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Executives

Amy Wagner - Senior Vice President, Investor Relations

John W. Chidsey - Chief Executive Officer, Director

Ben K. Wells - Chief Financial Officer, Treasurer

Russell B. Klein - President, Global Marketing Strategy and Innovation

Analysts

Joseph T. Buckley - Bear Stearns

John S. Glass - CIBC World Markets

Glen Petraglia - Citigroup

Steven T. Kron - Goldman Sachs & Co.

John Ivankoe - JPMorgan

Jeffery A. Bernstein - Lehman Brothers

Mark Wiltamuth - Morgan Stanley

Matt DiFrisco - Thomas Weisel Partners

TRANSCRIPT SPONSOR
Wall Street Breakfast

Burger King Holdings, Inc. (BKC) F4Q07 Earnings Call August 24, 2007 10:00 AM ET

Operator

Good day, ladies and gentlemen. Thank you very much for your patience and welcome to the Burger King Holdings fourth quarter fiscal year 2007 earnings conference call. My name is Bill and I will be your conference coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Ms. Amy Wagner, Senior Vice President of Investor Relations and Global Communications. Please proceed, Madam.

Amy Wagner

Thank you, Bill and good morning, everyone. Welcome to Burger King's fiscal 2007 fourth quarter earnings call. We have prepared an earnings call PowerPoint presentation to assist in presenting our fourth quarter and fiscal year results. These slides, as well as the audio broadcast of this call, may be accessed through our investor relations page on our website at www.bk.com. Both the audio portion and the slideshow will be archievd on our website where it will be available for future reference.

Presenting on the call today are John Chidsey, Chief Executive Officer, and Ben Wells, Chief Financial Officer. Also with us on the call is Russ Klein, President Global Marketing Strategy and Innovation, and he’ll be here and available to answer any questions you may have about our marketing, advertising and products during the Q&A portion of the call.

We’ll spend about 25 minutes today discussing our fourth quarter and fiscal year-end results before opening the call up for questions.

Before we begin today, I would like to remind everyone that this conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management’s current expectations based on currently available data. However, actual results may be impacted by future events and uncertainties and could differ materially from what is discussed today. More detailed information about these uncertainties is contained within the Safe Harbor statement included in this morning’s earnings release.

The presentation also includes non-GAAP financial measures as defined by Regulation G. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures and other information required by Reg G are included in the appendix to this presentation.

With that, I will turn the call over to John.

John W. Chidsey

Thank you, Amy, and thanks to all of you being on the call today. This morning we will discuss our solid fourth quarter and fiscal ’07 results. We will then provide you with our outlook for fiscal ’08, after which we will open the call up for questions.

I am excited about our fourth quarter and fiscal year performance. Our momentum continues across all our business drivers -- marketing, products, development and operations, enabling us to once again post strong quarter-over-quarter results, making fiscal ’07 a record year for BKC across all key metrics.

Page three of the presentation depicts several of this quarter’s highlights. Revenue increased across all geographic segments, driven by our strongest quarterly comps of the fiscal year and by our improved net restaurant growth. Our laser focus on top line expansion yielded revenues for the quarter of $590 million, an 11% increase over the prior year’s fourth quarter of $533 million.

We recorded our 14th consecutive quarter of positive worldwide comps of 4.4%, with positive comps across all business segments, driven by our global Spider-man 3 promotion and once again our strong comps in EMEA A-Pac of 4.1% were led by the U.K., confirming that our U.K. strategic initiatives implemented two quarters ago continued to gain traction.

In the U.S. and Canada, we recorded our 13th consecutive quarter of positive comps of 4.8%. During the period, we benefited from a full quarter of the breakfast value menu, and since May 10th we also increased sales from our late night initiative. Both the breakfast and late night day parts continue to grow at a faster pace than overall sales. Additionally, our marketing alliances with Spider-man 3, Spongebob and NASCAR were winners for us and we continue to offer the right mix of premium and value products that helped to drive traffic to its best performance in 10 years.

Restaurant development continued in the right direction. Our worldwide net restaurant count increased by 154 as compared to the same period last year. This number is lower than our forecast of 200 primarily due to 25 restaurants that had delayed openings because of permitting issues in Germany and the Middle East, and due to our decision to close early about 30 distressed restaurants in the U.K. market.

We continue to be opportunistic and to do what is right to grow the brand in the long-term. This is why we pulled these U.K. closures forward. We are now better positioned to accelerate net restaurant growth in fiscal ’08.

Having said that, I am very pleased with our development performance during this past year. We opened 441 restaurants, 26% more than we opened in the prior year, and on a net basis, we added over six times more restaurants than we did last year, the first year in recent history of meaningful expansion.

The worldwide average restaurant sales of $311,000 for the quarter is an 8% increase over the prior year and our trailing ARS of $1.19 million is the new record high for the system. I am also pleased to announce that our company restaurants on a worldwide basis have reached an ARS of $1.3 million for the first time.

Turning to page four, we continued to deliver on our multi-faceted growth opportunities which yielded strong profitability and quarter-over-quarter improvements. Our robust top line revenue increased, led by strong comps, net restaurant growth and a higher worldwide blended royalty rate drove significant improvements in profitability.

This quarter, adjusted EBITDA was $103 million, which excludes the previously announced $7 million in expense associated with the termination of the new headquarters facility lease that the company proposed to build in Coral Gables.

These results represent a 26% increase over adjusted EBITDA of $82 million in the same quarter of last year.

Adjusted net income of $40 million, a 60% improvement over the prior year period, was boosted by lower interest expense and lower tax rates, and adjusted earnings per share were up 61% to $0.29, compared to adjusted earnings per share of $0.18 in the same quarter of last year.

This quarter also exemplifies our commitment to using our strong free cash flow to enhance shareholder value. We declared and paid our second quarterly dividend as a public company of $0.0625 per share.

Additionally, the Board of Directors approved a $100 million share repurchase program, which provides us with the flexibility to be opportunistic, depending on market conditions, to buy back shares in the open market and to retire them.

And on July 31st, we retired an additional $25 million in debt. Given today’s high cost of borrowing, we believe this debt pay-down will further strengthen the company’s financial position and benefit all shareholders.

On page five of the presentation, you will note key worldwide quarterly highlights. Total revenue was up 11% for the quarter. Premium and value menu offerings, accelerated net unit growth, improved operations and an increase in the blended worldwide royalty rate drove solid revenue performance and as expected, the breakfast and late night day parts yielded incremental traffic and sales.

Company restaurant margins decreased by 20 basis points to 14.8% from 15%, primarily impacted by restaurant closure and acquisition costs associated with shoring up the U.K. market. These additional costs represented approximately 140 basis points of margin.

Restaurant margins in our other business segments, including the U.S. and Canada and Latin America regions, increased quarter over quarter.

Now is a good time to provide an update on the U.K. As mentioned before, we decided to pull forward the closure of about 30 restaurants in that market that were financially distressed and originally earmarked to close during fiscal ’08. Even though we don’t like to close restaurants, our job is to manage our portfolio profitably and to run restaurants that are accretive to the bottom line.

On a very positive note, the U.K. initiatives we instituted several quarters ago are clearly working, as evidenced by seven straight months of positive comp performance. We still have some work to do in this market and we remain focused on improving our performance through high quality products, exceptionally run restaurants, and targeted marketing.

Our fourth quarter profitability measures on all fronts increased substantially over the prior year period.

On page six of the presentation, we have depicted our fiscal year 2007 results and I want to briefly point out some highlights. By working together and by maniacally focusing on our go-forward plan, we were able to exceed our annual financial targets across all key metrics.

First, worldwide comps increased by 150 basis points to 3.4% from 1.9% in the prior year. Again, we increased our net restaurant count by 154 restaurants, significantly higher than the past six years.

Our strong top line performance resulted in revenue growth across all business segments to a record high of $2.23 billion, a 9% increase compared to the prior year and exceeding our F07 annual growth target of 6% to 7%.

Our ARS is also at a new record high of $1.19 million, a 6% increase from the prior year, and our worldwide blended royalty rate increased 11 basis points to 3.79%. Company restaurant margins increased 50 basis points, as our strong comp performance across all business segments and our cost management initiatives, including the savings from the recently completed rollout of the flexible batch griller in the U.S. and Canada, helped offset margin pressures predominantly in the U.K. and commodity pressures in the U.S. during the back half of fiscal ’07.

The year-over-year progress yielded an adjusted EBITDA improvement of 12%, at the higher end of our F07 annual target range of 10% to 12% growth. Even including the $7 million lease charge, we are still within our guided growth range at 10%. Adjusted net income increased by 32%, significantly higher than our F07 annual target of 20%.

We exceeded our revenue, adjusted EBITDA and adjusted net income fiscal ’07 financial targets by delivering on our multi-faceted growth opportunities. Our strong performance this year demonstrates the inherent leverage of our business model and its potential for future growth as we continue to ramp up our development, both in the U.S. and internationally, and as we continue to focus on driving comps worldwide.

On page seven is our fourth quarter financial highlights detailed by reporting segment. Both revenue and income from operations improved significantly, up 11% for revenue and 39% for adjusted income from operations.

U.S. and Canada revenues grew by 5% and adjusted income from operations improved by 24%, favorably impacted by comp sales of 4.8% versus a prior year of 2%. As mentioned earlier, our comprehensive marketing calendar drove both sales and traffic, contributing to the best quarterly comp performance during the fiscal year.

Our strategic marketing alliance with both Spongebob and Spider-man 3 proved to be successful. In addition, we benefited from a full quarter of the breakfast value menu and extended late night hours, which became effective on May 10th.

During the quarter, we featured the right mix of premium and value products from the Western Whopper to our new Ham Omelet, the anchor of the breakfast value menu. Company restaurant margins improved by 30 basis points to 15.8% from 15.5%. We did not, however, realize the full margin benefit from our strong comps, due in part to higher paper and product costs tied to our Spider-man 3 and late night promotions, which impacted company restaurant margins by approximately 60 basis points.

We also experienced higher commodity costs, primarily in beef, as a result of the current commodity environment, providing an additional 70 basis points of margin pressure. This combined 130 basis points of negative pressure was more than offset by reductions in casualty claims, accelerated boiler depreciation, and utility savings derived from the substantially completed rollout of our flexible batch griller.

EMEA A-Pac revenues grew by 23% and income from operations was flat. Revenue growth was driven by 105 net new restaurant openings and the acquisition of 31 restaurants from financially distressed franchisees in the U.K. The revenue increase was also driven by positive comps of 4.1% versus the prior year of 0.2%, again led by strong U.K. performance. Across the region, our Whopper promotional tie-ins with Spider-man 3 resonated well with guests.

Despite the increase in revenues, company restaurant margins decreased 100 basis points, primarily due to U.K. restaurant closure cost and lower margins generated at the acquired U.K. restaurants. Margins were also impacted by high utility costs across all major EMEA markets. These decreases were partially offset by improvements from sales of higher margin products, such as the Aberdeen Angus Burger and a reduction in beef costs.

In Latin America, revenues grew by 17% and income from operations increased 29%, both were positively impacted by 95 net new restaurant openings and positive comp sales of 1.5% versus 5% in the prior year period.

During the quarter, performance was driven by the extreme spicy burger Spider-man 3 promotion in Mexico. In our other Latin American markets, we offered a combination of indulgent and value products. Company restaurant margins increased 40 basis points to 25.9% from 25.5%, primarily as a result of these higher margin products.

Page eight details our fiscal 2007 financial highlights by reporting segment. Solid top line growth across all business segments, driven by robust comps, solid net unit growth, improved operations and a higher worldwide blended royalty rate contributed to a 9% increase in revenue growth to $2.23 billion, a new record for the system.

Strong year-over-year improvements in income from operations in the U.S. and Canada, Latin America, and all EMEA A-Pac markets, excluding the U.K., yielded significantly better worldwide profitability.

On page nine is our company scorecard. Once again, by delivering strong quarterly and annual results across all metrics, we drove best-in-class bottom line growth. I will now take a few minutes to discuss each one of our metrics.

On page 10, we illustrate our quarterly comp sales on a worldwide basis and for the U.S. We are very pleased with the performance of our marketing initiatives during the past three years and we continue to raise the bar in fiscal ’07. Our strategic marketing alliances, our movie tie-ins, our innovative promotional campaign, such as X-Box, our progress for the extended hours of operation, the introduction of the breakfast value menu, and our right mix of premium and value products all contributed to our success.

We are now entering our fourth year of black-on-black results and I feel good about how our fiscal ’08 marketing calendar is shaping up. Our comp strength and momentum continues into our first quarter, led by our promotional tie-ins for Transformers and The Simpsons Movie. Throughout the rest of the quarter, we will be promoting our late night hours and in September, we will kick off our NFL sponsorship.

Turning now to page 11, as you can see we made significant progress in our restaurant development. We built the foundation for future restaurant growth worldwide. We put the right people in the right places and created a strong pipeline of franchisees committed to unit growth. In fact, our fiscal ’08 new restaurant pipeline is the strongest it has been in recent history.

And during our upcoming fiscal year, we expect to have more BK restaurants operating than we have ever had in the history of our brand. We opened 441 restaurants, a 26% improvement in restaurant openings compared to the prior year. We ended the fiscal year with 154 net new restaurants, six times higher than the previous year and significantly improved from the over 100 restaurant net loss realized in fiscal ’05 and in fiscal ’04.

This past year marked the first year of substantial net unit growth in six years and this is just the start. We are driven to continue our profitable expansion into new and existing markets. We exceeded our gross new restaurant openings in the U.S. and Canada and in Latin America. In EMEA A-Pac, openings came in lower than forecast, primarily because of those delayed due to permitting, all of which will be open by calendar year-end.

This year, we proved our ability to successfully expand internationally with about 80% of restaurant openings coming from outside of the U.S., and going forward we anticipate this same level, or about 80% of gross new restaurant openings to come from our international markets.

Additionally, we continue to build enthusiasm among new and existing franchisees as we open restaurants with more attractive cash flow and cash returns. As a matter of fact, the last 50 free-standing restaurants open in the U.S. that operated for a year or more have an ARS of $1.5 million, 26% higher than the rest of the U.S. system.

Again, I am pleased with what we accomplished this year with our development. We now have the right formula with the right people and the right strategies in place to execute our global expansion plans.

At this point, I would like to turn the call over to Ben, who will update us on the rest of our metrics.

Ben K. Wells

Thanks, John and good morning, everyone. As John mentioned earlier, we continue to improve ARS. This quarter, ARS improved 8% to $311,000 and worldwide ARS reached a record high of $1.19 million.

Additionally, our company restaurants worldwide hit an all-time high ARS of $1.3 million. On page 12, we illustrate our U.S. company restaurants ARS by sales bands with their corresponding margin. This graph depicts the profitability potential of our fixed cost model. Our focus on top line growth via comps, development, product innovation, operations, and extended hours translates into more profitable restaurants as we yield progressive margin leverage with higher sales.

For instance, our company restaurants with an ARS of $1.9 million and above have a corresponding restaurant margin of 25.4%. U.S. company restaurant margins of 16.1% are also up 140 basis points from last year. Margins benefited from sales of higher margin products, lower food cost for most of the year compared to the prior year.

During F07, we managed our commodity costs by leveraging our well-developed supply chain to source proteins from competitively priced international suppliers. Specifically, we were able to deflate some of the beef price pressures inside the U.S. by buying a portion of our beef from internationally based suppliers. In addition, we will continue to maximize company restaurant margins by focusing on the middle of the P&L.

As forecasted, we completed the rollout of the flexible batch broiler and the kitchen minder to all U.S. and Canadian restaurants on June 30th. These restaurant initiatives will accomplish two things; first, they will be incremental margin drivers during normal cost environment, and second, they will help offset costs during unfavorable commodity markets.

On a U.S. system basis, we now have 2,282 restaurants open for at least 12 months, or approximately a third of the total unit count at an ARS above $1.3 million, another record high.

Turning to page 13, we saw quarter-over-quarter improvements in both the number of U.S. restaurants that are above a 4% royalty rate and an incremental increase in our worldwide blended royalty rate. Our worldwide blended royalty rate for fiscal ’07 was 3.79%, an 11 basis point improvement over last year’s rate of 3.68%. We now have approximately 30% of the U.S. restaurants above the 40% level. We will continue to post improvement in these metrics as franchisees renew their franchisee agreements at the higher 4.5% contractual rate and as new U.S. restaurants sign up at the higher level.

Our fourth quarter effective tax rate was 35.7%, benefiting primarily from the positive resolution of a federal tax audit. Our fiscal ’07 full-year tax rate was 33.6%, lower than our normalized tax rate of 37% due to several non-discrete tax items that positively impacted the rate, positive resolution of state and federal tax audits, and reductions in valuation allowances.

We anticipate that our fiscal ‘08 tax rate will continue to improve over our prior year’s normalized rate of 37%. Our fiscal ’08 tax rate is therefore forecasted to be in the 36% to 37% range.

Turning to page 14, this past year we generated strong cash flow from operations, which we used to: one, invest in the business; and two, strengthen the balance sheet by paying down debt; and three, return value to shareholders in the form of quarterly dividend payments.

Our balance sheet is strong and we will continue to evaluate investment opportunities that align with our overall strategic plan. Our goal is to have a capital structure that supports our growth plans and allows us to respond to strategic initiatives. For instance, this quarter we paid down an additional $25 million in debt. After evaluating our options and given the current debt market environment, we determined that paying down debt now to reduce our interest expense would best align with our plans.

Next year, we intend to increase our capital spending, primarily from cash generated from operations by 50%, to approximately $120 million to $150 million. Our increased capital spending will be used to open new company restaurants, scrape and rebuild approximately 20 to 30 dated company restaurants, and depression of our existing portfolio, all of which is forecasted to increase profitability and in turn increase shareholder value.

We continue to analyze investments that will solidify our restaurant portfolio, such as buying restaurants from franchisees that want to exit and then selling them to best-in-class franchisees that are enthusiastic and committed to growing the brand.

Before turning the call back to John, I want to mention that we have included additional company data and reconciliations in the appendix of this presentation, and again, thank you for your interest and participation in the call. John.

John W. Chidsey

Thanks, Ben. Once again, I am extremely pleased with our fourth quarter and full year results. It means that the foundation we have built is strong and our momentum continues as we head into fiscal year ’08. We made progress on all our growth drivers, which yielded significantly higher profitability.

We believe that development efforts this year prove that we have the infrastructure, capacity and discipline to profitably grow the brand in existing and new strategic markets. Our marketing continued to power on with best-in-class marketing alliances with the NFL, NASCAR, Microsoft X-Box, and movie promotional tie-ins with Spongebob and Spider-man 3. And we continue to differentiate ourselves with edgy and memorable advertising campaigns.

We introduced the first national QSR breakfast value menu and our strategic mix between premium and value menu offerings drove sales and margin. On the ops front, we continue to drive operational excellence and significantly improved our operations metrics in the U.S. We successfully rolled out our operations platforms globally and by sharing best practices across the world, we will continue to improve and become better than the competition.

I am glad to be where we are today. We exceeded our annual financial targets. We are executing on our global go-forward plan, and we are consistently delivering on our multi-faceted growth opportunities. Our focus and our strategies we developed a few years back remain exactly the same and I am pleased to say that we have a lot of growth potential still ahead of us.

With that said, I would like to discuss our fiscal year ’08 growth outlook. Our plan remains on a steady path. Our goal is to grow comp sales by 2% to 3% on an annual basis. That is what our model needs to deliver strong profitability and yes, we would all like to exceed our goal.

We intend to drive top line expansion by increasing our net restaurant count by approximately 300 restaurants during the year. Again, we expect about 80% of new restaurant openings to come from international markets, and our worldwide blended royalty rate will continue to improve as more U.S. restaurants migrate to the higher 4.5% contractual royalty rate.

Our goal is to continue to grow G&A at the rate of inflation, as we did this past year, significantly less than our revenue growth rate. And as Ben mentioned, our effective tax rate is forecasted to be in the 36% to 37% range, and CapEx is expected to increase to $120 million to $150 million.

All of these assumptions drive a business plan that will deliver top-of-the-industry growth forecasts. Revenue is planned to grow at 6% to 7%, and EBITDA will increase by 10% to 12%.

And because of our unusually low tax rate this year of 33.6% that aided our 32% year-over-year improvement in net income, our net income in fiscal ’08 should expand by approximately 12% to 15%. If we could base our growth rate using the normalized fiscal ’07 tax base of 37%, our net income growth forecasted in fiscal ’08 would be approximately 20%.

I am excited about this year and I am confident that we have the right formula in place to fuel further growth and deliver once again on our financial targets.

With that said, I would like to thank everyone on the call for their time and continued interest. Operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Joseph Buckley of Bear Stearns. Please proceed.

Joseph T. Buckley - Bear Stearns

Thank you. I had a couple of questions. First, just to clarify in the guidance, the 10% to 12% net income growth is off the $152 million of adjusted net income?

John W. Chidsey

No, the 10% to 12% was on EBITDA, and then the 12% to 15% was off of net income, which would be off of the 152.

Joseph T. Buckley - Bear Stearns

Okay, I’m sorry. I’m confusing the two. Okay, the 12 to 15 is off the 152. Okay, and then just a couple of questions; with the Spider-man promotion, you mentioned some food and packaging cost pressures. What was unusual about that promotion that led to those issues?

Russell B. Klein

There actually wasn’t anything particularly unusual versus our other gaming events. All of our gaming events come with increased cost of doing business on packaging that is warranted, if you will, on the basis of overall traffic impact and sales growth, so there wasn’t anything particularly unique.

John W. Chidsey

I think the unique part, Joe, is just that compared to what you would run normally, yes, bags that have creative things on there, or cups, things like that, are higher than your normal cost but it wouldn’t be any different than if you compared it to a -- like the promotion last year around Star Wars or something of that nature.

Russell B. Klein

We also had late night packaging, which was an additional impact during this period, which is, if you will, a non-recurring or is a unique aspect to our packaging costs that affected us. And then we had some commodity impacts, so it was a little bit of a perfect storm at that time.

Joseph T. Buckley - Bear Stearns

Okay. Mentioning Spider-man, is that because the sales mix related to that promotion was higher than usual then?

John W. Chidsey

Yes, I would say obviously, when you look at the results, we were very happy with what it drove for us.

Joseph T. Buckley - Bear Stearns

Okay, and then just one more, just walk through the CapEx numbers again versus what you spent in ’07 and if you can, break down the $120 million to $150 million by new units and remodels and other uses?

Ben K. Wells

Yes, we can. Again, the number is approximately 50%. We are going to 120 to 150. Inside the increase, $20 million to $30 million is going to go to rebuilds and remodels, and new company restaurants and investments will be $20 million to $30 million.

Joseph T. Buckley - Bear Stearns

Okay. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of John Glass of CIBC. Please proceed.

John S. Glass - CIBC World Markets

Thanks. I first wanted to follow-up on that CapEx question; is this a level that we’d expect going forward, or is this a one-year event? And then also, could you just go back -- I didn’t get that breakdown. I only got numbers that added up -- maybe I wrote them down wrong, but $40 million or $60 million. Can you just go back through the components?

John W. Chidsey

We’ll go back. Ben can go back through the components. I think what we would say is this is going to be an ongoing increase. The reason we decided to step up the CapEx is when we went back and looked at what both our franchisees and we had seen on scrapes and rebuilds, we had a 38% sales lift when we looked at the last universe of scrapes, and we had about a 17% lift on substantial remodels, and obviously both of those give you great cash on cash returns, and so we want to be more aggressive.

If those numbers continue to pan out across this year, obviously we would continue into the future, not at the higher rate but we would certainly continue to spend at the rate that we are going to spend this year. So the proof will be in the pudding but I have no reason to think that this year will be any different than what we saw last year on a smaller scale.

Ben K. Wells

Again, the CapEx number, 120 to 150, I gave the incremental numbers and so I don’t confuse everybody, again the incremental is $20 million to $30 million on the rebuilds and remodels; $20 million to $30 million on new company restaurants and investments. But if you take a look at the total, about $50 million will be in new company restaurants, another $46 million will be in remodels and rebuilds, ongoing maintenance is $21 million, and then it falls into other of approximately 25.

John S. Glass - CIBC World Markets

Okay, thank you. That was helpful. Can you just talk about your outlook for the food and labor environment? This year, fourth quarter in particular, you got leverage on the U.S. margins despite having higher expenses. Do you think that’s something that can continue, or were there some one-time events in the fourth quarter, like the Worker’s Comp stuff, for example, that may not recur and give you the same lift?

John W. Chidsey

Yes, some casualty claims, things like that you’re mentioning?

John S. Glass - CIBC World Markets

Correct.

John W. Chidsey

We modeled basically flat CRM for the year, maybe even a slight decrease just because it’s kind of hard to know exactly where commodity costs are going to go and while we would all like to be optimistic and think they are going to come down somewhat from where they are now, just on the conservative side, we’ve assumed that despite the fact we’ll have increasing top line, that CRM will remain flat in the outlook we just gave you.

John S. Glass - CIBC World Markets

Okay. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Glen Petraglia of Citigroup. Please proceed.

Glen Petraglia - Citigroup

Thank you. Maybe this is a question best directed towards Russ, but I think this year is your third year of doing the NFL promotion. What is the challenge associated with making it incremental to last year if you’ve now done it two years in a row? What are you doing different this year?

Russell B. Klein

Well, every year with every promotional asset, whether it be the NFL or our NASCAR team with Michael Waltrip Racing, we look to build events that are focused on the components of our sales comps, whether they be check building events or traffic building events, or devoted to particular segments of our business.

In this particular case, the NFL event, we have a large scale kids’ program with miniature jerseys that will be very appealing to parties with kids and families. So every year again, we build up these events around the metrics that we are planning to deliver in that particular period and that’s the plan for the NFL.

Glen Petraglia - Citigroup

Okay, and then Ben, in terms of the CapEx increase, I think when I was down there a few months ago, one of the things that we talked about was Burger King stepping in and working on the behalf of franchisees to negotiate rent, et cetera, with landlords who are maybe trying to be a bit too aggressive. Are you guys co-investing at all with franchisees which is contributing to some of that $20 million to $30 million incremental? You highlighted new units and investments. How do you think about that going forward? Is that something that you think you’d use your cash for?

Ben K. Wells

Yes, it is incremental. We will continue to monitor the requirements of our franchisees and what it takes to improve the company’s image and increase the company’s presence. Earlier we had a question about is this a one-time shot on CapEx or is it a continuing trend? At this juncture, we are going to tell you it’s a continuing trend as we continue to invest in the brand.

We are stepping up to that image and we obviously understand the complexities of the current macro economic environments around the debt markets and we will continue to evaluate our need to support the other program on a go-forward basis.

Glen Petraglia - Citigroup

Okay, so you are suggesting that you would be willing to co-invest with franchisees if they are having a hard time finding financing?

John W. Chidsey

We, well, really BKLs. I think just to clarify, when Ben gave you the number of $50 million for new company restaurants and BKLs, 80% of that is just pure new company restaurants for ourselves. I would see maybe $10 million of that that we set aside where if the opportunity was right and it was a certain franchisee that was more interested in us acting as the bank. Generally, they don’t like that because we end up owning the building and the land. So we have set aside a small piece if necessary for that.

Glen Petraglia - Citigroup

And BKL is BK leasing?

John W. Chidsey

Yes, that’s where in our portfolio where we own the building and people just lease it, more akin to the McDonald’s model, basically.

Glen Petraglia - Citigroup

Okay. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Steven Kron of Goldman Sachs. Please proceed.

Steven T. Kron - Goldman Sachs & Co.

Thanks. Good morning, guys. A couple of questions; first, can you just, in light of the current environment, maybe Ben, just talk about the balance sheet and how you guys are thinking about that going forward? I think in the past you’ve talked about being comfortable at a higher leverage ratio, should the sponsor group look to sell additional shares. Where do you currently stand in light of what’s going on in the marketplace?

Ben K. Wells

Well, at this juncture, as we reduce another $25 million, our debt leverage is now 2.1%. We feel very, very good about our capital structure on a go-forward basis. We’ve got considerable flexibility within a multi-year credit agreement. That will easily fund any incremental acquisition requirements that we may throw at it, and/or capital spending if we decide to increase it.

As to where the sponsors are, that’s really left up to the sponsors. The reality here is that we are very comfortable, given the current environment, with where we are at and we are going to continue to evaluate share repurchase and debt repayment as we go forward, as we continue to improve the model. But our flexibility right now is extremely good and we are very comfortable with where we are at.

Steven T. Kron - Goldman Sachs & Co.

That’s helpful. Thanks. The other question I have is more on the U.S. sales-building initiatives. You talked about certainly extended hours. Can you maybe give us a sense on what type of lift that may have provided to comps in the period? You also talked about breakfast continuing to be a driver. Can you update us on what percentage of the sales mix breakfast currently is? And then lastly, I think last quarter you talked about the Hold’ems product coming out probably in the October/November timeframe. Can you give us a little update on that as well?

John W. Chidsey

I’ll do part and Russ can do another part. I think on the late night, obviously we said in the release and we certainly said here that breakfast and late night continued to grow faster than our overall sales rate, so I am not really going to go into anymore detail in terms of what specifically, what the piece was but just assume we continued to grow those two day parts faster than that. I think that was question one.

Question two --

Steven T. Kron - Goldman Sachs & Co.

Was specifically on breakfast with the value menu now, and given that that continues to be a driver. I think in the past you’ve said maybe breakfast as a percentage of ARS was somewhere around 8% to 10% or something. Is that --

John W. Chidsey

Well, breakfast has always been for us more in the kind of 12% to 15% range, and so obviously if we are growing breakfast faster than our overall growth rate, we continue to chip away at that. That’s again still probably our single biggest opportunity and we will continue to put weight behind our breakfast value menu, continue to innovate around breakfast products, and continue to look for opportunities to push into more extended hours around breakfast as well. I don’t know if there’s anything else you wanted to --

Russell B. Klein

Yes, our value menu at breakfast is running north of 15% of the mix, and again remember that it is essentially accretive to our overall day part margins at breakfast, so that’s been a win. And our stated objective of trying to grow breakfast as well as our late night business at somewhere in the range of 2X to 3X our overall growth rate is one that we still feel comfortable with.

The other component I would say is we also declared that with the required hours of operation initiative of midnight or later, we expected to close the gap by a good five hours versus the disadvantage that we had prior to that. And in fact, our hours survey has come in and shown that we did in fact achieve that.

On Hold’ems, we’ve basically opened up another test market around that product and we’ve done so out of enthusiasm for what we think the prospect of that platform will be. We are continuing to learn a lot of things about how to master that product in the restaurant, as well as the consumer appeal and we are working to sharpen up our positioning around that. It still remains a key planning platform for us in FY08, so we are continuing to advance that product accordingly.

Steven T. Kron - Goldman Sachs & Co.

Okay, and as far as the October/November timeframe, you’re not committing to that at this point?

Russell B. Klein

That’s correct. We basically raised up another test market because of the accumulated learning that we’ve had from the original phases of markets, so it will not be rolled out nationally in October/November but we are looking still at an FY08 introduction, based on our ability to move through this most recent test that we are raising.

Steven T. Kron - Goldman Sachs & Co.

Okay. Thanks very much.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of John Ivankoe of JPMorgan. Please proceed.

John Ivankoe - JPMorgan

Thanks. Just a few quick questions, if I may, the first on the net openings for fiscal ’08. The number that you are guiding to is 300 and I remember a number of 350 to 450 I think at one point. Is that a function of less gross openings or is it a function of more closures in fiscal ’08 for that minor reduction?

Ben K. Wells

It’s probably more -- I think the number you are thinking of, John, was the 330 to 400 number, which was the 3% to 4% net unit growth we talked about, which is why I think the actual wording we used earlier was approximately 300, so I don’t think we are deviating from what we said longer term.

I think part of that is really more driven by closures, because we saw that the openings were 26% higher than the previous year. We continue to feel really good about our openings pipeline. We are just guiding towards a net number. And again, the only excess closures that you might not have on a go-forward basis would still be finishing off what we have to do in the U.K.

John Ivankoe - JPMorgan

On the U.K., I know you did quantify what those incremental costs were in the third quarter. I think they were around $1 million. Have you quantified them for the fourth?

Ben K. Wells

I don’t remember off the top of my head but I am going to say roughly $2 million.

John Ivankoe - JPMorgan

$2 million in the fourth quarter?

Ben K. Wells

I’m sorry?

John Ivankoe - JPMorgan

It’s $2 million incremental in the fourth quarter?

Ben K. Wells

Yes.

John Ivankoe - JPMorgan

Okay, and that’s in the company restaurant operating cost?

Ben K. Wells

It’s in OI&E.

John Ivankoe - JPMorgan

It’s in where, Ben?

Ben K. Wells

OI&E -- other income and expense.

John Ivankoe - JPMorgan

Okay, I’m sorry. Thank you for that. Also, just a clarification; I think, John, you said in an answer to a previous question to expect flat CRM. I guess that’s company restaurant margins. Was that a comment -- and that was I guess in the context of fiscal ’08. Is that an expectation of yours for all of fiscal ‘08 on a global basis? Or is that just particularly related to the U.S.?

John W. Chidsey

No, it was really globally flat and I think that’s partially just because again, we’ll have the savings from our, you know, the new batch broiler which has been rolled out in the U.S. and is now being rolled our across the globe. But it is very difficult to know exactly what the commodity environment is going to look like in the U.S. throughout ’08.

Again, I would like to think that we’ll come down from these highs, in which case there will be some upside. We continue to have utility pressures in Europe and things like that, which is really why we model flat. I am still hopeful we’ll end up with a surprise here between again commodity cost here and what goes on in Europe, but just to be conservative, that’s what we modeled, flat CRM for the year and that still drove the 10% to 12% EBITDA and it still drove the 12% to 15% net income. So hopefully we get a positive surprise there.

John Ivankoe - JPMorgan

Okay, got that, thanks. And finally, on the tax rate, obviously I think you were expecting 36 to 37 now for fiscal ’08. I mean, there was an expectation of kind of a long-term decline in that tax rate going forward, and certainly there was some expectation that maybe fiscal ’07 was the beginning of that. Are we still on track for kind of reducing the tax rate 100 basis points a year going forward? Is there anything that is keeping it --

Ben K. Wells

I think we are. I’m sorry, yes, I think we are. We would have been at 38. We’re at 37. Now, what we didn’t anticipate, frankly, as we gave that guidance is the strength inside the U.S., which drives profit obviously into a higher tax zone. If we don’t hit it, there’s nothing fundamentally wrong. It’s actually a nice problem to have. The mix is slightly different than we had earlier anticipated but the -- we are still internally holding down to that 100% drop each -- 100 basis points rather, I would like to be 100% -- 100 basis points drop each year as we go forward.

John Ivankoe - JPMorgan

Okay, great. That’s all for me. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Jeffery Bernstein of Lehman Brothers. Please proceed. Mr. Bernstein, please check if your phone is muted.

Jeffery A. Bernstein - Lehman Brothers

Thank you. First, a clarification on the guidance. I think you had mentioned that if fiscal ’07 had come in at a normalized 37% tax rate, net income growth forecast for fiscal ‘08 would actually be 20%. Is that what you were guiding towards?

John W. Chidsey

That’s correct.

Jeffery A. Bernstein - Lehman Brothers

Okay, so the 12% to 15% is just based on a much lower-than-expected rate for fiscal ’07?

John W. Chidsey

That’s correct.

Jeffery A. Bernstein - Lehman Brothers

Okay, and you mentioned in your commentary the U.K. market. I think you said 140 basis points impact on company operating margins in the fourth quarter. I am just wondering whether that’s the end of it or how you expect that to play out as we look into fiscal ‘08 in terms of the impact on company-operated margins.

John W. Chidsey

Obviously from this point, we would expect it to get better because, as we’ve said on the last couple of calls, we’ve worked through basically all of the FFRP -- you know, franchisees in distress, if you will, and therefore we don’t expect to acquire anymore restaurants. The ones we have have started to improve just in terms of your basic cleaning up the ops and putting money back into them, so I would not expect to see any further degradation. I would expect to see improvements as we operate those restaurants more profitably.

Jeffery A. Bernstein - Lehman Brothers

The units that you have acquired and that are getting better, I’m guessing you mean that it won’t be a 140 basis points drag going forward but it is still going to be a drag until you get them up to normalized levels?

John W. Chidsey

Correct. I mean, it will just be like in the U.S. when we bought a lot of those. It took us two years really to get to where we wanted to get. I mean, we made a lot of progress in year one but it doesn’t happen overnight.

Jeffery A. Bernstein - Lehman Brothers

Okay, and then separately on the comps, I’m just wondering, looking at your franchise versus your company-operated stores, where you stand on pricing, what kind of the process is in terms of how the company thinks about pricing versus your franchisees?

Russell B. Klein

We’ve seen some opportunity and our franchisees certainly have seen some opportunity to take price, nominal price increases over the past 18 months. Certainly there’s been some amount of that in an effort to offset other operating cost pressures.

In the company, we are continuing to perfect a pricing model that we think will continue to serve us well going into FY08 and out years, and also allow us to move that pricing optimization model into the franchise system.

So we do see some upside there and that’s of course separate from our ability to develop pricing power through premium products and differentiated products. Overall, we are always measured about that because the value for the money perceptions are critical to this particular segment and probably account for some part of why the strength of our performance is in these economic times. So we are always trying to balance the two.

Jeffery A. Bernstein - Lehman Brothers

At this point, the franchisees are a little ahead of the company, as the company tries to perfect that model, is that --

Russell B. Klein

I would say franchisees are ahead of the company in terms of taking price moves. I would say the company is leading a little bit more science around exactly where the best places are to take price and we’ll all be on the same page here probably over the next 12 months.

Jeffery A. Bernstein - Lehman Brothers

Okay, and lastly, could you just break out a rough estimate of how the 300 net units break out by major market?

John W. Chidsey

Sure. Again, it’s 80% of that will be outside the U.S. and let me see -- let me get it right in front of me here. Europe and Asia-Pacific, which is one segment, will basically be two-thirds of that. Latin America will be in that same range it has traditionally been in, the 95 to 100, and the U.S. should be a net positive this year for the first time. It will probably be in the 20 to 30 range.

Jeffery A. Bernstein - Lehman Brothers

Okay, I thought when you had said 80% international, that would imply I guess 20% of the 300 would be in the U.S.

John W. Chidsey

Actually, on a net basis -- well, I was thinking more on a gross basis. On a net basis, you are right. It will be considerably more. I was talking, when I said 80% more, that was on gross openings.

Jeffery A. Bernstein - Lehman Brothers

Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Mark Wiltamuth of Morgan Stanley. Please proceed.

Mark Wiltamuth - Morgan Stanley

Good morning. I wanted to explore one of your comp opportunities in value menu. Could you maybe discuss how your value menu mix has changed since you put that in? And what’s a reasonable goal that you could get to over time?

Russell B. Klein

Again, just to restate, as you know both our AM and our PM value menus are constructed in such a way that the GTMs are not dilutive to the overall menu margin, and in some cases are even accretive. So from a matter of strategy, we are very happy to drive those menus to as large a percentage of the menu mix as we can see in the near future.

The breakfast value menu has jumped into a more prominent piece of the overall breakfast day part than has the PM value menu, where we have moved it from about 8% or so to about 12%, 13%, and we continue to see obviously a lot of headroom there. If you look at competitors in the 18%, 19% to 23% range of the overall mix.

The introduction of our Spicy Chicken Crisp, which is in the market as we speak and will be advertised beginning actually this weekend, we expect to be another key factor in driving our overall value menu as a percentage of sales.

Mark Wiltamuth - Morgan Stanley

So that 12 to 13 number is the overall number or just the PM segment?

Russell B. Klein

That’s the PM.

Mark Wiltamuth - Morgan Stanley

Okay, and the 15% you had mentioned earlier was breakfast, right?

Russell B. Klein

Yes, maybe even north of that.

Mark Wiltamuth - Morgan Stanley

Okay. Thank you very much.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Matt DiFrisco of Thomas Weisel Partners. Please proceed.

Matt DiFrisco - Thomas Weisel Partners

Thanks very much. I just wanted to clarify a couple of things with respect to the guidance before my question; did you say commodity costs, you expect to be or are modeling flat for your outlook for ’08?

John W. Chidsey

Yes.

Matt DiFrisco - Thomas Weisel Partners

Okay, and then also, did you mention what the -- are you still continuing in this current quarter with around that 4% domestic comp rate?

John W. Chidsey

No, we did not say that. We just said that the quarter, we continued to see very positive momentum in the first part of the quarter. That’s all we said.

Matt DiFrisco - Thomas Weisel Partners

Okay. Also, I just wanted to -- going back to the question earlier in the call with respect to access to financing for the franchisees, is this something that -- it’s a little unclear to me. Is it something that is an evolving, or you are trying to correct a problem that’s been a part of the legacy of Burger King, or is it something new with the current overall interest rate environment that they might have worsened as far as what we’re hearing about and that’s getting all the front-page news about as far as tightening credit. Are your franchisees suffering through a little bit of that as well? And it’s incremental or is it improving?

Ben K. Wells

No, this is a longstanding program that Burger King has had. There is no change in it at all. We continue to participate in the property market and as far as our franchisees getting financing, we have maintained a constant dialog with our commercial bankers that they access and there are no issues at this particular time with regard to them obtaining credit as we know it right now.

So no, this is not something we are reacting to the current market. This would represent perhaps an extension of a longstanding program as we get excited about our returns and our growth opportunities.

Matt DiFrisco - Thomas Weisel Partners

Okay, and then can you tell us where you stand in the percentage of overall, your franchisees domestically that are still yet to be converted to the higher royalty rate of 4%, and what is the pace that you expect them to be, or how long is this tailwind going to last as far as being a benefit to earnings as you convert these people over?

John W. Chidsey

We are about a third of the way through in terms of people on the 4.5% royalty rate, and it was changed in 1999, so technically it will go all the way to 2018, because we have 20-year franchise agreements. So you can basically model 5 to 6 basis points a year. You might have some where it’s a BIP or two higher, but on average you’ll pick up about 5 basis points a year.

Matt DiFrisco - Thomas Weisel Partners

Perfect. Thank you very much.

Operator

Thank you very much, sir. I would like to turn the call back over to Mr. Chidsey for closing remarks.

John W. Chidsey

Again, thank you very much for your time today. Thank you for your questions. We remain very excited about our prospects for ’08 and looking forward to dialoging with you in the upcoming months. Thanks a lot.

Operator

Thank you very much, sir, and thank you, ladies and gentlemen, for your participation in today’s conference call. This concludes your presentation for today. You may now disconnect. Have a good day.

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Source: Burger King F4Q07 (Qtr End 6/30/07) Earnings Call Transcript<br>

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