Good evening and welcome to the Shake Shack's Second Quarter 2018 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode and the lines will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Leo Rhodes, Vice President of Finance and Investor Relations. You may begin.

Thank you, Katherine. And good evening to everyone. We look forward to discussing our second quarter 2018 results with you today. Joining me for Shake Shack conference call are Randy Garutti, our Chief Executive Officer and Tara Comonte, our Chief Financial Officer. By now you should all have access to our second quarter 2018 earnings release, which can be found in investor.shakeshack.com, in the news section. Additionally, we have posted second quarter 2018 supplemental earnings materials, which can be found in the Events & Presentations section on our site or as an exhibit to our 8-K for the quarter. During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release, and the appendix of our supplemental materials. We'll begin our call this evening with brief remarks from Randy and Tara before moving to Q&A. As a reminder some of our statements made today may be forward-looking statements and actual results may differ materially from due to a number of risks and uncertainties, including those discussed in the Risk Factors section of our annual report on Form 10-K filed on February 26, 2018. Additionally, any forward-looking statements represent our views only as of today, and we assume no obligation to update any forward-looking statements if our views change. Now I will turn the call to Randy.

Good evening everyone on the call today. Now more than halfway through 2018, I'm pleased to report that Shake Shack continues to deliver strong top and bottom line results as we execute our strategic growth plan. During the second quarter, we opened five more domestic company operated Shacks and six international licensed Shacks. We delivered year over year revenue growth of 27% including a 1.1% increase in same-Shack sales and adjusted EBITDA grew by 12.9%. These results were driven by the strength of both new and existing Shacks as well as by our focus and ongoing commitment to invest across our key digital incentives and foundational infrastructure. Shake Shack is a growing loyal connected community and we are relentlessly focused on excellence, experience, and hospitality. This vision statement we shared throughout the year represents who we strive to be every day and essential to how we operate across all aspects of our business as we build this company for the long term. We are committed to executing the core pillars of our strategy, holding ourselves accountable for performance and investing in our business for long-term growth. We are continuing to execute on a clear and deliberate growth strategy centered on the following key components. Our development pipeline remains robust both domestically and across our international licensed regions. Although as Tara will discuss, in this current year, the backend timing of our opening creates a headwind in near-term sales and while this backend opening schedule tempers our revenue expectations for this year, we're thrilled with this class of Shacks and we are looking forward to their contribution to our 2019 and longer term sales growth, along with a really healthy development pipeline for next year. We are innovating around our core menu, testing new categories and menu items that we believe…

Thanks, Randy. Total revenue for second quarter of 2018 which includes sales from both company operated Shacks and licensing revenue increased 27.3% to $116.3 million. Sales from our company operated Shacks increased 28.3% to $112.9 million due primarily to the addition of 25 new domestic company operated Shacks since the second quarter of 2017. Licensing revenue increased 2.1% to $3.4 million driven by a net increase of 20 Shacks since the same quarter last year. Within our license business, and as Randy mentioned, we remain very pleased with the strength of our Shacks throughout Asia, particularly with our strong early start in Hong Kong. Similar to last quarter, the implementation of the new revenue accounting standard has impacted the timing of the revenue recognitions of some of our licensing agreements. As we did in our first quarter 10-Q, we include a comparison in the footnote to show our revenues reported under both the new and old standard. We expect the reduction of revenue recognized over the full year to be approximately $500,000, which is consistent with previous expectations and is incorporated in our 2018 revenue guidance. Same-Shack sales increased 1.1% during the second quarter. This increase consisted of a 3.7% increase in price and mix, including the 1.5% to 2% price that we took in December partially offset by a 2.6% decrease in traffic. Similar to the third quarter, price and mix were also positively impacted by our growing digital channel which typically result in a higher average check than in Shack. And as Randy noted, digital innovation will continue to be an area of increasing importance and investment across our business. Our comparable Shake base in the second quarter included 50 Shacks which represents the half the total number of company-operated Shacks in the system at that time. And…

Thanks Tara, I want to end today with a note of thanks to our team and update you on how we think about leadership here at Shake Shack. in May, we gathered over 650 Shack leaders and welcomed many of our dedicated suppliers and key business partners from around the globe to our Shack leadership retreat. This year's message centered around connected community and the belief that as we grow, we must act smaller and be more connected than ever before. There is no question that our industry faces a challenging environment in relation to staffing and rising wages, none of this will be easy but we're committed to paying the right wage offering compelling benefits and providing a great work environment build upon the hospitality our Shacks have become known for. Our leaders are working harder than ever to build community gathering place that become a key part of our guest everyday lives and to the lives of our team members. We're proud to be growing, we're proud to be building a company where leaders are training future leaders and we look forward to our welcoming back to Shake Shack soon. And with that, we'd like to thank you all for joining today's call and operator you can go ahead and open the line for questions.

[Operator Instructions] our first question will come from Sharon Zackfia with William Blair.

I guess a question on the cadence both innings for this year. Is it fair to say that you had some that for opening later in the fourth quarter that's kind of what it sounds like in the commentary and through the first half of the year if you are kind of above your expectations that the revenue reiteration was just really because of those new unit timings. And then secondarily how should we think about pre-opening particularly in the fourth quarter [indiscernible] you guys ever opened that many locations before in one quarter.

Yeah, thanks Sharon. You got it right, we've really been thrilled with the performance of a few things. The end of 2017 Shacks that performed strong, the beginning of 2018 Shacks and specifically we've called out a couple of those new market launches, Charlotte, Cleveland, Staten Island, New York, some really good starts. So that part of the solid beat for the first half of the year. The unfortunate reality for timing just really is that way more than we expected of our Shacks are going to open in the third and fourth quarter with the vast majority of those in the fourth quarter with the majority of those in December. So it'll be a big push for us at the end of the year. We're really expecting a busy holiday season for our team. Look, we are in good shape to do it, as Tara mentioned this, just been some questions - some issues on permitting is taking longer, contraction on both landlords work to deliver to us. And then sometimes our own permits getting ready, it's just been delayed from what we expected. So that's the unfortunate reality. But this is not one quarter of a company here, we are really excited that all these Shacks as we said in the 32 to 35 we'll be getting in this year. And they're going to make a great contribution for a long term. As it pertains to startup cost, you should kind of read into the same guidance I just gave, most of those are going to happen really towards the end, the fourth quarter and towards the end of the fourth quarter which is part of why we raised stronghold, we have that app and we have some non-cash deferred rent that builds up a little more than we expected. So that's part of why startup costs ends up being a little higher than that. It will hit you more at the end of the year.

We'll continue onto Joshua Long with Piper Jaffray.

Great, thank you taking the question. Obviously, the brand has a very strong following and really speaks to both New York heritage but then also as you go across the nation. I was curious in just how you think about that now that you have a growing base outside of New York, California you mentioned having strong unit volume. What you've learned there in terms of really taking Shack into new market and then maybe preparing new markets for 2019, 2020, and beyond pipeline just in terms of staffing or getting the brand ramped up and ready to go.

Not just in the United States, but also globally. We have this opportunity, being the strength of the brand, our history, it really gives us a chance to do something special, when we open new markets. And just a couple of examples, this last quarter, we did a pop-up in Seattle. We opened one of the finest restaurants in Seattle. We did a pop-up for one day in their parking lot. Nearly 3000 people showed up just for a four hour pop-up. It's extraordinary what can happen for Shake Shack and some of the openings that we've had, if you follow along and you look at what's happened, some of those mentioned in Charlotte, Denver this year, two shacks in Denver, both of them really, really strong starts. It's part of why we invest a lot in the startup costs line that you see so we can capture that opportunity out of the gate. It's also part of how we've, keep the strong AUVs, continuing to go for the company over the long term. And, meanwhile, our business strategy means about 80% of those shacks that we opened will be in existing markets. We love that too, we love going deeper into existing market, it helps our teams, it helps our supply chain and we've barely scratched the surface, you look at us having 102 restaurants in this country. We've barely scratched the surface on those economies of scale. So we really have so much opportunity on the road there. But we love new markets. This coming month, next couple of months, we're going to open in Nashville, Tennessee; Birmingham, Alabama in the fourth quarter and Seattle and the Bay area of Palo Alto. So like that balance, we really think it's a good thing to the brand and for our national expansion. To your question about the learning, as we've noted in previous quarters, our numbers are strong everywhere we've gone. We've shared that information and especially in California, as I noted, we're really excited to continue so much of the strength. So we're excited about the future of where we're headed in development.

Great. Thanks for that. And particularly exciting to hear about the increasing scope and opportunity for projects, obviously, still early on in that, just curious on how you would characterize some of those additions and the shacks that you had in there in terms of just really supporting that long-term pipeline and targets that you had, I mean, does that allow you to do things quicker or just maybe do things more the right way as you go through and really building the brand for the long term.

It's Tara. We're really excited to really get into this project properly. And as you right pointed out, as we went through very detailed indigenous process, we decided to expand the scope to get more done at one point in time for a whole host of reasons, mostly to do with sort of distractions, disruptions of business and to bring - as well as to get the benefit sooner. So one of the examples where we expanded scope is in our HR systems, which we're not originally in scope, but we told about potentially being and so it's a very broad upgrade in this financial systems, touch both back office and shacks, operational systems in relation to some of the procurement processes that touched the back office on the Shack and the same with HR. And obviously a number of add-on areas. And the objective is those multi-faceted, one of the things we're focused on doing is making sure that we're not putting any administrative burden on our shacks that we would have to, because we want our operators focused on delivering a great guest experience. And so, we would use technology where we can to lessen that burden. Will they want to be adding cost in an efficient and effective manner for the long term and again obviously technology will help us leverage our cost basis, where we're adding - we are using take rather than continuing to add same solution of hedge. And finally, I think - I feel I think it's an enabler to top line growth, I think, having efficient, scalable, flexible systems allow you to get far greater insight into the business, allow you to out-speed up, get the rate of decision making. So we are excited to get going. I mean, it will take us into next year now, but we feel very god about it.

You reiterated the way we've run this company from day one. We're thinking about everything from a very long term. We are adding systems that will support a much, much bigger company. We've talked to you about doubling our sales and our units in less than three years in this current timeframe that we're look at. We have just over 180 shacks worldwide and that is a small number compared to where we're headed, and now we want to get some foundational solid infrastructure that we can really grow with and ramp up our opportunities as we go down the road.

Operator, I was just going to take the opportunity to just correct something in my prepared remarks. I believe I said 2019 when I should have said 2018, as it relates to our adjusted pro forma tax rate gains of 26% to 27%. So, that was a 2018 guidance, as reflected in our earnings release that we posted earlier.

And we'll go to Jake Bartlett with SunTrust.

The first is just a clarity on the revenue guidance. It sounds like the development is significantly more back end weighted than you thought, but you kept the all the other metrics, how should we think about that in terms of the average unit volume target that you have?

Yeah. We don't know that yet. I mean, we've had shown performance. We'll see if we can get to the high end of that range. It's still - we're holding it right now on an AUVs, JP costs, we literally have 20, 22 restaurants though yet. So there is a lot that's going to go into an AUV calculation when you add all those restaurants. So if you look the opportunity to raise from what we beat in this last quarter, it's just really completely impacted by development schedule and all that timing. So that's really how we're thinking about it. These restaurants will open, they will open well. There will be great checks, but we just wanted to get the full benefit, the full year that we had hoped for. All that said, when we target everything, we shared this before, we've got that target of about, we're about $4.5 million currently on our AUV. We think that will be in the 4.1 to 4.2 range by the end of this year. And we'll see, we'll keep you focused if we can beat that.

And then as you look at your pipeline for '19, should we expect a similar level of back-end loading or do you feel more comfortable that it's a little more evenly weighted throughout the quarters.

I've been doing this long enough to say that I've never had that expectation and somehow almost every year, most companies like ours end up with a back weighted schedule. I'm not sure even though we do everything in our power to change that reality, that that changes. Right now, we're going to come towards a very balanced 2019 in a similar number of shacks that we've built this year but we'll get back to you on that as we - as we that class firms up. What we do know is that it's really looking like a solid class. We think it will be roughly again in 2019, this is a similar strategy of about one fifth of those in new markets, a lot of our new markets will be adding next year hopefully and going deep in the markets that we're excited about here. So we're devoted, got to have a solid fourth quarter here and get these shacks open and run it.

Into the technology and your initiatives, maybe delivery, you talked about how really in the late - fourth quarter last year, the biggest impact, but you started to have so many pilots it was having a major impact, were there less stores impacted by your pilots, pilot - your testing in the second quarter here, was it the same - has it been pretty consistent and kind of speaking of that 50% number and maybe if you can confirm that or just let us know whether that's been fluctuating as you've been testing.

It's a fluctuated. It's a bit on the partner, it's been on the pilot. Today, the majority of our shacks are doing delivery pilots with a few partners and these quarters, these past couple of quarters, we've done old different partner tests, some on, some off, currently, we are running with three and that is in the majority of shacks. So I think particular delivery, we're really excited about the delivery and our strategy has not changed here. We believe that there is an increasing guest demand for it. We believe we have a lot of work to make it an excellent hospitality experience for our guests who choose to order that way and for our guests who are in the shack. It's a growing and exciting opportunity for us, but one that we are being patient with. We want to make sure we have the right partner or partners depending on how we do it and we're going to keep discussing that to make sure it's a really good long term business. We are patient, we're not just jumping at sales that might be there for us. We don't think we can do it the right way and we still want to learn. We want to do it well, and we want to do it well for a really long time.

Our next question comes from John Ivankoe with JP Morgan.

The first one, the labor market and the labor outlook. I guess I'm looking over the next 18 months, is there anything that you're doing to enhance some of your current HR practices to attract and retain the labor force that you need both for your new stores over that timeframe, you're obviously going to need a lot of revenue, need a lot of people. And then secondly and related to that, you did mention that overtime, the software kiosk may help reduce labor cost. I mean, is that or at least you implied that in your prepared. I mean, is that what you're seeing in some of your early tests and I guess at this point, what are you looking for to see in terms of making software kiosks in most if not all of your installed base in the U?

Thanks, John. On the labor, look, there is no surprise. We are living in good economic times, low unemployment and that means it's harder than ever for us, clients. Let me give you an example of how we're doing this and how we're thinking about it. We're going to open at Nashville, Tennessee, minimum wage is 725. We're going to start people start at $13 hour. That's what it takes to get a great team member that can build and bring the hospitality and that Shake Shack will bring to that market and we're super excited to pay that. Potentially high rates, right, it impacts our labor line over time. We have a number of our markets in the most expensive wage rates in America with New York City, California, DC, Chicago, the Northeast, I mean, all of our major markets are increasing - going to continue to increase. So what are we doing about it. You know what, we're continuing to be a great employment brand, we're continuing to offer solid benefits, solid starting rates. Most importantly, opportunity to develop. [indiscernible] and you see the impact of the leaders of our company where they came from, so many of them have been people who started in our jobs have now grown changed their lives through Shake Shack and learning to be leaders. So as we grow, we're going to be a lot leaner, we're going to have a lot of people and we're going to pay for it. There's also just fun things we're experimenting with, right. We're thinking about how to schedule, we're thinking about how to work with today's workforce of a gig economy and people who need more flexibility, because frankly there's a lot of opportunities of jobs where they can get it. And we've got…

We'll continue on to John Glass with Morgan Stanley.

Randy, if I think I heard you correctly on delivery, you said the majority of shacks you actually offered delivery, so what is the difference, I guess, between a test and a rollout, is it just you're not, so - you're letting demand of crude naturally in other words, if you say we're now rolling it out, is maybe don't get as much sales of, because you're already doing it effectively.

Yeah. That may be the case. It depends on the ultimate partner or partners that we choose, John. So you're right in saying that what we have done only a couple of times are in these islands over the last year is a couple of promotions. Those have generally lasted a week or two. For the most part, we're just running as a normal restaurant on their platform. So we do think, as we think about the potential, we're not giving a timeframe for that, because we still are being patient about it and discussing this with potential partners, but we do think that there is opportunity for increase in that over time once we clarity with our guests, with people, which channel or channels they can count on. The good side of our testing is we're learning a lot, the challenge to it is it's a little bit of up and down for our guests who have seen us come in and out of the various platforms. So, as I said, it's about getting the ops right, getting the experience right. We've got new packaging happening, we've got new packaging coming, there's a lot of different ways we're thinking about how to get a French Fry to your home as well as we possibly can, how to get a frozen shake to your home in a way that you're excited about it. So we want to work out all those basics first to make sure the foundation of it is there. I'm very confident that the level of delivery we're doing today over the long term can and should increase in the future, but that's a little bit further out from near term expectation.

And then just two financial questions. You didn't raise restaurant level margin guidance. I assume that though [indiscernible] and the fact that you're opening stores later this year, I would think would benefit margins, is there some offset to that perhaps labor or do you just maybe feel more comfortable at the high end based on that.

John, you cut off a little bit in that question, but we're sticking with our 24.5% to 25.5% operating margin guidance and I don't think was any real news that to say. We have some moving parts and together, they result and is holding that guidance flat. So as we mentioned, we had some increasing beef prices towards the end of Q2 and we think that may continue. So we think that perhaps from flat, we may have some slight de-leverage now on cost and we'll continue as we talk to, the sequential de-leverage in labor. Same with other OpEx, for the reasons we mentioned, not least delivery and commissions which Randy just talked to. And so - but we've got leverage for various reason within occupancy. And so all of those sort of netting out, we still stand by the 24.5% to 25.5%. And to your point, we've got a lot of shacks.

Right. And just on G&A, were there any material concrete costs this quarter or are they really all coming in the fourth quarter?

Nothing material. You'll see in some of our adjustments in earnings release and then in the Q, we identified those, there was nothing of huge this quarter. So I think that, we're really starting to the majority of them, starting to kick in to implementation, which as I mentioned, we expect to start in early September.

Our next question will come from Andrew Charles with Cowen.

When you look at the LTOs you've run so far this year on griddle chicken and piloting the veggie burger, is there a wellness bent and the brand is starting to embark upon.

You know what, I think it's balanced. Most of it's listening to our guests. So veggie is really a new thing for us. It's a test, it's an LTO. It's nothing we really want to learn. We, number one, want something to be young, we want to taste good, we want to become essential to your life that when you go there, you can be excited. So I think when you think about veggie or other new categories that we might think about down the line, we want to be impactful, we want them to drive traffic over the long term. So veggie is a kind of thing that, depending on how it goes, we want to hear from our guests that they may not have come otherwise. Right. With certain things, we wanted to be - maybe I shifted or maybe I come a little more often because today I'm not eating meat and I love Shake Shack, so I want to try veggie burger. So it's only in 18 locations right now, so it's really a minimal test. It's some of California, New York and Texas really is where it's centered, but people are liking it. I really like it. It's a great item and that's kind of what we're excited about here is seeing the test kitchen, the innovation kitchen come alive, because it's really there starting in the fourth quarter here that we'll start to see the opportunity to really some things, to have some fun downstairs right here to do a lot more of the local items, maybe even some of the things that we might choose to do internationally. We've got a lot of different ideas, so we're excited about innovation, we're not short of ideas around here, but we're very balanced about how many things we want going at once.

And then can you walk us through the monthly cadence of sales. Is it wrong to think that April was softer than the overall quarter due to an earlier Easter this year that presumably pulled forward some of the high volume spring break season business in to March?

Andrew, we don't break down the quarter. We did - on your Easter point, I think we talked at the end of the last call, potentially impacting a couple of days, but nothing material.

We will now go to Jeffrey Bernstein, Barclays.

Just following up on the cost pressures, just looking at the labor line more specifically, it seemed like in the first quarter, you did a great job with only modest de-leverage and then this quarter, it was much more meaningfully. So I'm just wondering, was there a change in the basket of inflation from a labor standpoint in the quarter, maybe what's your outlook for that basket? And as you think about that, I mean, do you want to be kind of employer of choice, how much of the wage inflation do you think is your own choice to pay well above the wage versus how much is driven by the regulation. And then I had one follow-up.

I think there is a lot in there. But a lot of it is driven by wage inflation mandate effects. Also, different kinds of regulations like we've talked about, New York and other things that have happened. So there are many markets where we pay above minimum wage, there are some that we pay at minimum wage. These are generally the higher increasing ones like New York, but again our goal always with our team is to get you out of that wage, get you to a shift manage wage that is materially higher, get into promotion, get into manager. And that's been the method that we really used here. So, but it's really work. Look, it's a changing economy. It's hard and it's always been hard. We've been [indiscernible]. This is 17 years in the making this story and this question has never been an easy one. And I'm pretty certain that 10 years from now, when we're talking, it will still be a hard one. It just got different flavors right now. So, we're doing our best to react market by market and the best way we can do that is hiring great leaders that provide a great work environment and the one that we work on. But there is exterior pressures that continue to grow.

And then I just think about the pricing, when you're sitting in that type of, I think you mentioned that you took sub-2% pricing back in December of '17. I am just wondering what's your outlook as you look to the back half of '18, maybe if you can frame it as how much pricing you would think you'd need to hold the margin flat or do you even think you have pricing power here to take if you want to offset some of the labor.

Couple of things in there. We have no intention at this stage of taking any price for the rest of this year. We generally take price around the 1% to 2% range annually. That's been the case for the most part over this last decade for Shake Shack, even longer. So it's hard to say what we'll do this year just yet, we're not - we haven't given that guidance yet, we'll keep an eye on it. I believe as a brand, we continue to have a lot of pricing power. But there's a difference between what we could take and what we should take. I have said that for many years, we do not intend to take enough leverage, enough to offset labor entirely. Labor is probably a mid to high single digits increase year-over-year and that continues. That expectation continues for a number of years. So we probably - we do not expect to take enough price. So we'll have to work on other things as we have and as we've guide you over the long term for this brand. We've got a number of tiers of pricing now, so we use that strategically region by region and we think we will take price overtime as we grow.

Thank you. We will now hear from Andy Barish with Jefferies.

I think historically, menu innovation has been a traffic driver, I'm sorry a check driver for you and now it kind of feels like scheduled delivery is driving some of the step up in mix that we've seen. Is there any reason to think that these levels aren't going to continue for any foreseeable future as you can grow those channels?

If you look at the past few years, you're absolutely right well, not just menu innovation, menu mix, menu shift, the way that we've sold things, we've been able to successfully continue to grow our check beyond our menu price increases and some smart decision making by the team on that and some of the things we offer. Yes. Digital is an increasing part of that because as we've said, the digital channels generally so far have had a higher average check. I don't see any near term end to that phenomenon, because we do believe over time digital as a percent will continue to increase and we continue to believe that we're going to offer compelling menu innovations that will drive that. You may have some quarters that menu innovation is up as a accretive to that and some quarters, down. But overall, we're always going to be thinking about menu innovation to drive frequency to drive overall sales, but we do think that digital has a big opportunity to go up from here.

Thank you. We have no additional questions in the queue. I'd like to turn the floor back over to our speakers for any additional or closing remarks.

Just want to say, thank you to everyone, appreciate your support for Shake Shack and we look forward to seeing you at Shake Shack soon. Thanks, everyone. Have a great night.

Thank you. Ladies and gentlemen, again, that does not conclude today's conference. Thank you again for your participation. You may now disconnect.