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Executives

John Beisler – Vice President Investor Relations

Andrew F. Puzder – President, Chief Executive Officer &Director

Theodore Abajian – Chief Financial Officer & ExecutiveVice President

John J. Dunion – Executive Vice President Supply ChainManagement

Analysts

Anton Brenner – Roth Capital Partners

Brian Moore – Wedbush Morgan Securities, Inc.

Steve Weiss – JP Morgan

Rachel Rothman – Merrill Lynch

Dean Haskell – Morgan Joseph

Lee Lignos – Lakeway Capital Management

Conrad Lyon – FTN Midwest Securities Corp.

Keith Siegner – Credit Suisse

CKE Restaurants, Inc. (CKR) Q3 2008 Earnings Call December 13, 2007 9:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the CKERestaurants Third Quarter Fiscal 2008 Conference Call. At this time, all participants are in alisten only mode. We will befacilitating a question and answer session towards the end of today’sconference. If at any time during thecall you require assistance, please press star followed by zero and acoordinator will be happy to assist you. I would now like to turn the presentation over to your host for today’sconference Mr. John Beisler, Vice President Investor Relations. Please proceed sir.

John Beisler

Thank you Brandy. Good morning and thank you for joining us. My name is John Beisler, Vice President ofInvestor Relations for CKE Restaurants. CKE Restaurants is hosting this conference call to discuss our resultsfor the 12 weeks ended November 5, 2007. Yesterday, CKE issued a pair of press releases announcing it’s financialresult for the 12 weeks ending November 5, 2007 and it’s same store sales forthe four week period ended December 3rd. Both releases are available on our website www.CKR.com. CKE has also filed it’s Form 10Q with theSEC. This call will reflect itemsdiscussed within those press releases and Form 10Q. CKE management will make reference to themseveral times this morning.

Speaking on today’s call are Andy Puzder, President andChief Executive Officer, Ted Abajian, Executive Vice President and ChiefFinancial Officer. Andy will begintoday’s presentation with a few comments regarding our third quarter and period11 same store sales results as well as provide an update on several importantinitiatives. Ted will then review ourthird quarter results with you. Andywill conclude today’s presentation with comments on the strategic direction ofthe company. Andy and Ted will then takecalls from callers.

Before we begin, I’d like to remind you of our disclosureregarding forward looking statements contained in Form 10Q and earningsrelease. Our disclosure regardingforward looking statements can be found within Form 10Q under item two,management’s discussion and analysis of financial condition and results ofoperations. Matters discussed during ourconference call today may include forward looking statements relating to futureplans and development, financial goals and operating performance and are basedon management’s current beliefs and assumptions. Such statements are subject to risk anduncertainties and actual results may differ materially from those projected inthe forward looking statement. I introduceyou now to Andy Puzder, President and CEO.

Andrew F. Puzder

Thanks John and good morning everybody. During the third quarter we continued toexecute both strategically and operationally on our plan to position ourcompany for long term sustained growth and to improve near turnprofitability. Strategically, werepurchased a significant amount of stock materially reducing our outstandingshare count. During the third quarter we repurchased $4,796,899 shares of ourcommon stock at a total cost of $80.1 million. Through the first three quarters of fiscal 2008, we repurchased 13,199,219 shares at a total cost of $233.7 million dollars. Since the end of the third quarter werepurchased an additional 447,700 shares at a total cost of $6.7 million. Since the inception of our stock repurchaseplan in April of 2004, we’ve repurchased approximately $19.1 million shares orapproximately 32% of our fully diluted share count for a total investment of$331 million. We expect our sharerepurchases to be accretive to EPS in fiscal 2009. We’ve updated our investor presentation andit can be accessed at www.CKR.com. Youclick on the investor tab and then on presentations and at pages seven andeight of the updated presentation we summarize our shareholder distributionsover the past four years and our diluted share count history dating back tofiscal 2001.

During the third quarter we also refranchised 16 Hardee’srestaurants. Since the end of the third quarter we refranchised an additional30 Hardee’s restaurants in the Kansas Citymarket giving us a total of 126 restaurants refranchised year-to-date. The development agreements we entered into inconnection with our refranchising program obligate the purchasers to build anadditional 59 restaurants over the next five years. While refranchising reduces our grossrevenues and adjusted EBITDA it also provides us with cash for debt reduction,share repurchases or funding of our capital plan. It reduces our capital expenditures,increases are adjusted EBITDA minus capital expenditures and increases our precash flow. Refranchising is alsoexpected to increase our company operated restaurant averages and volumes asthese market generally have average unit volumes below the systemaverages. We’ve included an analysis onpage 50 of our updated investor presentation quantifying the benefits ofrefranchising on pre cash flow.

As we have no plans to build new units in these markets andthe acquiring franchisees are agreeing not only to remodel these restaurantsbut also to build new units under developing agreements, this is clearly theright move for our company and the Hardee’s brand short term and longterm. In addition, as we execute on ournew unit development in selected Hardee’s markets and at Carl’s Jr., we willoffset at least a portion of the near term reduction in revenue from ourrefranchising efforts. In this respect,it is my pleasure to announce that for the first time in eight years, or inthis decade, we are opening more restaurants than we are closing. As of the end of the third quarter, we andour franchisees operated 3,036 Hardee’s and Carl’s Jr. restaurants, an increaseof 43 restaurants since the end of fiscal 2007. Year-to-date both Hardee’s and Carl’s Jr.’s have had positive growth asbrands and both we and our franchisees have had positive unit growth.

While the increase in restaurant count is not a large numberin absolute terms, it is a significant achievement as it demonstrates we arenow in a fluxion point with respect to our unit growth. This will be the first year since 1999 thatour brands will have more units opened at the end of the year than they did atthe beginning. In other words, it shouldbe our first year of positive net unit growth. Going forward, new units will become a more significant driver of ouradjusted EBITDA and our EPS growth. There is a new unit growth summary on page 12 of the updated investorpresentation.

At the operations level, we implemented certain cost reductioninitiatives during the third quarter to offset rising commodity costs and theimpact of the increases in the minimum wage. These initiatives combined with an improvement of 40 basis points inworkers’ compensation expense made Carl’s Jr.’s third quarter food andpackaging and labor and employee benefits consistent as a percentage of companyoperated restaurant revenue with the prior year quarter. At Hardee’s we actually saw a 20 basis pointimprovement in labor and employee benefits as a percentage of company operatedrestaurants revenue versus prior year quarter. But, a 210 basis point increase in food and packaging costs. An increase in dairy and biscuit ingredientcosts negatively impacted Hardee’s operating costs due to strength of itsbreakfast day part. Occupancy and otherrestaurant operating cost increased by 110 basis points over the prior yearquarter due primarily to higher depreciation related to our new point of salesystem at Carl’s Jr.’s and the ongoing remodel program at both brands. To date, we’ve remodeled 133 Carl’s Jr.restaurants or 33% of the system and 63 Hardee’s restaurants or 11% of thesystem.

Despite the fact that our first price increase impacted onlythe final period or 1/3 of the third quarter and our second price increase tookaffect after the end of third quarter, our efforts to mitigate the impact ofrising restaurant operating costs began to have a positive impact in the thirdquarter. In second quarter, ourrestaurant operating costs were 300 basis points above the prior yearquarter. Of this 300 basis pointsincrease, 90 basis points were due to an increase reserve for a very old andvery large workers’ compensation claim. All other restaurant operating cost were 210 basis points above theprior year for the second quarter. Inthe third quarter, despite continued increases in certain commodity costs,particularly biscuit ingredients, diary, potatoes and cooking oil, we reducedthe gap between last year and this year to 190 basis points. We’re working diligently to reduce that gapeven further for the fourth quarter when both price increase will have theirfull impact.

With respect to fourth quarter, we’re continuing toexperience high costs for certain commodities and scheduled increases invarious state minimum wage rates will impact our labor expense. Nonetheless, we continue to work diligentlyto narrow the gap versus the prior year. One other expense worth noting is a $1.8 million charge we took inconnection with our interest rate swap agreements. As Ted will discuss in more detail, weincurred this charge because interest rates declined after we entered into ourinterest rate swap agreements. Similarly,if interest rates increase in the future, we would expect to record a benefitto earnings. However, for the thirdquarter that charge reduced both net income and EPS. The after tax impact of this charge wasapproximately $0.02 per diluted share and we had calls yesterday after wereleased our earnings from some of our shareholder assistants, who we alwaysappreciate, asking that we emphasize that our 13% EPS would actually have been15% without this charge and, of course, that’s true and we did try and put inthere that it was a $0.02 charge. But,on the other hand we do have to absorb that charge.

G&A improvements, in addition to our efforts to reducethe impact of increased commodity and labor costs, we also focused on G&Areductions as a way to improve earnings. As Ted will discuss in more detail, we’ve seen significant G&Areductions throughout the year. Forthird quarter, even without the reductions related to the sale of La Salsa,which appear in discontinued operations, we were below not only the prior yearbut our internal forecast which contemplated the refranchising of Hardee’sunits. We achieved this improvementdespite increase in G&A expense with respect to certain departments such asour real estate and construction and training departments as we gear up forgrowth.

Both brands experienced positive same store sales in thethird quarter despite rolling over strong results in the prior year. Same store sales at company operatedrestaurants increased 7/10 of a percentage at Carl’s Jr., on top of positivesame store sales of 6.2% last year for a positive two year total of 6.9%. Hardee’s same store sales increased 2.7% ontop of positive same store sales of 5.6% last year for a positive two yeartotal of 8.3%. As of the end of thethird quarter, Carl’s Jr.’s average unit volume was $1,486,000, a $46,000increase since year end and rapidly approaching the $1.5 million mark. Hardee’s average unit volume was $945,000, a$29,000 increase since year end and, again, rapidly approaching the coveted $1million mark.

As we announced yesterday, same store sales improved forboth brands in period 11 with Carl’s Jr.’s up 2.5% and Hardee’s up 3.2%. We achieved these sale gains despite twoprice increases and the onset of winter weather during the final two weeks ofthe period in the Midwest and southeast. As of the end of period 11, Carl’s Jr.’saverage unit volume was $1,490,000 and Hardee’s average unit volume was$949,000. The accumulative result of ourcost reduction initiatives and our positive same store sales offset bycommodity costs and depreciation expense increases and the $1.8 million chargein connection with our interest rate swap agreement was third quarter incomefrom continuing operations of $7.5 million or $0.13 per diluted shares. As stated earlier, we repurchased asignificant amount of stock.

During the first three quarters of 2008 we’ve added $198million in debt to our balance sheet such that at the end of the third quarter,our total outstanding debt is now $376.1 million. At the end of the third quarter our debt toadjusted EBITDA ratio was approximately 2.25:1. Although our debt to adjusted EBITDA ratio has more than doubled sincethe end of fiscal 2007, our ratio still remains towards the bottom of our groupof peers. As of today, we have a $269million balance on our term loan, of which we have effectively fixed theinterest rate for $200 million of the borrowings with the interest rate swapagreements, as I mentioned earlier. Wecurrently have $37 million outstanding on our $200 million revolving creditfacility and our total bank debt is $306 million. The bottom line is in a challengingenvironment we’ve reduced our restaurant operating costs, reduced G&Aexpense, had positive sales and continued to make necessary investments in ourbusinesses while returning capital to our shareholders and positioning ourselvesfor improved growth and profitability.

I will now turn the discussion over to Ted Abajian our ChiefFinancial Officer for his discussion of the financials.

Theodore Abajian

Thank you Andy. Goodmorning everyone. Before I get started Ineed to make you aware that during this conference call we may refer to certainnon GAAP financial measures as explained in our earnings release issuedyesterday and in our report on Form 10Q for the 12 weeks ended November 5,2007. Also, our reported financialresults have been adjusted to reflect the sale of our La Salsa Fresh MexicanGrill change which has been classified as discontinued operation within ourconsolidated financial statements. Iwill now take you through our third quarter results.

Consolidated revenue for the third quarter was $351.6million, a $2.8 million or .8% decrease from the prior year quarter. The decrease in revenue reflects the impactof our refranchising efforts, partially offset by our same store sales growthand new unit development. Third quarteroperating income was $19.5 million, a $7.3 million decline from the prior yearquarter operating income of $26.7 million. The year-over-year decline in operating income is primarily attributableto a 110 basis point or $2.9 million decline, I’m sorry $2.9 million increasein food and packaging costs and a 110 basis point or $2.9 million increase inoccupancy and other restaurant operating costs. I will comment further on both of these areas when I address ourperformance at the brand level.

Third quarter G&A costs which include an $841,000increase in share based compensation expense declined by $1.9 million or 40basis points as a percent of total revenue as compared to the prior yearquarter. G&A cost excluding sharebase compensation expense were down $2.7 million for the quarter. Facility action charges were $.3 million forthe quarter as compared to a credit of $1.4 million in the prior yearquarter. The prior year results includedgains on the sale of surplus properties that did not recur in the current yearquarter.

Interest expense was $7.7 million for the third quarter, anincrease of $3.9 million as compared to the prior year quarter. The increase versus the prior year quarter isdue to a combination of higher overall debt balances resulting from our sharerepurchase activity and, as Andy mentioned, a $1.8 million non cash charge weincurred during the third quarter to adjust the carrying value of our interestrate swap agreements. You may recallthat during the third quarter we entered into interest rate swap agreementwhich effectively fixed the interest rate on $200 million of our term loan debtat 6.22%. These agreements expire inMarch of 2012. Subsequent to enteringinto these agreements, both current interest rates and expected future interestrates declined. As of the end of thethird quarter we were required to record a $1.8 million charge to account forthis decline and interest rate. Sincethe charge we recorded as the effect of resetting our interest rate to the currentmarket rate, we would expect to begin recording interest expense at the thencurrent market rate from that point forward. However, future declines in interest rate yield curves would require usto record additional charges. Differentinterest rates, or more specifically if forward looking interest rate yieldcurves should increase we would reverse a portion, all or potentially more thanall of the charge we have recorded in the third quarter. However, since the end of the third quarterrates have continued to decline. Ifinterest rates were to remain at current levels which we updated as ofyesterday, we would expect to record an additional charge of approximately $3.5million in the fourth quarter to reflect the impact of this decline in interestrates on the fair value of our interest rate swap agreements.

Third quarter income from continuing operations was $7.5million or $0.13 per diluted share and include the aforementioned adjustment tointerest expense which equates to approximately $0.02 per diluted share.

I’ll now briefly discuss third quarter results at both Carl’sJr. and Hardee’s. At Carl’s Jr., thirdquarter same store sales increased .7% rolling over a 6.2% increase in theprior year quarter. Restaurant operatingcost increased from 130 basis points to 78.8% of company operated restaurantsrevenue. The increase in restaurantoperating cost was driven by a 140 basis point increase in occupancy and otherexpense over the prior year quarter due primarily to an 80 basis point increasein depreciation expense arising from our increased remodel activity and theroll out of new point of sale software and related hardware. Both food and packaging costs and labor andemployee benefits were relatively flat versus the prior year quarter. Higher direct labor expense related tominimum wage increases at the federal and state levels were offset by areduction in restaurant level manager bonus expense and a 40 basis pointdecrease in workers’ compensation expense from favorable adjustments to ourworkers’ compensation claim reserves.

Moving now to Hardee’s, third quarter same store sales atcompany operated Hardee’s restaurants increased by 2.7% rolling over a 5.6%increase in the prior year quarter. Restaurant operating costs increased 260 basis points to 84.3% ofcompany operated restaurants revenue. The increase in restaurant operating cost at Hardee’s was primarilydriven by a 210 basis point increase in food and packaging costs. A substantial portion of the increase in foodand packaging costs is due to higher commodity prices for biscuit ingredientssuch as floor and buttermilk, as well as dairy products overall. These items have a much greater impact on Hardee’sbusiness than Carl’s Jr. as a result of significantly higher breakfast sales. Occupancy and other expense increased 70basis points over the prior year quarter due primarily to general liabilityinsurance expense which was 50 basis points unfavorable to the prior yearquarter as a result to adjustments to our claim reserves. Labor and employee benefits decreased 20basis points versus the prior year quarter primarily as a result of a 50 basispoint reduction in workers’ compensation claims expense resulting fromfavorable adjustments to our workers’ comp claim reserves and a reduction inrestaurant level manager bonus expense. These favorable items more than offset higher direct labor expenserelated to minimum wage increases at the federal and state level.

Before Andy wraps up our prepared comments this morning, I’dlike to comment on our general expectations with respect to a few key fourthquarter metrics. While we continue toexperience commodity cost pressures, we do believe the actions we have takenover the past several months should continue to benefit restaurant leveloperating costs such that fourth quarter year-over-year, such that the fourthquarter year-over-year increase in restaurant level operating costs as apercent of sales should be lower than the year-over-year increase in the thirdquarter. With respect to refranchisingand the associated decrease in G&A spending, we expect to see additional G&A spending reductions versusthe prior year during the fourth quarter as compared to the third quarter runrate. A significant portion of ourrefranchising activity occurred during the third quarter and early in thefourth quarter. Specifically, of the twomost recent transactions covering a total of 56 restaurants, one closed duringthe last week of the third quarter and the other transaction closed four weeksinto the fourth quarter. Finally, ourestimate for weighted average diluted shares outstanding for the fourth quarteris 56.8 million shares, a 20% reduction from the prior year fourth quarterdiluted weight average share count of 71.2 million shares.

I’ll now turn the call over the Andy for closing remarks.

Andrew F. Puzder

Thanks Ted. Despiteall of the cost issues facing our business, on an EPS and an adjusted EBITDAbasis we expect this year to be the second best year we’ve had since our teamtook over management of the company, exceeded only by last year which was aperfect storm of low costs and high sales. A series of charts featuring our EBITDA EPS and adjusted EBITDA growthare located on pages 51-53 in our investor presentation and I think it reallyputs this in context. We also expectthat as we begin to reap the benefits of our capital plan and our strategicinitiatives, both EPS and adjusted EBITDA will continue to improve. We expect adjusted EBITDA to grow an averagerate of 11-13% over the next five years.

I will now address a couple of questions that seem to occurin investor meetings and in these conference calls. First, investors have been asking how much wespent with respect to our previously announced capital plan and what kind ofreturns we’re seeing? We’re now about 21months, or 23 accounting periods into our $650 million capital plan which wedisclosed in April of 2006. In ourcurrent investors presentation we’ve updated that plan to factor in certainchanges in our underlying assumptions including, an increase in the costs ofour remodels and the sale of Hardee’s units. This update is available on pages 9-11 in our investorpresentation.

Since the beginning of our last fiscal year through the endof third quarter of fiscal year 2008 we’ve expended $178.4 million of ourprojected capital expenditures. Of this,$120.3 million has been non discretionary spending which includes remodels,repair and maintenance expenditures and investments in IT and our distributioncenter. The remaining $58.1 million hasbeen discretionary spending which includes new unit growth and dual branding ofour restaurants. As we previouslyindicated, our initial capital spending will be weighted towards nondiscretionary projects as we invest in areas where capital spending has beendeferred for some time and where we need to rebuild our infrastructure asrequired for growth.

As expected, our refranchising of more than 100 Hardee’sunits this year has reduced our capital spending needs over the coming years aswe no longer need to commit remodel and repair and maintenance capital forthese stores. In addition, because weare in some instances simultaneously dual branding stores as they are beingremodeled, we’ve reduced the amount of capital allocated for the dual brandingprogram. Partially offsetting theseitems is an increase in the projected cost of our remodels and an increase inIT spending due to higher implementation costs of our POS system as well as anew distribution management system installed in our Ontariodistribution center.

In all, we’ve reduced our five year capital spending by$32.5 million to $617.5 million with approximately $439 million to be spentover the next 3 ¼ years. Since ourcapital expenditure plan is back loaded with discretionary expenditures, if wefail to experience acceptable returns going forward we will reduce this amountor extend the time period as we deem prudent. The bulk of our capital spending to date, for which there is ameasurable return on investment, has been our remodels. Although this is a non discretionaryinvestment as we would have to remodel our restaurants even if there were nomeasurable returns on the funds we invest, we do expect a return from ourremodels and we do everything we can to increase that return. Remodels are simply a cost of doingbusiness. To date, we’re experiencing an8% return on our Carl’s Jr. remodels and about a 16% return on our Hardee’sremodels. This disparity in returns isdue to a number of factors including higher averaging volumes at Carl’s Jr.sand a greater need for remodel at Hardee’s. In addition, we never really saw a decrease in sales at Carl’s Jr. eventhough there was the remodels and as we may not be seeing an increase of salesonce we complete the Carl’s Jr. remodels although, we are seeing anincrease. We are examining exteriorelements that may help improve the remodels at both brands.

To date, about 2/3 of our capital spending has gone intoinvestments we needed to make to support future growth and for which it isdifficult to measure a return on investment. Our remodels which have a lower return on investment than dual brandingor new units, as such, our capital expenditure budget is front loaded with nondiscretionary expenditures for which it is difficult to measure a return oninvestment, or which have a lower return on investment than the expendituressuch as dual branding and new units which have a higher return but, are backloaded in the budget. This obviouslyresults in lower initial returns and higher returns as we proceed through theplan.

With respect to our discretionary capital spending wecompleted operator Green Burrito conversions in the third quarter. We now have a total of 191 Carl’s Jr. GreenBurrito company operated restaurants and 179 franchised units for a total of370 dual branded units or 33% of the Carl’s Jr. system. We expect to dual brand approximately 20-25company operated restaurants with Carl’s Jr. and Green Burrito this year. We’ve opened nine company operated Carl’s Jr.restaurants through the first three quarters of fiscal 2008 and, we intend toopen 18-20 new company operated Carl’s Jr. restaurants for full fiscal year.

On the Hardee’s side, we completed 12 company operated RedBurrito conversions in the third quarter and now have a total of 63 companyoperated Hardee’s Red Burrito dual branded units and eight franchise units fora total of 71 dual branded units or 4% of the Hardee’s system. We expect to dual brand approximately 35company operated restaurants with Hardee’s and Red Burrito this year. We’ve opened five company operated Hardee’sthrough the first three quarters of fiscal 2008 including, a total of two dualbranded locations and, we intend to open six to eight new company operated Hardee’sfor the full fiscal year. While weremain encouraged by the results of these units, we will build a very limitednumber of future units if the results do not justify the investment.

Another question that investors have raised to us, is why wewaited to the end of third quarter to take a price increase to offset commodityand labor costs increases at both brands. While we did take pricing early in the year, to some extent, I believe,we were a little behind the curve and initially a little timid with respect toour price increases. However, there werereasons for our delay which were unavoidable. First, we do take pricing where and when we can on a regular basis. At the highest priced brands in our segment,we cannot take large price increases until our competition does so or wefurther separate ourselves from the pact on price, on a price valued basiswhich would negatively impact our transactions and sales. The reality is that because of our premiumquality, higher priced positioning we will always be somewhat behind our lowerpriced competitors from a timing perspective on large price increases.

Second, when we increase prices we do take the time toevaluate where in the menu we can increase prices most effectively with theleast amount of consumer reaction. And,finally, we try to time these increases to proceed seasonal run ups inrestaurant traffic such as the beginning of summer and at the beginning of theholiday shopping season since traffic gains tend to reduce the potential forsales and transaction losses resulting from higher prices. Consequently, we targeted October andNovember for our price increases. Wecertainly seem to have accomplished our objective with our two price increasesas we have yet to see any price related impact to our sales trends in periods10 and 11 while preliminarily we have seen a positive impact on our operatingresults. We’ll know more about theimpact of these price increases by the end of the fourth quarter.

Finally, investors ask why the increase in commodity andlabor costs seems to have impacted our brands more than some of ourcompetitors. Well, first, for thereasons stated above certain of our competitors took price increases before wedid. More fundamentally however, such costsincreases impact us more because we own a greater percentage of our restaurantsthan our competitors. This means, whencosts go up, our profits go down to a greater extent than is the case withcompetitors having a higher mix of franchise restaurants. This is because franchisors get royaltiesbased on gross revenues not bottom line profits. If in fact, a franchisee increases prices tooffset increased costs, royalties could actually go up if revenues increase. On the other hand, there is substantialbenefits to owning more restaurants when restaurant level costs declined asoccurred last year because, we get a huge benefit versus the competition as ourrestaurant level profits improved with decreased costs even if revenues arestagnant. We believe we can address, andin fact, we are addressing the current commodity and labor cost increases inthe short term with certain actions including the price increases I discussedearlier. We also believe that due to ourrestaurant ownership mix, in the long run we will benefit to a greater extentthan most of our competitors, when following these price increases commodityprices declined.

Now, I hope that answers some of your questions. While always looking to improve, we do feelwe’re on the right path in addressing both the short and the long term issuesthat we’re facing. We’re focused, we’redetermined and I remain very optimistic about our company’s future and I lookforward to taking us into the New Year. We will now take your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen if you wish to ask a question, pleasepress star followed by one on your touchtone phone. If your question has been answered or youwish to withdraw your question, star two. Press star one to begin and we’ll stand by for first question. And, your first question comes from the lineof Tony Brenner of Roth Capital Partners.

Andrew F. Puzder

Good morning Tony.

Theodore Abajian

Good morning Tony

Anton Brenner – RothCapital Partners

Good morning. I havetwo questions.

Andrew F. Puzder

Could you get closer to the phone?

Anton Brenner – RothCapital Partners

Yeah, I’m sorry.

Andrew F. Puzder

That’s okay.

Anton Brenner – RothCapital Partners

I have two questions. One is, Andy, you seem to be edging more than I’ve heard you before onyour intention of opening new restaurants. On the restaurants that have opened this year are the sales trends lessthan you would look for? Is there someother reason you went out of your way to mention that you won’t, you won’t opennew stores if the trends are disappointing?

Andrew F. Puzder

No. If I gave thatimpression, I apologize. We’re openingas many new Carl’s Jr.’s as we can find reasonable sites to open them on and,our new real estate department which , you know, we’ve really invested in overthe past 18 months is doing a spectacular job of coming up with sites. We’re going into some new markets and we’regoing to be developing a lot of Carl’s Jr. restaurants. On the Hardee’s side I want to make surethat, we’re still at that $950,000 average unit volume on the company storesand the new units that open up substantially higher than that but, I want tomake sure we get the metrics rightbefore I do the same kind of aggressivedevelopment at Hardee’s that we’re currently doing at Carl’s Jr. And, all I meant to emphasize in the scriptwas, if we don’t, while the capital plan contemplates that we will get thatformula and I believe that we will get the formula for the metrics on the new Hardee’sunits, that if we don’t get it, I have, we have the discretion not to build asmany new Hardee’s and that’s really my only point. We fully intend to develop a lot ofunits. That really is, as we go forwardand look at our EBITDA on our earnings per share in coming years, really a bigpart of our growth in those areas is going to come from these, this new unitdevelopment that we’re contemplating and we are aggressively pursuing that.

Anton Brenner – RothCapital Partners

Okay. My secondquestion relates to your share repurchase program. I’m wondering if given your potentialdiscretionary cap ex spending, if you intend to remain aggressive on sharerepurchase. And, I’m curious what youcompute your rate of return on share repurchase as being.

Andrew F. Puzder

Well, the computation on the rate of return, that’s notsomething that we’ve made public or that we’re going to make public. But, we do expect it to be accretive nextyear. On the issue of how much, howaggressive we’ll be, I think, going forward we’ll be more opportunistic. We’ve done, I’m really, I think, we’ve doneabout as much as we can do with bank debt and, you know, I’m happy, reallyhappy that we were able to accomplish what we did accomplish with traditionalbank debt which we can repay and we can get interest rate locks in it and it canbe very advantageous to us. I think, ifwe did something meaningful going forward we’d have to finance it differentand, at the moment, I think we’re going to and, we have our non discretionaryprogram which is still in place and we do have dry powder if a good opportunitypresented itself. But, I don’t thinkwe’re going to be as aggressive over the coming year certainly as we were thisyear.

Anton Brenner – RothCapital Partners

Thank you.

Andrew F. Puzder

Thank you.

Operator

Your next question comes from the line of Brian Moore of WebBush Morgan.

Theodore Abajian

Good morning Brian.

Andrew F. Puzder

Good morning Brian.

Brian Moore – WedbushMorgan Securities, Inc.

Good morning. I’m alittle rusty on my floating the fixed swap accounting. I’m hoping you can talk to me about, I guess,maybe the up front payment associated with that and then, how much of theinterest expense line they’re charging top out as cash.

Andrew F. Puzder

It’s tough to tell you. This isn’t very intuitive so I’m going to turn you back over to Ted.

Theodore Abajian

Thanks Andy, I was perfectly prepared for that one. No, Brian the, well, first of all, the $1.8million charge during the quarter, none of that is cash during the quarter.And, what is effectively happening here is we entered into these swapagreements that fixes our interest rate at a point and time for, at the timewas a 4.5 year term. If, as interestrates change you have to mark that instrument to market much like an investmentsecurity. Since interest rates went downfrom the time we entered into the agreement until at the end of the quarterthey were lower than when we entered the agreement in the middle of thequarter. You effectively are required totake charge for the difference between the rate you’re locked in at and thethen current rate as of the end of the fiscal quarter which is a charge basedon the entire 4.5 year term remaining which makes the assumption interest wouldstay at that level at the end of the quarter. If interest, as I mentioned earlier, if interest rates change goingforward, you take additional charges if they go down further. Or, if interestrates were to go up, you would actually reverse a portion or potentially all,or even more than all of that charge that you’ve taken previously. It is complicated, I wish it’s.

Brian Moore – WedbushMorgan Securities, Inc.

There was an upfront payment, Ted? I’m sorry.

Theodore Abajian

No. There is noupfront payment. It’s a fixed rate swapwith no upfront payment.

Brian Moore – WedbushMorgan Securities, Inc.

Okay. Fairenough. Perhaps a question for Andy,could you maybe speak to the divergence and two year comp trends in recentmonths, perhaps from a geographic product or competitive standpoint?

Andrew F. Puzder

Well with Carl’s Jr. we ran an ad, it was called Teacherwhich met with some, I guess, unfavorable reaction from some teaches. And, you know, while normally I’m willing todefend our ads right to the limit, I didn’t think fighting teachers was aparticularly good idea so, we backed off the ad and I think it had an impact onCarl’s sales during the third quarter. So, I think that, more than anything else, you see that. Although sales were still positive we didhave to pull our ad which we felt would be driving sales that quarter off theyear.

Regionally, you know regionally things have been fine. I mean, the Midwestand southeast has been great. Now, Iwill tell you in the last, the last week or two of period 11 and part of period12 and, I don’t know what part of the country you’re living in right now but,you know, there are , we just had severe ice storms up through Oklahomareaching up into Missouri and parts of the Midwest and southeast. And, you know, we get these things every yearbut, they rarely fall at the same time. So, you know, that can impact your same store sales certainly more than,more than anything else. But, I mean, we’re seeing, we’re seeing absentweather, absent the weather and even in, even after our pricing increases and Iknow people say the way your prices went up, you know, your sales should goup. Well, that’s not necessarily, ifthat were true, you know, we’d raise them a whole bunch everyday. You know, at some point your prices go upenough that it drives business away and you have to be careful not to do that.

But, even with two good pricing increases in periods 10 and11, we haven’t seen negative impacts tothe trend. So, you know, I think on a, Ithink a lot of the articles you read about how people may be trading down tofast food and, we’re in a particularly good situation with our quality messageto intercept some of that trade down, I think we’re seeing, we’re seeing goodtrends pretty much across the brands. And, you know, we always, we’d love to beup 5% a year, that’s not realistic. That’s not going to happen. But,sales have been good. I mean, it’s not,I’m not, I can’t tell you in any part of the country I’m seeing any reallymajor declines. I’m looking at Ted andhe’s shaking his head no too. So, we’renot seeing any declines geographically or by product mix.

Brian Moore – WedbushMorgan Securities, Inc.

Alright. And maybe,one final question. I guess, given your comments about parody in terms of pricing, I guess first, doyou believe you’re at parody with some of your, you know, lower pricecompetitors? And then secondly, to getmaybe the willingness to take additional pricing, the timing, you know,particularly given the two step minimum wage increase here in California.

Andrew F. Puzder

Yeah. You know, thereare, we emphasize pricing because that’s something we can talk about. There are also other things we do to improvethe cost structure which, you know, really are competitive related and we don’ttalk about in these conference calls. But,with respect to being in parody on pricing, I think everybody’s continuing toraise their prices. The impact of thedollar on the industry, on commodity costs, the weakness of the dollar oncommodity costs continues and it affects our competitors as much as it affectsus. And, we keep an eye on what they’redoing, particularly the franchisees of some of the larger, our largercompetitors. You know, you can’t, whenyou’re a franchisor, you can’t tell your franchisees what to charge. So, whenyou’ve got a large franchise system as some of our competitors, you know, youwatch the franchisees, you know, to see where the prices go because, they’regoing to mark to market, to use a phrase we’ve used already today.

So, we keep an eye on them and, I think, people continue toraise prices and we will as well. Youknow, we’re going to do what we need to do to make sure that our margins gowhere they need to go and stay where they need to stay. Although, as was the case when beef went upback in, was it 2004? You know, we maybe, we may be a quarter behind or a few periods behind our competition but,we’re not going to be much behind.

Brian Moore – WedbushMorgan Securities, Inc.

So would that be fair to say, I’m sorry to interrupt.

Andrew F. Puzder

That’s alright.

Brian Moore – WedbushMorgan Securities, Inc.

There’s a willingness to see something before the typicalsummer and, you know, or shopping season type periods you referenced earlier?

Andrew F. Puzder

Well, we normally take price increase at the beginning ofthe year in first quarter and I expect that we’ll do that again this year. What I was talking about seasonally is whenyou take really major pricing. You know,we took two substantial price increases in periods 10 and 11 before the shoppingseason. We will continue to take pricingthroughout the year and we may, we may take even more substantial pricing justbefore the summer hits. We’re, we don’tbelieve we’re done with this yet. Wecan’t be done adjusting our prices until the economy adjusts and, that doesn’tlook to be happening in the short term.

Brian Moore – WedbushMorgan Securities, Inc.

Great. Thank you verymuch.

Andrew F. Puzder

You’re welcome.

Operator

Your next question comes from the line of Steve Weiss of JPMorgan.

Steve Weiss – JPMorgan

Hi. Thanks. I wantedto ask about your margin expectations going forward. I know the goal in the fourth quarter is tofurther reduce the gap. But, at thispoint, as you’re looking to 2009 given the pricing and other margin drivinginitiatives and just generally easier laps, how should we be thinking aboutrestaurant level margins to progress in the year?

Andrew F. Puzder

Well, you know, there’s obviously two elements to that. One is what will you do if the pricing situationstays stagnant or continues to escalate. You know, we need to do what we need to do to stay, to improve ourmargins and to stay current with the changing economy. Now, if commodities start to come down, andthey will at some point come down, just as interest rates will at some pointwill go up. Commodity costs will at somepoint come down. And, at that point,given the pricing we’ve taken and our premium positioning, we’re going to reapsubstantial benefits just as we did last year when commodity prices wentdown. So, a lot of it depends on theeconomy but, I’m going to let, having said those general things, I’m going toturn it over to Ted to see if he wants to say anything.

Theodore Abajian

Yeah, I would add a couple of things to that Steve. First of all, if you recall last year towardsthe end of our first quarter which our first quarter ends the end of, themiddle of May is when we began to see the commodity price increases. So, a good portion of our first quarter lastyear didn’t have the impact of the kinds of commodity escalations that we’veseen for the remainder of this year. Andso, we’re still, you know, fighting a bit of a head wind in terms of therollover even in terms of the first quarter. But, as Andy said, you know, look, our expectations are at some point wewant to rebuild our margins to a level, you know, back to some historicalnormalized levels. And, that’s going tobe a function of continued price increases on our part and other adjustments wecan make within our brand as balanced against what may happen in the commodityenvironment overall. And, again, we do,at some point commodities are going to break and, if we knew the answer tothat, you know, it would be a different ballgame completely. But, I don’t think anybody has a good, clearcrystal ball on that matter.

Brian Moore – WedbushMorgan Securities, Inc.

Okay. And Ted, canyou just help us understand what you may have contracted from a commoditiesstandpoint as you look out over the next, you know, next fiscal year. We have John Dunion with us, our head ofsupply chain management. I’ll let himcomment on that topic.

John J. Dunion

Yes, thank you. Wetypically stay out ahead in forward coverage on most of the major commoditiesand actually, the four that Andy spoke to being oil, cheese, wheat products anddairy products. So, we’ll typically keepcoverage in place at various levels three to four months out in the future.

Brian Moore – Wedbush Morgan Securities,Inc.

Okay and the general pricing that you’re seeing on what youdo have under contract. Can you commenton that?

John J. Dunion

Yes. I mean, we’vegot , we’ve got a situation which is basically driven by a weak dollar and is accentuatedby the funds coming in and buying the futures and having very heavy netpositions and futures contracts.

Brian Moore – WedbushMorgan Securities, Inc.

Okay. And then, justfinally, Andy I know you’re working on a lot of things beyond pricing toimprove the overall picture. And, Iknow, you probably don’t want to talk about a lot of it just from a competitivestandpoint but, can you give us some sense of the opportunities you see in thebrands to improve margins beyond price?

Andrew F. Puzder

We, we’ve got actually some substantial things in theworks. But, you can make ingredientchanges, you can make product mix changes, you can try and make day partchanges, all of which can impact your restaurant level operating costs. So, to some extend you’re sort of guessing atwhere prices are going to go on different commodities. But, you know, John does a very good job atthat for us. And, we think we’ve got ,we got some, I think, we’ve got some veryinteresting things we’re working on that I think can make a big difference forus. And, we’re day and night working onthese, and talking about these margin issues to get them more and more undercontrol going forward without, again, getting so far ahead of our competitionthat we damage our price value, our price value impressions in the market. We want consumers to, they realize we’rehigher priced, we want them to continue to know that we’re higher value aswell. So, we’ve got , I know I’m beingvery vague about this but, I have to be but, we’ve got some good stuff going on.

Brian Moore – WedbushMorgan Securities, Inc.

Okay. Thanks verymuch.

Operator

And, your next question comes from the line of RachelRothman of Merrill Lynch.

Andrew F. Puzder

Hey, Rachel, how are you?

Theodore Abajian

Hey, Rachel.

Rachel Rothman –Merrill Lynch

Hi. Good morning guys. Can you tell us how much price you did take in period 10 and period11?

Andrew F. Puzder

Well, actually, I had that in the script and then we took itout because, we don’t want, we don’t want people kind of guessing how much of the pricing we’re going toget. So, we’re not going to commentpublicly on how much pricing we took. Unless, Ted, you’ve changed your mind and want to comment? No, he’s shaking his head no. So, no we’re not going to.

Rachel Rothman –Merrill Lynch

Would you, is it low single digit, mid single digit? I mean, I guess we’ll get the average checkat the filing of the K but, that isn’t going to be for quite a while.

Andrew F. Puzder

Rachel, this one comment I would make, if you recall backwhen beef prices spiked and we took large price increases in the beginning offourth quarter back in, I think, it was fiscal 04.

Rachel Rothman –Merrill Lynch

Okay.

Andrew F. Puzder

You know, at that time at Carl’s and Hardee’s we tookbetween 3-4% in price. And, you know,that was a single price increase and, you know, I would consider that on ahistorical basis to be a very significant price increase. And, you typically wouldn’t take a singleprice increase of that magnitude absent an event driven situation like we hadback then with beef. So, and typically,you know, you would be in a position where, you know, in a normal year youwould take a couple, you know, two or three price increases that mightaggregate to, you know, a couple ofpercent. Maybe 2.5-3% in a year whenyou’ve got commodity inflation. So,normally wouldn’t have individually taken a price increase the magnitude of the3-4% increase that we took back in fiscal 04. But, it was, meaningful in orderto combat these commodity increases.

Rachel Rothman – MerrillLynch

I guess, can you give us some comfort when you talk aboutthe traffic trends not having fallen off. I can appreciate that but, it seems as though, from the data in thequeue, the transactions are already negative at Carl’s. So, is it just that they’re not becoming morenegative? Or, that you actually saw arebound in traffic?

Andrew F. Puzder

No, we didn’t, I think what we said in the press release,and it’s true, we did not see a change in the trends.

Rachel Rothman –Merrill Lynch

Okay.

Andrew F. Puzder

So, and really, that’s between you, when you increase yourprices what you’re looking for as well,is it materially impacting your sales or your transaction trends and so, atleast as of the date of that press release we had not seen such areaction. You know, it gets hard to tellin the, you know, with Hardee’s right now it’s hard to tell because you don’tknow what is impacting. You know weatheris having an impact so, it’s a little tougher to see what’s going on right now.But we’ll know once the weather normalizes out there.

Rachel Rothman –Merrill Lynch

Yeah. The saddestpart is we use to think about the option on the company really being the Hardee’sturnaround and that seems like it’s really worked out well but, it’s happeningat the same time Carl’s is posting softer results than we’ve seen in a numberof years and, I think that kind of puts some pressure on the story. Maybe you could just segway that into reallywhat you think has lead to the kind of lower performances that we’ve seen outof Carl’s this year versus historically. And, I know you mentioned the teacher ads but, is it maybe a [inaudible]new product news or has it been just significant capital reinvestment on thepart of your competitors in the market? Is it the economy in California? Or, what do you feel is hindering yourability to kind of drive, I don’t know, call it 4% comp.

Andrew F. Puzder

You know, if you look back, if you look in the shareholderpresentation, and I’m leafing through quickly here. You can see that in fiscal 02, sales were up2.9% at Carl’s and then the next year they were up 7/10 of a percent. Then the next year 2.9 and then .77 and then 2.2, then 4.9 and then this year we’reup about a percent. You know it does,you know, in years when you have a large average unit volume and you have avery good year then, next year you’re happy to be positive. I mean, we’re not going to be up, we probablyaverage, if you average these numbers out we’re up about 3% a year maybe 3.4,3.3. So, you’re not going to get, you’renot going to get 4% every year, you’re going to average around 3.3-3.4. And, we’re not, the only thing, I mean, we’vehad a couple of things happen at Carl’s this year but, really nothing that’sdecreased average unit volume, nothing that’s caused us to decide that we needto change our marketing direction or what we do with our products.

We’ve got some ideas how to drive sales over the coming yearand, you know, we think we’re going to continue to do that as we have in prioryears. You know, you’re going to berunning over some softer numbers this coming year so, absent some macroeconomics circumstances, you should see Carl’s Jr. to continue to be as stronga performer or stronger performer than it has been in the past. So, it’s not, it’s very difficult to judge abrand by a quarter or two. I think, you have to look over the history of thebrand and look at the strength of the brand and at Carl’s we continue to have,even with these pressures, still the margins are very strong or, I should say,the operating expenses are low in comparison to the competition and our averageunit volumes are approaching $1.5 million. New units continue to do extremely well so, I’m not, in the short termI’m not, I guess I’m not feeling as concerned about the future as maybe I’mintuiting that you are. It’s, you know,Carl’s is doing real well. When you lookat what sales we just had in period 12, we were up, what 2.5?

Andrew F. Puzder

2.5

Theodore Abajian

Period 11, excuse me, we were up 2.5, you know it was over5/10 of a percent increase last year. But, you know, you’re going to do better when you roll over those lowernumbers. So, we love to see Carl’s up2.5, 3, 4% this year. But, it was up 5.1% last year, so. You know, we’re not discouraged and we haveplans to try and continue building it going forward. One of the things we need to do at Carl’sthat I’m kind of excited about and we’re actually going to be within the nexttwo periods, we’re going to be putting more of an emphasis on breakfast which Ithink is a huge, huge opportunity at Carl’s. And, there are some other day parts and segments that we can concentrateon competitively that Carl’s hasn’t concentrated on in the past that I thinkcan drive business in different parts of the day. You know, I think that’s a big factor atCarl’s because, obviously, we’re open all day and we need to make sure thatwe’re doing as well at breakfast, or late in the day as we’re doing at lunch.

Rachel Rothman –Merrill Lynch

I guess, just ask the question a different way. When I look at your five year same storesales growth from calendar 02 to calendar year 06 which excludes this year, Ihave Carl’s at 3.7%. Given that thevolumes are high but, I mean, that’s just a constraint that exists, is thereany reason that we should think about that not being your, kind of average ornormalized rate going forward?

Theodore Abajian

No, I think in the 3% range is what we’re willing to thinkof as over time what we’re going to do. You know, 3.7, 3.5, 3.4, whatever the number turns out to be. I know if you’d have taken it back one moreyear it goes down because 01, we were only up 1.8%. But, you know, we, you know, that’s withinthe range of where we look to grow with the brands.

Rachel Rothman –Merrill Lynch

Okay. Great. And then just finally, I’ve had a number ofchains like Jack In the Box, McDonalds, [inaudible], IHop, they’re all pursuingthe refranchise of their company operated stores and one of the key driversthey highlight which you highlighted today was the opportunity to materiallyleverage their G&A. Can you talkabout how much you think you can leverage your G&A? How we should think about that? I know, I think Ted gave some context aboutfourth quarter seeing more leverage than third quarter but, is that on apercentage of revenue? Is it on a dollar basis? You know, really what opportunities are there for you to lower yourG&A as you shed a third of your Hardee’s? You will have shed a third of your Hardee’s, and in terms of dollaramount, how should w think about that? And then, as a follow up to that, I guess, it also frees up your time,right? Because, you don’t have to worryas much about the operations. Can youjust kind of characterize where you’re spending that extra time? What you’re focused on?

Theodore Abajian

While Andy thinks about the answer to that question, youknow, the G&A side is obviously, something we’re living through real timeright now. I will say, you know, onemetric that I haven’t even gone over in any great detail with Andy, frankly, iswe look at our incremental spend per store in the neighborhood of, I’m going togive a range here $20-$24,000 per year per stores. So, you know, I think that’s, you know, arealistic expectation and obviously, we’d like to do better than that and takemore overhead out than that but, right now it’s kind of, while I believe we cantake that out, the incremental on top of that is a function of, you know,living for a period of time without the stores and then making adjustmentscorporately to staffing to improve upon that number.

Rachel Rothman – Merrill Lynch

So, the $24,000 is G&A overhead?

Theodore Abajian

$20-24,000 I think, is a safe range. And, I think as we get, you know, keep inmind half the refranchising has occurred in the last six weeks frankly. So, as we get a little deeper into this, Ithink, we’re going to have even greater clarity on our ability to takeadditional G&A out.

Rachel Rothman –Merrill Lynch

And, is that the net? Meaning, the transfer from company operated to franchised? Or, is that just the amount that you wouldexpect to save? Because, obviously, they’ll be some G&A costs associatedwith the incremental franchise store.

Theodore Abajian

Yeah. That actually,that actually is the amount that comes out directly related torefranchising. There is some incrementalamount that comes back in but, that is not a very significant amount. Very, I mean, very minimal incomparison.

Rachel Rothman –Merrill Lynch

And then, just finally, as a follow up, can you just talkabout why the franchise margins deteriorated so much in the quarter? I know there’s all kinds of things thatimpact that but, I guess, conceptionally, I would think that as you add morefranchise stores you’d be able to get pretty substantial leverage in thatcategory?

Theodore Abajian

Yeah. There’s reallya couple of things. One, first of all,we did have collections, again, in the prior year last year at Hardee’s relatedto bad, essentially collection of previously bad debt expense, amounts that hadbeen previously written off of about $1.8, $1.9 million dollars last year at Hardee’sthat did not recur this year. So, that’sone item. The other item, and I’m notcertain exactly how you’re calculating it, our distribution revenues which werevery low margin to begin with are actually up and part of the reason they’re upis we’re having franchisees.

Rachel Rothman –Merrill Lynch

Great. Thanks so muchguys.

Theodore Abajian

Okay Rachel.

Operator

Your next question comes from the line of Dean Haskell ofMorgan Joseph.

Andrew F. Puzder

Hey, Dean.

Theodore Abajian

Morning Dean.

Dean Haskell – MorganJoseph

Good morning gentlemen. Congratulations on a great operating quarter taking out the discontinueditems and that swap charge, a good number $0.15 well above the consensus. I did miss one of the comments on the chargeexpected for the swap in the fourth quarter.

Theodore Abajian

Yeah, Dean that was.

Andrew F. Puzder

That’s assuming interest rates stay where they are.

Theodore Abajian

Yeah, as of yesterday based on, you know, interest rate expectations yesterdaywhich changed throughout the day, would be $3.5 million. But it, and I look at that regularly, it’samazing how much that can change in any given day.

Dean Haskell – MorganJoseph

And, what are you using? A T note four or five years out for the term of the loan?

Theodore Abajian

No. No, it’sactually, I mean, actually the counter parties that we have the swap agreementwith literally provide a valuation, you know, at any point and time that weask. It’s based on the five year forwardswap curve.

Dean Haskell – MorganJoseph

Okay.

Theodore Abajian

The LIBOR swap curve.

Dean Haskell – Morgan Joseph

Great. Second question,for Andy, do you plan on emphasizing anything else accept for anything otherthan breakfast, perhaps value for the next couple of months as we go throughthe traditionally seasonally weak period?

Andrew F. Puzder

When you say emphasize, we’re not going to go onto TV with avalue message. We do have value in therestaurants and, I think, that the consumers, at Carl’s in particular, now, weare doing a, right now, a bacon cheddar double burger at Hardee’s right now onthe two for $3 message as we do our double cheeseburger normally and also baconcheddar fries. Which, by the way, if youcan get out to Hardee’s are spectacular. And, that’s as close as we get to a value message.

Dean Haskell – MorganJoseph

Okay. Great. Yeah, I’m going to have the bacon cheddarfries this afternoon.

Andrew F. Puzder

Great. Let me know how they are.

Operator

As a reminder, that’s star one to ask a question. Your next question comes from the line of LeeLignos of Lakeway Capital.

Theodore Abajian

Hi Lee.

Andrew F. Puzder

Good morning Lee.

Lee Lignos – LakewayCapital Management

Hey, good morning. How are you guys doing?

Andrew F. Puzder

Good.

Lee Lignos – LakewayCapital Management

A couple of things. First, as a shareholder, I’d like to, you know, acknowledge the factthat you guys have done a very good job at providing more understanding interms of the numbers and guidance and kind of what’s going on. I just wanted to tell you that it’s a showthat we do appreciate that. I know, it’sa very difficult company to look at from a modeling perspective and you guysfinally, I think, got it right this quarter.

Theodore Abajian

Oh, thanks Lee. Weappreciate that.

Lee Lignos – LakewayCapital Management

That said, as an investor [inaudible] the stock has come ina lot and when you look at the valuation relative to the rest of the universe,it trades at a pretty significant discount and I think one of the things that alot of investors are confused about is, you know, obviously this was a year of transition.You guys are doing a lot to clean up the company for future growth, you boughtback a lot of stock which, I think, is definitely a boldish sign. But, as you look out to next year, I thinkthere’s a little bit, I guess, I don’t want to say concern but, it’s reallyjust more people are really trying to figure out what the growth trajectory isfor the business. And, I was hoping, youknow, you kind of touched upon this in pieces of lower expenses here and takingprice there. But, can you kind of giveus a better framework for how to think about the growth for the earnings of thebusiness? And, I guess, one of thepoints to that is that’s there’s always been a weird disconnect between thevaluation of the company on an EBITDA basis versus and earnings basis. And, Ithink, right now the company is positioned to start growing the earnings and Iwas just hoping you could try to give us a little bit of framework to try tofigure out how we can look at that growth going forward.

Theodore Abajian

Hey Lee, this is Ted. Obviously, you know, we’re very focused on the overall share price andwhat we can do to grow that over time. And, you know, this is a down year, there’s no question about that andnobody at this table or in the company is the least bit satisfied with thatand, you know, we’re working very hard to make, you know, as much as this yearwas a disappointment, or a declining year, to make next year kind of anoutsized growth year. But, I would saywe’re operating in an environment that we’re not, that we haven’t operated inconsistently previously. IN other words,in a commodity environment and labor cost environment that is a bit, has abunch of wild cards in it, not to mention a consumer and, you know, all theother issues affecting the economy that are a little unusual. Having said all of that, we’re certainlyinternally working to make next year, you know, a better than average growthyear. And, I think to make that happen,you know, we’re going to need to be able to take additional price increaseswhich we’re planning to do. Whether ornot commodities, you know, commodities could be a big help or a big hindrancein that regard. Whether they’ll help outat all or not, right now many of the forecast we see suggest that they’re goingto continue to escalate. So, you know, Ithink we’re very bullish on those prospects but, frankly, our business plan isbased on, you know, looking out four or five years and achieving over that timeperiod, you know, as I think Andy [inaudible], you know 11-13% EBITDA. We’re still committed to that. Obviously, this year being a down year meanswe’ve got some ground work to make up frankly.

Andrew F. Puzder

Well, let me, I’ve had time to think while Ted was talkingso maybe I can add a little to that. Ithink the way I would look at it is, if commodity cost continue to increase andlabor cost continue to increase at the rate that they’ve been increasing, we’regoing to be continuing to increase prices as are all our competitors and takeother actions internally to maintain margins and profitability, you know, wherethey are or better than where they are.

You know, we’re trying, we’re closing that gap on lastyear. We’re very focused on doing thatand we’re doing whatever we can to minimize that gap and will continue to dothat going forward. If prices stagnate,if they stop increasing that will be a much easier job for us because we’vealready done a lot of the actions we need to get caught up and we can do more. And, if commodity prices come down, you know,labor is going to be what labor is going to be, you know how its stagedin. And, a lot of what’s happening inthat respect depends upon the next election. But, if we’re looking at a time period where our commodity prices are going to decline, we’re going toget big benefits from that, huge benefits because of our restaurant ownershipand our actions we’re taking now. So,it’s, you know, I would look at it in kind of that three pronged way whether ifcommodities and labor continue to go up, which is hard to image they would but,if the Fed keeps lowering the interest rate then, the dollar keeps weakening,then our goods are going to be very desirable over seas and that’s going tocreate issues for us. But, it’s hard tobelieve they would continue that for much longer but, if they did we’re goingto continue to work very hard to continue to improve those margins. If they stabilize, you know, a lot of thework will be done for us because, we’re already taking those actions. And, if they actually improve, we’re going toget big benefits. And, I think that ismainly the kind of three pronged approach we have been looking at withoutgiving you any particular percentage or dollar numbers to fill in. But, I think, that’s how we view thebusiness.

Lee Lignos – LakewayCapital Management

Fair enough. Iappreciate the insight.

Andrew F. Puzder

Thanks Lee.

Operator

Your next question comes from the line of Conrad Lyon at FTNMidwest.

Andrew F. Puzder

Good morning.

Conrad Lyon – FTNMidwest Securities Corp.

Hey, good morning everybody. Hey, let me go back to Carl’s and kind of the sales outlook. You know, this might be helpful, Ithink. In terms of the best volumes thatyou see, can you give us kind of an idea perhaps maybe where the top 10%, top5% of your stores lay?

Andrew F. Puzder

Well, if you’re talking about franchise and company, youknow, Mexicogot, God it’s got to be close to $1.8 AUV now. You know, Mexicojust kicks butt. We just opened arestaurant in Pango Pango, American Samoawhich had the record opening for a first week at a Carl’s Jr. I think they did like $115,000 in weekone. So, there’s some real strength overseas and we are, although we didn’t put it in this presentation, in our nextpresentation we’re going to give you guys a little more insight to what we’redoing internationally and we think we’re making some very positive andmeaningful moves internationally. Domestically, for company owned stores or for franchise stores, our bestmarket would probably be Los Angeles, Orange County where we average, we’ve gotto be hitting close to $1.7 there now.

Theodore Abajian

I don’t have the exact numbers.

Andrew F. Puzder

I don’t have it either but, it’s got to be close to $1.7.You know, incredibly strong markets for us. And then, you’ve got your outer markets, the reason you franchise inyour outer markets is because you want the franchisees to go out and developthem because they start a little slower but, I would say we do extremely wellin Southern California where we have, you know, we have, I don’t know, I wantto call them TPGs but, that’s not the right thing. We have enough advertising dollars that we’recompetitive with even our major competitors. So, that makes a huge difference and we’ve got a big focus in increasingour advertising dollars in every market, that’s part of the development planbecause, the more advertising dollars you have when you have a strong brandwith great food, good service, and remodeled restaurants, if you’ve got thoseadvertising dollars you’re going to drives sales. So, is that the answer you were looking for?

Conrad Lyon – FTNMidwest Securities Corp.

Yeah. That’s thefirst part. I want to see where youtypically top out and then, I don’t know if that’s even topping out but, thenext question is, is really how, what is the demand like at during your peakhours? Do you feel like you have abilityin some of those better units to increase sales? Or, do you feel that the number oftransactions during your peak hours are more difficult to increase at thosehours?

Andrew F. Puzder

Well, it’s a question that’s sort of a restaurant by restaurant basis. You know, we have restaurants, you know, I’llgive you an example of a specific one. We have a restaurant on Santa Monica Boulevard just, west of the 405,you know, and they’ve got to be doing, you know, $2.5 million there and quitehonestly I’ve been there at lunch and dinner and unless I make a biggerbuilding or a bigger parking lot, you know, at lunch I can’t really do a lotmore business in that unit. Now, that’san unusual unit and I would say 90-95% of our units we could still growlunch/dinner. But, there are some units,and it’s particularly true in high density areas where real estate isexpensive. We’ve got some leases that Carlhimself, you know, originally set up, you know, back in the day where you know,you really can’t increase the size of your unit or the size of your parking lotand you may have lunch issues withrespect to growing the business. But,again, you don’t have breakfast issues and you probably don’t have late nightissues so, you can grow business that way. But, that’s a very small percentage. You know, if it was 10% of the units I would be astounded. I’ve got to believe that it’s much lower thanthat.

Conrad Lyon – FTNMidwest Securities Corp.

Okay. Let me go adifferent direction. I think youmentioned that you’re going to be pushing some new items out in differentparts. Does that also entail wideroperating hours?

Andrew F. Puzder

You know, we look at operating hours a little bitdifferently than some of our competitors do. We have expanded operating hours because, for example, let’s usebreakfast at Hardee’s. You know, if youopen at six o’clock, you do a certain amount of business between six andseven. If you open at five o’clock youmay not do as much business between five and six but, it turns out you do morebusiness between six and seven because you were open five to six and, you know,the floors are cleaned and the people are working and everybody knows you’rethere. So, we, and, you know, the end ofthe day is true too. If you’re closingat 11 o’clock, at 10:30 your guys got the mop buckets out and, you know,they’re ready to go. If you’re closingat midnight well, they’ve got the mop buckets out at 11:30. So, there are, we look very closely at hoursbecause we want to be open hours were the restaurants are profitable. Now, if your franchisor principally, andwe’re 70% franchise but, we still have a higher percentage of companyrestaurants and they’re a very significant impacter of our EPS and EBITDA. But, if you’re more of a franchisor than youare a company restaurant operator, really you want to be open 24 hours becauseyou’re getting paid on the top line not on the bottom line. The reality is with us, we don’t want to beopen hours where we’re not making a profit. And so, while we do look very closely at what the hours should be, we haverecently expanded hours at Hardee’s. Wealso did an expand hours test at Carl’s by the way, and decided that maybe wedidn’t need to be opened to the expanded hours we were open because thebusiness wasn’t there and we kind of cut it back a little bit. I’m talking about half hour increments hereso, don’t get excited it’s not like we’re closing down at nine o’clock at nightor something. But, it’s something welook at very closely but, if you’re not open certain hours there’s probably areason and the reason probably is you don’t make money during those hours andwe’re a very profit oriented organization. So, we look at it in that perspective not simply a sales generation viewbut, a profit view.

Conrad Lyon – FTNMidwest Securities Corp.

Okay. Last question,coupons. Just curious to see how, whatyour coupon sales are like and what the redemption trend has been?

Andrew F. Puzder

You know, I don’t know how much.

Theodore Abajian

We don’t, we don’t give anything specific out in thatregard. I mean, our couponing hasn’tbeen materially changing over the last couple of years. I know from time to time, especially when youlaunch a new product; we always do some kind of couponing. That’s consistent year-to-year.

Conrad Lyon – FTNMidwest Securities Corp.

And, kind of what I’m getting at is I’m curious to see ifconsumers are gravitating more towards those things these days than not.

Andrew F. Puzder

We’re not, you know, we really haven’t, I don’t think we’vematerially changed it in either brand so, I’m not. You know, that’s a way, again, that might bea franchisor or franchisee thing. But,you know, you can drive business, I can drive transactions to Carl’s Jr.tomorrow if I wanted to. You know, itjust won’t make us as much money. So,it’s, you know, it’s kind of a balance.

Conrad Lyon – FTNMidwest Securities Corp.

I hear you. Okay. Thank you very much.

Andrew F. Puzder

Okay. Thank you,Conrad.

Operator

Your next question comes from the line of Keith Siegner ofCredit Suisse.

Theodore Abajian

Hey Keith.

Keith Siegner –Credit Suisse

I just wanted to follow up a little bit on theadvertising. When I look at Hardee’s andwhat the spend was for the quarter it’s a little bit lower in dollars but alsoin percent than we’ve seen kind of recently and below what I expected. Was this kind of related to the pulling ofthe teacher ad? Is it partiallytiming? Or, could we see a ramp again infourth quarter? If you could just helpme understand that.

Andrew F. Puzder

If there’s a change, it’s timing. It’s not, it’s not anything. And, the teacher ad wouldn’t have impacted itbecause, even though we pulled the ad we still ran different ads, they justweren’t new ads or as effective of an ad. But, we still ran ads the same as we would have. If there was a difference it was a timing.

Theodore Abajian

Yeah. It’s entirely atiming issue.

Keith Siegner –Credit Suisse

Will we be above kind of a normalized run rate in the fourthquarter due to the timing? Or, just kindof go back to a normalized spending, a little over 6%?

Theodore Abajian

It’s a little bit tough to say Keith because, sometimes theyear-over-year change is a result of adjustments to non media spend, okay? Within the prior year we had, you know, anadjustment to increase our production costs, for example, to account foradditional spending. So, you know, ourmedia spending tends to remain relatively constant as a percent of sales, youknow, with a little bit of seasonality depending on the quarter we’re in.

Andrew F. Puzder

A lot of this is, they do this on a DMA by DMA basis but, alot of it is they’re trying to project what sales are before they know whatsales are so they know what to spend on advertising which is a percentage ofsales. So, you know, sometimes there’scatch up and sometimes you’re holding back because you overestimated. So, it’s a, it is a timing thing.

Keith Siegner –Credit Suisse

Okay. [Inaudible] youmentioned how new unit Hardee’s are better than the average. What metrics do you need to see or would youlike to see for maybe feeling comfortable with accelerating the new units?

Andrew F. Puzder

You know, at Carl’s we know where to build, we know how bigto build, we know, I mean, we’ve got it all down. And, you know, that’s because even in the 97,98 period we opened 100 plus restaurants and there are still people in thecompany who, you know, we’ve been opening Carl’s all along. We never really stopped. With Hardee’s, we just stopped. I mean, there hadn’t been, there was a periodwhere there wasn’t a new Hardee’s for 10-15 years on the company side. And, we changed the brand. You know, it useto be this brand you opened in little towns and, you know, you were the burgerplace, the roast beef place, the fried chicken place and the breakfast place. Well, you know, now we’re the thick burgerplace and we’ve got this great breakfast. So, it’s trying to determine where, what size and also, if there’s alsooperations issues. Your guys need to know how to open new restaurants and it’sdifferent than operating a restaurant where you know what the average unitvolume is.

When you open a new restaurant you have to plan for thefuture. So, we’re actually bringing someof our Carl’s guys over to the Hardee’s side to work on new unit openings withthe Hardee’s people. We’re looking atdifferent restaurant sites, we’ve got, you know, within the last 18 months webrought Rich Buxton on to head real estate. We’ve really got a far more sophisticated system for looking at thedifferent metrics that we need to look at to decide where to open, what time,you know, when do we open? How do weopen? So, while we do get, the new unitsas you would expect, you’ve got a beautiful new restaurant in a place that youbelieved it would work and you’ve got this great food and good service andsmiling faces. You do much better thanyou would at an older site on an average unit volume basis. You know, that’s not really, AUV really,opening AUV really isn’t the issue. Thequestion is how well do you hang on to that business and how much profit youmake from that business. And, you know,we want to see those metrics be very solid before I commit to really kind ofblowing out development at that brand as we’re blowing it out at Carl’s. And, while I think we’re going to get thereand I’m seeing progress ever day in those respects and we’ve got a lot of focuson that, that next to getting margins under control, that’s probably ourbiggest focus and it’d be hard for me to tell you which is bigger because itmay be even a bigger focus than margins. But, while we’re very focused on getting that right at Hardee’s. I’m just not willing to commit in any ofthese calls or investor meetings yet that we’re there.

Keith Siegner –Credit Suisse

No, that’s actually very helpful in terms of gaining anunderstanding about how you’re approaching it. So, I appreciate that. One lastquestion, the remodel cap ex that Carl talked about, the increased cost ofremodel, is the cost coming from a change in how you’re implementing theremodel? Is it just higher costs ofconstruction?

Andrew F. Puzder

Well one was when we started out I was really, I was reallyhammering these guys to keep the costs down and they did. But, they were doing some things like, theywouldn’t put in a new floor. You know,floors a big expense. Well, you know, alot of these restaurants I went and visited and they did the remodel and didn’tdo the floor, it didn’t look like it was remodeled. So, I realized, I had tolet them do more floors. Or, theywouldn’t remodel the bathrooms. They’dremodel just the public areas and then you’d go into the bathroom and it wouldkind of ruin the image of the whole. So,there were some things they weren’t doing at first because of pressure to keepthe cost down that I’m letting them do now. So, I think we’re looking at about $150,000 a unit initially and nowit’s up to $185,000.

Theodore Abajian

$185-$190,000 depending on the floor.

Andrew F. Puzder

So, it’s, you know, I’ll take the blame. I mean, I think we needed to do more so,we’re doing more.

Keith Siegner – CreditSuisse

So you’re seeing the sales commensurate to keep the returnsroughly similar?

Andrew F. Puzder

You know, actually, I did this pretty early on so, I can’ttell you but, I can tell you the early remodels were not as happy with thesales or the reaction as I am now. And,I think, we took the research out of our updated investor presentation becauseit didn’t make sense to keep including it. On our website you can go back and get the old presentations if you wantto see the research and, it hasn’t changed. But, the research on the remodels came back incredibly good. So, we are looking at some exterior elementsto give it more of a pop so people as you drive by see that it’sremodeled. Right now, most of the work’sbeing done on the interior where it needed to be done. But, we are looking at an extra element whichwould be a little more money but, if it, you know, if it improves the returnthen it’s worth the investment. So,we’re taking a look at that as well.

Keith Siegner –Credit Suisse

Okay. Thank you verymuch.

Theodore Abajian

Thank you.

Andrew F. Puzder

Thank you.

Operator

You have no questions at this time. I would now like to turn the call back overto management for closing remarks.

Andrew F. Puzder

Well, thanks everybody. Thanks for being on the call and I look forward to addressing you in theNew Year. Have a wonderful Christmas, agreat holiday and a happy New Year. Thanks very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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Source: CKE Restaurant, Inc. Q3 2008 Earnings Conference Call Transcript

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