would expect us to stay in that low 7% range, 7% as a percentage of revenue. We kind of had a goal, a communicated goal that we wanted to get into that low 7 range within a couple of years and that would be right in 2008. And so we got their sooner, that doesn't mean that we expect to go much lower than that in fact I would expect it to be in that low 7% range for this year and then in the next year. I think in longer term -- I think we certainly can get into the sixes and I think it’s possible maybe over a three-year period to maybe get into kind of that mid-six range if you will. We're certainly a very disciplined company, we're certainly very focused on putting the right G&A in this quarter business, but we're also 100% company owned, we also put a lot of time and effort into developing our people, put a lot of time and effort into searching for the very best ingredients, and so we'd be very cautious not to be too aggressive in cutting our G&A to have any kind of negative effect on any of those things that we saw are very important to our business.

Okay, thank you so much.

Thanks Rachel.

We'll take our next question from Dean Haskell with Morgan Joseph.

Thank you gentlemen. Congratulations on a great second quarter.

Thank you Dean.

Thanks very much.

My question goes back to the naturally raised meats, what percentage of units currently have the naturally raised beef and then what percentage of units have the naturally raised chicken and then what percentage have both?

I don't know on the top of my head, we really track it by percentage of total and right now 100% of our pork -- so 100% of our units served only 100% naturally raised pork. We had 76% of our stores serving naturally raised chicken and 43% of our stores are serving naturally raised beef, I don't know off the top of my head how much served both chicken and beef, what percentage that is, I'm sorry.

Okay, you can assume possibly that all of the beef are also serving the chicken given that differential and the positions?

No it's not like that.

No, it's not that way because it's important what part of the country meats come from because of distributions. So sometimes we may have for instance chicken available to a certain market, but beef not available to that market. In other times we'll have vice versa. So we have markets that have all natural pork and chicken, we have markets that have all natural pork and beef and many markets that have all three.

Okay and the rough differential as a percentage of price between of store that's completely non -- well they would have pork now, but would have only the pork versus would have any one of the other combinations?

Did you ask how many of our restaurants have only pork?

Just if I were to walk in, the ones that had only pork versus one that had pork, beef and chicken?

What would the price differential be? Its $0.30 to $0.60 per item per breed of all generally would be the difference in price.

Okay so almost, say 7% or 8% the check average?

Yeah I think that's fair.

Right now keep in mind…

While check average is actually 9.5, so maybe a little less than that (Jim) mentioned for check average or something close to that.

And keep remembering that's the premium that we would charge for that natural item, but in a market like Colorado where we didn't have price increases for three years all of a sudden we have raised prices on everything. And so if you compare like Colorado just after the price increase to Dallas before their price increase, there would be differences across the menu board but only the $0.30 to $0.60 the amount you referred to is due to the natural meat and eventually just due to a timing difference and when the market had price increase everything got in place and covering normal cost in doing business.

So how much of a normal price increase are you are taking in those markets?

Well it’s averaged about 7% in the market we've recently brought naturally raised meat and preferences in Colorado is 10% when we brought naturally raised chicken into Colorado which already had naturally raised pork and naturally raised beef. However, we had a naturally raised beef just over three years ago to Denver and did not increases our prices at that time because we had just instituted the price increase and didn't want to sort of double doing our customer, so we basically held off and took no additional pricing increases on the naturally raised beef for three years. But when we did raise prices, we raised them 10%. The same was true in Kansas City 10%.

A very smart move. So basically, you are running about a 3% CPI excluding any premium from naturally raised beef or pork or chicken etcetera?

I mean, that's probably close. I would think it's actually a little bit less than that. If you look at over the course of last four or five years, we’ve actually not kept with the CPI and we’ve fallen behind a little bit, quite frankly. But, that we are able to do that, we are delighted by that, because it helps us fulfill another one of our mission which is to remain accessible such that broad, broad groups of people can afford to go and enjoy our food.

Sure. And with aggressively rising traffic, you can cover those fixed costs over that base fast runways. Thank you very much again. Congrats on the great quarter.

Thank you so much, Dean.

Our next question will come from David Tarantino with Robert Baird.

Hello, everyone, congratulations.

Hi David.

Thanks Steve. The question on the comps, the guidance you gave last quarter suggested that you did not expect for traffic to improve sequentially from Q1 to Q2 and obviously we have seen that happen. So I was just wondering what your thoughts are and what drove that, was it that overall demands are getting better, or do you think you are driving that with some of your initiatives?

Well, David, there is little over 3% improvement in first quarter versus second quarter, and 1% of that was right because we took price in Colorado early in the quarter. Then probably the other 2% remaining part of that is momentum, maybe part of it was weather, in the first quarter we said we didn’t see an impact of weather or we couldn’t measure the impact of weather. So it was possible maybe we didn’t see some weather in the first quarter and we just weren’t able to really calculate what that amount is. But for sure, when we are back into to it, I think there is a little bit of an uptake in the second quarter. And my main comment and I’ll reiterate that is, that I want to caution everybody not to assume that you can take a two-year comp run-rate and assume that’s going to give you any insight quarter after the year and if you did that you find that we did have 2%, 200 basis point follow-up in the second quarter versus the first and if you continued, if you thought we will do the two-year run-rate it’s somehow going to be meaningful by the fourth quarter you’ll come up with some kind of comp in the 18% range or 17% range, as of anything with caution not to do that two year thing that worked so well for '05 and '06 but I don't think it will work or work really at all in '06 and '07.

Okay, fair enough, but I guess a follow-up to that would be the low-end of your comps guidance, assumes high single digits and your 10% year-to-date, so I was just wondering what your thoughts are and what could cause you to be below the year-to-date run-rate especially given that comparisons get a little easier in the back half.

Well, again I think the comparison here is not meaningful to speak because that was the completion of the two-year trend '05 and '06. We think kind of the quarters are relatively fair comparison quarter-to-quarter, I think frankly David the 10% falls right smack in the middle of our guidance and we would hope that we would not fall to the low end of that, but we want to make sure that our guidance range that gave us enough room for a little bit of a slip because of God knows what -- maybe weather, maybe some additional impact on the consumer and so we think the range is appropriate with right now us sitting on a year-to-date basis, right smack in the middle of it.

Okay, fair enough. And then last question on the labor line, other than the leverage that you got what drove the improvement there and what was the size of that benefit? I know you talked about the labor management at the store level, how would you split out, just general leverage versus some real improvement in the underlying rate?

Yeah, I would say the 190 about 60 basis points relates to our now being self-insured and of that 60 basis points, 30 of that is catch up for the first quarter, okay, and so that's non-recurring, the other 30 is recurring presuming that we can continue the good history in terms of health claims and things like that. So of the 190, 30 is not recurring related to our being self-insured, 30 is recurring, the rest of it 130 basis points is some combination of higher sales and more disciplined with historical metrics. And so breaking that 130 basis points into which is hard to do, it would probably be not too far if you split it down in the middle and that half was just due to having a labor metrics and half was due to having higher sales and just sales leverage, a kind of a scale as our average restaurant sales increased.

Okay. And just a follow-up to that. Is there any reason why you might not see a bigger improvement such as you start to cycle some of the investment you've made in the new staffing structure going forward?

No, I'll tell you seasonality would suggest that this will be our best quarter and that's point one. And then secondly, as we have moved into the third quarter already and we're seeing slightly lower average daily sales versus the second quarter, we've not been as effective in the third quarter so far in hitting that labor metrics. And so I would say that we performed very well in hitting our own internal goals in the second quarter, and so far we're a little bit behind that in the third quarter, and you know part of that is just adjusting. It's hard to adjust when your average daily sales decline a little bit. And so, we're working on that our field teams are working very hard on that, but we're not going to sacrifice the customer experience, we're not going to sacrifice things like throughput. And so, it's harmful, stated that the two forces, one seasonality and two maybe not quite performing through our own internal goals both of those might work against us in the third quarter.

Okay, thanks a lot.

Thanks David.

Okay thanks a lot.

Thanks David.

Next we'll hear from Larry Miller with RBC Capital Markets.

Hey guys.

Hi Larry.

How are you doing? I was trying to think about your volumes from a different perspective. At what level do you think you are running at an efficiency level that you don't want to -- maybe your turning away customers? I -- maybe you should be considering cannibalizing some scores, have you guys thought about the market penetration level with respect to cannibalization?

Well I'll tell you Larry we consider cannibalization, we think about impact, every time we open up a restaurant we estimate what that impact might be and we make a decision based on what we think the results would be after impact. We don't look at a restaurant that's doing $3 million and say that's too much volume, but we will impact it and bring that volume down. What we do say though, is there is a rush on $2 million and $3 million other than the freight area right next to it that we could do another restaurant that’s doing $2.5 million and so the very high volumes of restaurants suggest that we can put more restaurants near it, but it’s never a consideration where we go in and say this restaurant is too busy, we can't handle this volume; let's go open up another restaurant nearby. I think it’s one of the great things we have. Our great managers were developing great people in the restaurants and we have all the right equipment and we have the right training and everything's going right. We can handle some really pretty dramatic volume. To give you one great example we had a brand new restaurant in its very first week to over $70,000 of volume and as for the brand new crew and brand new customers, and so really we think we have pretty significant upside opportunities to run even higher volumes in our very high volume stores.

Great Jack, that's really helpful. Jack can I ask you a question and maybe it’s a silly question, but in terms of stock split I know there were some issues as you came up from the tax risk spin-off from McDonalds, is the only thing that prevented from doing stock split over certain time period?

You know Larry, it’s a big question. There are some things that would make it difficult. But I will tell you that we are not considering it stock split right now. We have a lot of things that we think and can add value to our shareholders, that can add value to our customers. It really revolves more around improving our ingredients, improving our restaurant design, continuing to develop great managers and crew, and we think stock split in terms of adding any kind of value at all is way, way, way down the list. So it's not something that’s on our list right now at all.

Okay. Thanks guys.

Thanks Larry.

And we will take a question from Jeff Omohundro with Wachovia.

Good evening. Just one question on the prototype and the building costs. Just maybe you can highlight a little bit on what you are seeing in terms of material cost trends, given the growth rate and the broader macro environments? And also, I am curious about what you are doing in renewable materials as part of your design process on your prototype? Thanks.

Okay Jeff, on the cost trends, we do think that the cost inflation has leveled off a bit in the past year and so in prior years we’ve seen inflation in the high single-digit in terms of our material cost. This year we have seen that maybe level off a little bit to more kind of the mid single-digit. So it's still more expensive, but maybe a little bit better than it had been in the prior year. This will be our fourth year that we expect our average development cost to be right around $900,000. And we have done that for a couple of things. One changing our building mix, where we have relied on that free standard as we felt it’s property brand and awareness is much higher. We have also been reducing the size of our building, we found that, we think that all the experience is better; I mean we don’t have very, very large buildings. And so, we have been reducing the size of our individual restaurants and that’s resulted in higher average sales. Our smallest restaurants do better gross sales than our largest restaurants. And then just a disciplined approach to designing and constructing our building, we’ve been able to maintain -- really to maintain the cost of our buildings. In terms of our renewable, we've been spending a fair amount of time on things like, what kind of energy uses our buildings that are trapped in, the Tortilla press that Steve mentioned earlier. It looks like that's going to consume a lot more energy than our existing Tortilla presses. We have been doing a lot of things with lighting over the past several years to try and reduce the energies with lighting. We got a couple of green buildings that were just certified in Austin by the local community there as certified green and we were expecting to open up a -- well we hope it will be a leased certified building in a suburb of Chicago, [Grenade] just outside Chicago that we hope to open later this year or next year. So, got a lot of irons in the fiber there, we are learning a lot about what green is all about, a lot of it is around energy and we expect to continue to get better in that as we go forward.

Thanks.

And if that -- with that we will conclude our question-and-answer session as well as our conference for today. We would like to thank you all for your participation. And we hope you enjoy the rest of your day.

Thanks everyone.