Chipotle Mexican Grill, Inc. (CMG) Earnings Call Transcript & Summary

Welcome to the Annual Meeting for Chipotle Mexican Grill. Our host for today's call is Brian Niccol, Chairman of the Board and CEO. [Operator Instructions] I will now turn the call over to your host, Mr. Niccol. You may begin, sir.

Good morning, and welcome to the 2021 Annual Meeting of Shareholders of Chipotle Mexican Grill. I'm Brian Niccol, Chairman of the Board and Chief Executive Officer of Chipotle, and it is my pleasure to serve as Chairman of today's meeting. We appreciate your attendance at our Virtual Annual Meeting and your interest in support of Chipotle. In light of COVID-19, we wanted to make sure all of our shareholders, directors and employees stay safe, so we are all participating remotely. All of the directors of Chipotle are in attendance today, and they are: Al Baldocchi, Matthew Carey, Gregg Engles, Patricia Fili-Krushel, Neil Flanzraich, Mauricio Gutierrez, Robin Hickenlooper, Scott Maw, Ali Namvar and Mary Winston. I, and each of these directors are nominated for election to the Board for a one-year term. Our executive officers are also in attendance today. Michael Gottlieb from Ernst & Young LLP, our registered public accounting firm, is with us today. Mike will be available to answer appropriate questions concerning our financial statements or related matters. The 2021 Annual Meeting of Shareholders is now called to order. In a few minutes, I will give a brief update on our business. Right now, I will turn the meeting over to Roger Theodoredis, our General Counsel, to conduct the procedural part of our meeting.

Thank you, Brian. The agenda for today's meeting is displayed on the screen. Before I begin, I will cover a few procedural matters. On the meeting website is a link to our rules of conduct for the meeting, which I encourage you to read. We will follow these rules today, and I will highlight a few points now. During the business portion of the meeting, we will only take questions from shareholders that relate to the 4 proposals being voted on today. After the business of the meeting is concluded, if we have time, we will take shareholder questions on other matters. Presentations of each proposal will be limited to 3 minutes per proposal. Kathy Wheadon is in attendance, representing Broadridge Financial Solutions. Broadridge is tabulating the vote for this meeting, and Ms. Wheadon has been appointed as inspector of elections to determine the presence of a quorum and to accept votes of our shareholders. I have with me a certification from Broadridge that notice of this meeting was properly given to all shareholders of record as of the close of business on the record date, March 23, 2021. A list of shareholders of record as of the record date who are entitled to vote at this meeting is available on the annual meeting website. This list has been open for examination for purposes relevant to this meeting for the past 10 days. Shareholders representing over 90% of the outstanding voting shares of Chipotle are represented at this meeting. Therefore, a quorum is present, and the meeting is legally convened. We can now transact business. It is 8:06 a.m. Pacific Time on May 18, 2021, and the polls are now open for voting. All holders of Chipotle common stock as at the March 23, 2021, record date are entitled to vote at this meeting. Each shareholder is entitled to 1 vote for each share of stock held. If you have logged into the website as a shareholder by entering the 16-digit control number you received with your proxy materials, you can vote your shares and submit questions. If you have voted your shares prior to the start of this meeting, your vote has been received by Chipotle's inspector of elections, and there is no need to vote again unless you want to revoke or change your vote. As stated in the notice of this meeting, our Board of Directors has approved the following proposals to be acted upon at today's meeting. Only business that is properly before shareholders may be voted on at today's meeting. Accordingly, these are the only items of business that may be voted on today: First, a proposal to reelect each of the 11 directors listed in the proxy statement for a 1-year term; second, a proposal to approve on an advisory basis our executive compensation as described in the proxy statement; third, a proposal to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2021; fourth, a shareholder proposal related to action by written consent of shareholders. We will now present the 4 proposals to be voted on at this meeting. Proposal 1 through 3 are presented by management. Management's position of each of these proposals is stated in the proxy statement, and we don't have any further comments to present today. We will now present proposal 4. The presenter will have 3 minutes to present their proposal. Proposal 4 requests that Chipotle's Board permit shareholders to take action by written consent. James McRitchie, who submitted this proposal -- is here present here to present, I'm sorry, the proposal. Operator, please open Mr. McRitchie's phone line. And Mr. McRitchie, please go ahead. You have 3 minutes.

Okay. Thank you very much. As stated, it's a shareholder proposal on the right to act by written consent. Many boards and investors assume a false equivalency between rights of written consent at a special meeting. However, any shareholder regardless of how many or few shares she owns can seek to solicit written consent on a proposal. By contrast, calling a special meeting may require a 2-step process. A shareholder who does not own the minimum shares required, must first obtain the support of other shareholders. And once the meeting is called, the shareholder must distribute proxies asking shareholders to vote on the proposal to be presented at the special meeting. This 2-step process could take more time and expense than the one-step process of soliciting by written consent. A similar proposal won 41.5% of the vote at Chipotle last year. The beauty of a good governance proposal like this one is that it's highly unlikely to result in any more costs or a special meeting or written consent, the mere presence of the good governance right, empowering shareholders to serve as the guardrails. It helps ensure Board nominates the directors. If this proposal is passed and adopted, directors will know that if they don't work in the best interest of shareholders, we will have a practical remedy and that remedy has teeth. We urge the Board to join the good governance, mainstream of U.S. companies and establish a right for shareholders to take action by written consent. Please vote for Proposal #4, do so immediately before the Board closes the polls. I hope the Board will leave the polls open for a moment or 2 to allow shareholders to vote this item if they haven't voted or if they voted against it and now want to change their vote. All too often, I've witnessed virtual shareholder meeting where voting polls are closed immediately after the final proposal is presented. Closing the poll so rapidly, renders presentations like this one meaningless. So I'm stalling a bit to give you a little more time to vote just in case the Board intends to close the polls immediately after I finish. However, I don't want to be accused of wasting your time or filibustering so I'll close now by once again asking you to vote for Proposal #4. Thanks for your attention and considerations.

Thank you, Mr. McRitchie. This is Roger Theodoredis again. You may recall -- and thank you. You may recall last year that Brian Niccol is going to do a presentation and the polls remain open until the end of that presentation. But thank you for your input. As to the proposal as stated in the proxy statement, our Board opposes this proposal because they believe that if a matter is sufficiently important to require shareholder approval then that matter should really be communicated in advance to all shareholders, and that all shareholders should have the opportunity to consider and vote on them. The Board believes that adoption of the proposal would make it possible for shareholders owning slightly over 50% of our common stock to make significant corporate changes without any prior notice to the company, the Board or other shareholders and without giving all shareholders an opportunity to consider, discuss and vote on the sanctions -- on the actions rather. So are there any comments or questions concerning these four proposals? If you wish to submit a comment or ask a question, please submit it through the website. We have 10 minutes for this section of the meeting.

Roger, at this time, I do not see any questions regarding the 4 proposals.

Thank you, Laurie. Then I'll turn the meeting over to Brian, who will give a brief update on our business.

Thanks, Roger. Before I begin, let me say that my presentation today contains forward-looking statements about our business and our expected future results of operations. Our actual results could differ materially from what I'm going to present and some of the factors that could cause actual results to be -- materially differ from those I present today are listed on this slide and are listed in our most recent earnings press release. So as we've discussed and as you are familiar with Chipotle, we have been a purpose-driven company from day 1. We continue to be a purpose-driven company. Our purpose has been consistently stated as cultivating a better world. And the way we do that is through our commitment to food with integrity, which is the process of sourcing, frankly, the very best ingredients we can find, preparing them by hand and then making sure that the produce is grown in a healthy way. Our farmers are committed to regenerative farming, and we obviously do everything we can to humanely treat the animals that ultimately provide the delicious food that we enjoy every day. I believe the purpose of our company and the values of our company has continued to be very strong and probably was really on full display throughout 2020 in dealing with the pandemic as well as a lot of other social issues that we encountered throughout the year. So if we move to the next slide, I'm happy to say the 5 key strategies that we outlined with everyone back in 2018 continue to stay the same. We know they are working. They're delivering results. They're very focused, and our organization is committing to delivering on these strategies. To just remind everybody, those 5 key strategies are making the brand visible, relevant and loved. That's number one; number two, creating innovations, by using a stage-gate process; number three, leveraging our digital make line to drive productivity and expand access convenience and engagement; and number four, engaging with customers through our loyalty program; and finally, running successful restaurants with a strong culture that provides delicious food, hospitality throughput and economics. And these strategies delivered, I think, really excellent accomplishments in 2020. As you can see on this slide, our revenue increased 7%, a little over 7% to $6 billion in a very challenging year in a business that frankly doesn't have drive-thrus at any meaningful scale. We were still able to grow restaurant sales by 1.8%. And I think really impressively delivered digital sales growth of 174%, taking our digital business now to $2.8 billion and accounting for 46% of sales. So I think a testament to our strategy is a testament to our organization and a testament to our ability to execute under unexpected situations. Obviously, that translated into restaurant margins of 17.4% and earnings per share of $10.73. Also, in this environment, we're still able to open 161 new restaurants, which I think is also a testament to the strength of the economics and the strength of our organization to be able to continue to execute with excellence. As we look into 2021, the first quarter, we just shared these results, but I think it's worth reiterating. Our revenue increased 23%, 23.4% to $1.7 billion. Our comparable restaurant sales were 17.2%, positive. And obviously, our digital sales continued to deliver in a big way, growing 133.9%, reaching almost $870 million, accounting for 50% of our sales. Our restaurant-level operating margin came back to over 20%, delivering 22.3% and earnings per share increased 74% to $5.36. So just a really tremendous start to the year. Again, I think, a testament to the organization, the people we have that are focused on the right things, doing it in a way that's consistent with our culture and values. The other key area for us is we were able to open 40 new restaurants. And we also successfully launched Cilantro-Lime Cauliflower Rice and the much anticipated digital-only quesadillas, which all have performed up to expectations. So if we think about our future priorities, not surprising, they're going to be focused on continuing to drive our digital business and giving people the access that we want. We're also expanding that digital access into Canada and Europe. Marketing, we will continue to drive what makes our company different, which is all about our Food with Integrity and using real ingredients and doing real cooking. And then obviously, use our loyalty program to ultimately drive culture, drive a difference and drive purchase. On the menu side, no slowing down on Food with Integrity as well as we'll continue to use our stage-gate process to validate new menu items accordingly. Operationally, we're going to continue to execute with excellence. As I mentioned earlier, we are committed to hiring great people, developing these people, creating a culture where they not only are successful today, but can have a career with us to grow into, hopefully, many 6-figure salaries. Importantly, we want folks to execute great speed, be on time, be accurate, and we're confident we're going to be able to continue to do that. And then on the restaurant development side, we have a full-court press on building more Chipotlanes and accelerating our new restaurants going forward. So lots of great things in our future. I think the thing that's most exciting about this is all the growth that comes with all of this. Last, I just wanted to touch on just the food safety procedures as well as the wellness practices that we have in place. I'm not going to cover all of this, but I think it's just important to share that we were recognized for, I think, being a leader in the space during COVID. And one of the things that I think is really a testament to our organization's cultural approach to food safety is the fact that as we stepped into COVID, really, the only things we had to enhance was the idea of wearing mask and social distancing. A lot of these other things you see on here, we're already in place. So I think it's a testament to the culture that we have, a testament to the training that we have around this and the commitment that we have to ensuring our employees are well and safe and our food is always food safety. And then if you go to the next slide regarding just what happened during COVID-19. We had a very simple goal. We want to keep our restaurants open safely for our employees and for our customers. And we wanted to do that so that people had access to great food in a safe way and also that our employees continued to earn their paychecks. And I'm happy to say that we were able to provide jobs to over 94,000 people with world-class benefits. We honored over $13 million of tuition costs for employees during this time period, paid out over $40 million in bonuses and assistance pay to our employees. We expanded emergency leave benefits. We provided additional access for employees and families around mental health. So all in all, our commitment to investing in our people is unwavering. You may have just saw the announcement about our investment now further into our wages with our hourly crew as well as our restaurant managers and how that has the ability to lead to well over $100,000 paying general manager job. So very proud of the organization, very proud of the work that we did for our people and very proud of the results that we achieved throughout 2020 and early into 2021. So that concludes my presentation, and I think we now will move to the conclusion of the meeting. So as of 8:21 a.m. today, Tuesday, May 18, 2021, the polls are officially closed for voting. Roger, will you please report the preliminary results of the voting?

Indeed. Based on the inspector of election's preliminary report, the results of voting are as follows: each of the nominees for Director received more than 90% of the votes cast in favor of his or her election and has been elected as a Director of Chipotle to serve a 1-year term that will expire in 2022. The proposal to approve, on an advisory basis, our executive compensation received more than 51% of the votes cast in favor of the proposal and has been approved. The proposal to ratify the appointment of Ernst & Young as our independent registered public accounting firm for 2020, received more than 94.8% of the votes cast in favor of the proposal and has been approved at 2021. Proposal 4 related to action by written consent of shareholders received less than 40% of the votes cast in favor of the proposal and has not been approved. We will file a Form 8-K with the SEC this week to report the final results of the voting today, including votes submitted at this meeting. Now I'm going to turn the meeting back over to Brian.

So Laurie, are there any questions?

We do have a couple of questions. So the first one, question is, as we recover from COVID, are you having any vendor supply chain issues?

Fortunately, our vendors and partners have done a phenomenal job working with our supply chain group here at Chipotle. And we have not encountered any major disruptions. And we continue to work very closely with them going forward. Obviously, it's a real-time situation, especially as the world continues to evolve through the current environment.

Great. We have another question, and this comes from the Connecticut Retirement Plans and Trust Funds, and they say that they appreciate the dialogue that the Board -- the company has had with investors, particularly as it relates to oversight of the workforce equity issues. The materiality of workforce, equity and human capital management have been a growing focus of the SEC and the COVID pandemic has only heightened the impact on the front-line workers and the entire supply chain. So the question is, has the Board taken steps to address the legal and reputational issues raised in recent allegations of violations of New York City's Fair Workweek Law?

This is Roger Theodoredis. You heard Brian say, our purpose is to cultivate a better world. And a huge part of that is having an engaged workforce and our hard-working crews are central to everything that we do. You heard what Brian recounted during COVID about the things that we tried to supply for the crews in all of our locations, the $40 million in increased bonus -- in bonuses and increased pay. The health care services, the tuition reimbursement of $5,250 each year plus debt-free degrees in selected institutions and the $2 increase that Brian mentioned in wages. These are really the things that demonstrate kind of put our money where our mouth is as far as living that purpose of cultivating a better world. As to the Fair Workweek, you can imagine that we absolutely share the spirit of the law and have consistently sought to collaborate with the City of New York as a good business partner would in any community because we take our communities as seriously as we do our employees. The Board answers -- in specific answer to your question, the Board is aware of this matter in New York City and is providing valuable oversight to our desire to come to a resolution on this matter with the city.

Great. Thank you, Roger. Another question is how many shareholders, excluding employees and the Board attend this online meeting? And how does that compare to a typical Annual Shareholder Meeting? And I'll say just looking at the attendance that all of our Board of Directors and our executive leadership team attend the annual shareholder meetings, both in the past and presently. And from attendance at past meetings, I'd say we have more attendees today than we do in our normal in person meetings.

And Laurie, that was my sense of it as well is that we have more attendees by these virtual meetings than we do in our live meetings.

Right. Great. And the last question is, I've seen a lot of news recently around your increasing benefits for your employees and increasing the average hourly wage to $15 per hour. If you can address why you've taken those steps and what success you're having with hiring employees during this challenged staffing time?

Yes, sure. So obviously, we've always been a leader in benefits, and that is inclusive of pay. And we saw that the market was becoming even more tight. And our understanding in order to attract and retain the employees that have the skills necessary to not only execute the business today but grow with us in the future, it made sense for us to increase our wages. And the feedback we've received, both from our current employees as well as the applicant flow that we're seeing as a result of this has all been very positive. And I think one of the things that people -- well, and I know people are also very excited about the idea of joining Chipotle so that they can have a career with us, to ultimately land in one of these general manager jobs in just over 3 years, earning over $100,000. So I'm very proud that our organization has the balance sheet and the business model to be able to invest in our people through these benefits, inclusive of wages. And I think as people continue to join our organization, stay with our organization, they recognize Chipotle really does live its purpose of cultivating a better world. And I'm very proud of our ability to do that for every community that we operate in.

Great. Thanks, Brian. And that concludes our Q&A.

All right. Thank you, Laurie. So that concludes the business for this meeting, and the meeting is now adjourned.

Thanks, everyone.

That concludes today's conference. Thank you for attending.