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Executives

Cheryl Fletcher – Director of Finance & Investor Relations

Cheryl A. Bachelder – Chief Executive Officer, Director & President

H. Melville Hope, III – Chief Financial Officer

Analysts

Michael Gallo – C.L. King & Associates, Inc.

Chris O’Cull – Suntrust Robinson Humphrey

John [Curtay] – Principal Global Investor

AFC Enterprises, Inc. (AFCE) F4Q07 Earnings Call March 13, 2008 9:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2007 AFC Enterprises Incorporate earnings conference call. My name is Katrina and I will be your coordinator for today. At this time all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call Ms. Cheryl Fletcher, Director of Finance and Investor Relations.

Cheryl Fletcher

Good morning everyone. Before we begin I would like to read the following forward-looking statements. Certain statements made on this call regarding future events and developments and our future performance as well as management’s expectations, beliefs or projections relating to the future are forward-looking statements within the meaning of the Federal Securities Laws. These forward-looking statements are subject to a number of risks and uncertainties. Among the important factors that could cause actual results to differ materially from those indicated by such forward looking statements are competition from our restaurant concepts and food retailers, our ability to franchise new restaurant units and expand our brand, increases in food and labor costs, affects of increased gasoline prices and other general economic conditions and the risk factors detailed in our 2007 annual report on Form 10K and other documents we file with the Securities & Exchange Commission. You should not place undue reliance on any forward-looking statements since those statements speak only to the date they were made.

During this call references may be made to non-GAAP terms of EBITDA and free cash flow. The company defines EBTIDA as earnings before interest expense, taxes and depreciation and amortization. The company defines free cash flow as net income plus depreciation and amortization plus stock compensation expense minus maintenance capital expenditures. The company’s computations and reconciliations to GAAP measures of the numbers referred for this terms are contained in our earnings press release that can be found on the company’s website atwww.AFCE.com.

I would now like to turn the call over to our CEO and President Cheryl Bachelder.

Cheryl A. Bachelder

Good morning and welcome to our 2007 fourth quarter and annual earnings conference call. Today I’m going to walk you through my first 100 days as CEO and present my assessment of the company. I’m then going to outline for you the new strategic plan that we have begun implementing to strengthen the brand and set Popeyes on a firm foundation for growth. We’ve crafted a plan to return Popeyes to the financial performance metrics that you expect of a growth restaurant company and we’re excited to share that plan with you today.

Before we present that plan I’ve asked our CFO, Mel Hope to briefly review our 2007 results. Then, I’ll return to talk about the strategic plan followed by our 2008 guidance.

H. Melville Hope, III

Good morning everyone. As you may have seen in our press release we met our EPS guidance for the fourth quarter of 2007 and as I talk about 2007 please note that for comparative purposes 2006 was a 53 week for us which included a 13 week fourth quarter. In the fourth quarter of 2007 net income was $3.6 million or $0.13 compared to $5.6 million or $0.19 per diluted share in the fourth quarter of 2006 including $0.02 for the 13th week. Fourth quarter earnings for 2007 included the favorable effects of $1 million of other income related to the hurricane insurance recoveries and net losses and asset impairment charges. Excluding these items our fourth quarter earnings would have been $3 million or about $0.11 per diluted share. During the fourth quarter total domestic same store sales were -1.6% primarily as a result of lower restaurant traffic. However, international franchise restaurants continued their positive same store sales trend with their fifth consecutive quarter of increased same store sales at 1.9%. Total global same store sales were -1.2%.

Total revenues for the fourth quarter were $39.1 million versus $40 million in 2006. The additional operating week in 2006 contributed approximately $2.5 million of additional revenue so when factoring that out our fourth quarter revenue would have increased by $1.6 million. During the fourth quarter sales from company operated restaurants were $19 million representing an increase of $600,000 over the fourth quarter last year. After adjusting for 2006’s additional operating week the quarterly increase would have been $1.8 million. This increase was primarily due to a $1.8 million increase in sales generated from the reopening of our New Orleans restaurants in 2007 which were closed due to Hurricane Katrina and a $1.2 million increase from new company operated restaurants opened in the Atlanta and Tennessee markets. This increase in total sales was partially offset by $1.2 million from negative same store sales.

Franchise revenues which are the revenues realized from royalties and fees paid by Popeyes franchisees were approximately $19.1 million in the fourth quarter compared to $20.5 million last year. The additional operating week in 2006 contributed an extra $1.3 million of revenue so our franchise revenue was actually flat versus last year. G&A expenses for the fourth quarter were $13.8 million versus $12.4 million last year. This increase was primarily due to higher professional fees and executive severance costs which were partially offset by lower incentive and equity compensation costs. Other expense and income reflected in other income of $1 million in the fourth quarter which was primarily attributable to our insurance settlements net of write offs. Operating profit in the fourth quarter was $8 million versus $10.1 million last year. This $2.1 million difference was primarily the result of higher G&A expenses as discussed above and the additional operating week in 2006. Fourth quarter interest expense was $2.2 million for both 2007 and 2006. Our tax provision of $2.2 million reflects and effective tax rate for the quarter of 37.9%.

I’m going to save some time now and just review the highlights of the full year of 2007 since there’s a complete summary of the year in last night’s press release. 2007 net income was $23.1 million or $0.80 per diluted share compared to $22.4 million or $0.75 per diluted share in 2006. For the year 2007 we recorded $2.7 million of net other income which included hurricane insurance recoveries and other offsets that are largely non-operating items. There’s a detailed schedule of those items in footnote no. 16 to the financial statements included in the 10K. Excluding the other income line item, our net income would have been $21.4 million or $0.74 per diluted share. Total domestic same store sales were -2.3% for fiscal 2007. This performance was slightly better than our latest guidance of -2.5%. International same store sales in fiscal 2007 were positive 1.1% bringing our total system wide same store sales growth for fiscal 2007 to -2%. New restaurant openings totaled 124 units in fiscal 2007. Openings fell below our expectations due to construction delays in international markets and in the US. For 2007 we closed 109 largely underperforming restaurants as part of our program of tightening up our operating standards.

Our G&A expenses for 2007 were $49.5 million within the range that we forecasted. G&A as a percentage of Popeyes system wide sales for 2007 was 2.9%. EBITDA margin for the year was approximately 30% and free cash flow was $28.5 million.

That completes my comments on 2007 I’ll now turn the call back to Cheryl Bachelder.

Cheryl A. Bachelder

I’m pleased that we met our earnings per share guidance for the fourth quarter in a very difficult market environment. But, I am particularly excited to talk to you today about our bold new strategic plan for putting Popeyes on an accelerated path to strengthen the brand, grow more rapidly and create value for our stake holders. When I came on board it was clear to me that we needed a game change to move Popeyes into the performance that you expect of a growth restaurant company. Starting in September the Popeyes board and I began an in depth and exhaustive review of Popeyes business performance and our competitive position in the market place. We have examined our brand and marketing efforts, our restaurant operations, our unit economics and the returns on our newly built units. We’ve studied our peer group both on operational measures and shareholder value drivers. We’ve used outside research and resources to develop this assessment of Popeyes opportunity and at the same time we’ve brought on two new senior management team members Ralph Bower as our chief operations officer and Dick Lynch as our chief marketing officer both with capabilities matched to our new strategic plan.

Importantly, we have also reached out to our franchisees and brought them into this business review process. That has confirmed that passion and commitment of our franchisees for building a strong Popeyes system. The completion of our assessment enabled the leadership team of Popeyes and our board of directors to evaluate our competitive position and establish concrete financial performance goals that will elevate us to the performance category of a growing QSR restaurant chain. Specifically, we are committed to a five year plan that delivers earnings per share growth in the 12 to 15% range with EBITDA margin and free cash flows among the best in the industry. Our plan focuses on four strategic pillars that we have determined are fundamental to our future. These are building a distinct and relevant brand, running great restaurants, strengthening our unit economics and aligning our people and resources to deliver results. Moving forward every company initiative will be measured against delivering on one or more of these pillars.

I’d now like to take just a few minutes to address each one. Let’s start first with building the brand. The Popeyes brand is every bit as strong as I thought it was when I joined this company. The brand stands for better food than other chicken QSRs and the facts support it. In a national syndicated research study in 2007 the top two drivers of guest satisfaction in QSR chicken are taste and quality. This same study indicates that Popeyes is perceived by QSR customers as significantly superior to the leading chicken QSR chain on both dimensions of taste and quality. Further, in my recent seven city tour which included over 20 guest focus groups we identified that this food superiority comes from the distinct ingredients, flavors and cooking methods of the Louisiana Gulf Region. In fact, customers that move away from a Popeyes restaurant say they take road trips back to get our distinctive food. Now, that’s an advantage.

The Popeyes brand also had an excellent food platform for innovation. Our Louisiana heritage gives us a melting pot of food cultures to draw on for new products. New Orleans is where seven cultures game together and the food includes influences from England, Italy, France, Africa, the Caribbean, Latin America and the American Indian. In short, we have a fascinating flavorful recipe rich source for innovation. We need to take this food heritage and innovate in a way that’s aligned with the lifestyle and eating habits of our guests. Our assessments have revealed four menu gap opportunities for Popeyes. In addition to our outstanding bone in fried chicken we need to provide more options in the categories of portable snacking foods for in car dining, quick lunch options that you can get in our drive thru, lighter choices so you can eat at Popeyes more often and value offerings for the guest on a tight budget.

I will tell you that we have not sufficiently leveraged the advantage of the Popeyes brand and our food platform to drive traffic in our restaurants in recent years. That needs to change and its changing now. Starting on March 31st we will begin marketing our superior bone in chicken claiming the real advantages that we have over ordinary chicken chains. We’ve branded our chicken, Popeyes’ bonafide chicken. Bonafide means real, authentic, it’s about the true advantages of our Louisiana heritage. We tested this approach in January and our restaurants are aligned and ready to deliver Popeyes taste and quality advantage to our guests. At the same time we’ve developed and tested with QSR customers a bold new menu approach to Popeyes. Using a host of outside culinary resources and significant consumer research we have two new menu platforms keyed up for launch in the second half of this year. The portable snacking platform and the quick lunch platform. We have also done the leg work to put in the test market a new everyday value platform for our guests on a budget. Every menu platform will take its food advantage from our rich Louisiana heritage.

In summary, we’ve created a plan to reassert this brand in the market place starting now. Getting from zero to 60 and leveraging our branded menu obviously requires significant investment. In 2008 we have invested in strategic consulting, market data, consumer research and an interim ad agency to the tune of $3.2 million. Approximately $2.4 million of this amount is for one time resources to speed our plans to market. The balance will be ongoing investments to keep our consumer insights and menu fresh and relevant for the future. We believe these investments will accelerate returns to our shareholders by returning this brand to positive traffic trends.

Let’s move now to talking about running great restaurants. If your brand and your menu drive traffic to the restaurant your experience at the restaurant determines if you’re going to come back and how often. So how does Popeyes stack up on the guest experience? Popeyes has always been known for superior food but we have never won accolades for a superior guest experience. The same syndicated research I mentioned earlier show Popeyes at a disadvantage to chicken competitors on service. Our new mantra at Popeyes is this, “Our service is going to be as distinctive as our food.” You know well that a competitive advantage on service in a large chain of more than 40,000 employees is not going to change overnight. But, we are going to act now on the things we know lead to improved guest experience so this mantra will be supported by programs designed to measure and markedly improve our guest experience. We recognize that these strategies will take a 12 to 18 month time frame to implement but our efforts are already well underway. In January, we rolled out a proprietary guest experience monitor to ever restaurant in the Popeyes system and we did away with the old style mystery shop evaluation. This new system provides the guest an 800 number on their food receipt and an incentive to call and give us their feedback on the seven or eight things that make a guest say, “Wow.”

Over the next several months we will build a robust sample of guest feedback that will give us a hard benchmark on guest satisfaction at every restaurant. We will then have a fact based understanding of the sales upside from moving our guest ratings up. We will use these facts to demonstrate the growth opportunities to our operators. This guest experience monitor is a proven QSR tool that has been used already to drive guest improvement ratings at several leading QSR chains. It is just the first of a new set of metrics that we will use to run great restaurants.

The second new metric that we’ve announced system wide is the addition of quarterly operation assessments of every restaurant in our system. In February we restructured our field organization to get closer to the restaurant and add meaningful value in improving operations. As part of this restructuring we set up a team of highly experienced people who will conduct these quarterly assessments and provide action planning and training to managers and crew in these stores. The training of our team has already begun. The quarterly frequency of restaurant visits will be in place in the second half of 2008.

Now, are our VP of ops, Forest Williams likes to say, “We moo what we measure.” Now Popeyes is measuring the things that we know drive a consistent wow experience for our guest and over time we expect these actions to result in steady improvement in our guest rating with a real impact on our guest visit frequency and profitable sale. These two investments require an incremental expense of $900,000 of which $.5 or $500,000 is considered non-recurring. Now, let’s shift to the topic of restaurant level profitability. It’s no secret the restaurant industry is facing one of the toughest years ever in commodities, grocery, labor and freight increases. To address this challenge we’ve assembled a task force to attack the operating cost structure of our system restaurants and we’re promptly identifying ways to improve our restaurant operating profit. This team includes franchisees, corporate operations, supplier partners and our purchasing and distribution cooperatives. We’re making investments in two areas, one, we are establishing a small savvy team of financial analysts to work through our restaurant data and identify opportunities for savings and improved returns. We’re also licensing a data warehouse tool to house our data that we currently collect by hand. Total cost of these investments is $1 million, approximately $400,000 of which is non-recurring. We expect the return on this investment to be seen in improved unit economics, which are the foundation for accelerating our new unit openings.

Let’s talk about unit growth. My urgency in jump starting traffic gains and improving guest satisfaction and driving better restaurant profitability is simply this, healthy unit economics allow us to accelerate growth in our restaurant count. We’ve reviewed our US and international marketing plans and believe this brand has a substantial opportunity for accelerated unit growth leveraging that brand and menu advantage I mentioned earlier. In total, we believe we can double the size of our domestic footprint without becoming over saturated and we certainly have huge potential for growth opportunities internationally.

I’d like now to talk about aligning our people and dollars to drive performance and achieve these financial goals. The first step in taking our plan forward was to have the right team in place. We’ve invested in senior leadership to ensure effective execution of our strategy and are delighted to have recruited both Ralph Bower and Dick Lynch. With these two executives joined with our existing talented team, our leadership team is now 100% in place. I can tell you I am excited about the caliper and skill set of this new management team. These four pillars of our strategic plan have now been embedded with our franchisee association leadership and our local D&A coop president. I can report to you that the franchisee leaders of Popeyes believe that we have an exciting plan for accelerating the profitable growth of this company. We’re aligned, highly energized and already moving forward together.

With that as a backdrop, I’d like to summarize for you the investments we’re making to change the game at Popeyes. In total, we’re investing $6 million in the initiatives that I have just reviewed to strengthen our brand and set Popeyes on a sound foundation for future growth. Of this $6 million $3.5 million are non-recurring investments in 2008 for speed to the market place. The remaining $2.5 million is an ongoing expense for running a better restaurant company primarily for the cost of talented people and analytical tools to run a metrics base results oriented team. We see these investments as essential to improve our competitive advantage and further differentiate ourselves from the market place starting now.

Having decided that these initiatives will be the focus of our strategic plan we are announcing today that we have commenced a process to identify experienced and qualified franchisees to purchase our company operated restaurants. When completed such a sale would set us up to be 100% focused on what we can do best, being a world class franchisor with a distinctive and relative brand and strong systems in place for our operators. Furthermore, the sale of our company operated restaurants would result in reductions in G&A expense to help offset these investments to strengthen the Popeyes brand for the benefit of all of our stake holders. Until a transaction or transactions occur to sell our company restaurants our earnings will not include the estimated cash and EPS benefits of those sales but will include the additional expense of our strategic investment.

Mel is going to walk you through the impact of those 2008 investments versus 2007 and then he will provide some color on the estimated impact of the sales of our company restaurants. I do want to make it clear however that the investments we are making are inarguably in the best long term interest of this brand, this company and our investors. While they will certainly impact our short term results, this management team will not shy away from the bold action that will help us secure the long term potential of Popeyes. Going forward we define success as performance in the peer group of growth restaurant franchisor. Our plan is to consistently deliver 12 to 15% EPS growth with 4 to 6% average annual growth in net units and same store sales of 2 to 3%. Our strong franchise model will have best in class EBTIDA margins, cash flows and return on invested capital.

In summary, at the completion of my first 100 days at Popeyes I am more convinced than ever that Popeyes is capable of significantly increased growth and profitability. We have a differentiated brand with clear competitive advantage. We’ve identified the strategic areas where we must improve, delivering a better guest experience, executing a better menu and marketing plan and driving improved profitability of our restaurants and we have already begun transforming these areas. As these initiatives are implemented we are confident that we’ll see a stronger system with substantial expansion in the US and around the globe. In short, Popeyes is now well positioned to be a growing QSR chain that delivers strong and improved return to our shareholders.

I will now turn the call back to Mel to briefly discuss our 2008 guidance and our planned uses of cash.

H. Melville Hope, III

As Cheryl referenced a key component of our new strategic plan is to invest, retool and strengthen the Popeyes brand. In 2008 our G&A investment to strengthen the brand will be approximately $6 million including $3.5 million of non-recurring investments to build top line sales and set Popeyes up for long term success. As I mentioned a few minutes ago our 2007 earnings per share results of $0.80 per diluted share benefited from insurance settlements related to our Hurricane claims in New Orleans. Net of these insurance recoveries and net other charges our earnings per share for 2007 would have been $0.74 per diluted share. For 2008 we expect our earnings per share to be in the range of $0.63 to $0.68 per diluted share. Our guidance includes approximately $3.5 million or $0.08 per diluted share related to the non-recurring investments we’re making in 2008. Therefore, on a comparative basis, adjusted guidance for 2008 would be $0.71 to $0.76 per diluted share versus $0.74 per diluted share in 2007. Please also note that our 2008 diluted earnings per share guidance excludes any estimate of the financial impacts of insurance recoveries related to the realization of D&O claims or any other non-recurring, non-operational benefits or expense which are beyond our ability to reasonably predict as to scope or timing.

Regarding our strategy, the company will evaluate proposals from qualified existing or perspective franchisees to purchase our company operated restaurants. If we were to complete transactions for the sale of all company operated stores we would expect to realize sales proceeds of $38 to $42 million yielding $0.08 to $0.14 per diluted share which is not included in our current earnings per share estimates. We expect total domestic same store sales in a very difficult consumer environment to be flat to positive one. We anticipate total new restaurant openings for 2008 to fall in the range of $115 to $130. Key to our strategy of strengthening our brand is addressing top line sales in unit growth so that we’re positioned to accelerate unit growth in the future. We anticipate restaurant closures will be similar to the past few years as we continue to close underperforming restaurants. Therefore, our net openings for fiscal 2008 are expected to range between five and 15 restaurants.

Our highly franchised business model is efficient and our G&A expense annually is averaged just under 3% of system wide sales. That’s among the lowest in the restaurant industry. With the $3.5 million of non-recurring investments to strengthen the brand we planned in 2008 we expect this percentage will increase this year to 3.1% of system wide sales as we begin to realize growth initiatives the company expects to see that percentage returned to a trend below 3% of system wide sales on an ongoing basis. We’re confident we can achieve those improving G&A efficiencies because we believe the planned sale of our company operated restaurants will allow us to reduce and deploy approximately $4 to $5 million of G&A expense annual for the growth of the Popeyes brand. The company is heavily franchised model also drives a high EBTIDA margin. During fiscal 2007 the company’s EBITDA margin was approximately 30%. This is among the highest in the restaurant industry. Even with the additional non-recurring G&A investments we’re making for the growth of the Popeyes brand the company’s EBITDA margins are expected to be slightly less than fiscal 2007 but still among the highest in the industry.

Lastly, our operating plan goal during 2008 is to generate pre-cash flow similar to fiscal 2007 cash generation of $28.5 million which includes insurance proceeds even with our new investments the impact on free-cash flows is essentially neutral. In addition, the availability of our free cash flow is preserved by slowing our investments in company operated restaurants. Under the terms of the company’s share repurchase program we expect to continue to repurchase shares opportunistically in the open market during the year and in addition yesterday March 12th we authorized a plan to execute an accelerated share repurchase program of $15 million following the filing of our 2007 10K. Our current credit facility provides that we be able to repurchase more than 35 million of our shares during fiscal 2008.

Cheryl if you’d like to wrap it up.

Cheryl A. Bachelder

Just a few words in closing. I hope that you as I am are more convinced than ever that Popeyes has been well positioned for growth. This new strategic plan that we walked through today will return Popeyes to the peer set of growth restaurant companies. We have a powerful strength in our brand, we have competitive advantages in our food and our heritage. We’ve identified the areas where we must improve and we’ve already begun those initiatives to make transformation happen. As we implement this plan we’re confident that we will have a stronger system ready to pursue substantial unit growth in the US and around the global. When all elements of our strategic plan are accomplished including the divestiture of our company operated restaurant Popeyes will be on a path to deliver 12 to 15% EPS growth on a model with EBITDA margins, cash flows and return on invested capital among the highest in the industry. We look forward to executing this plan and wish to thank you and all of our shareholders for your continued support on this new journey. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Michael Gallo representing CL King, please proceed.

Michael Gallo – C.L. King & Associates, Inc.

A couple of questions, first kind of a multiple part question on the divestiture of the company stores, one I guess do you plan to keep any companies? Do you plan to go 100%? Do you plan on keeping a nominal number five or 10 or a particular market? Are you planning on selling them as whole markets or as individual units? And, is the $0.08 to $0.14 number that you gave, is that what you expect to realize as a gain or is that what you’d expect to realize as an ongoing savings number?

H. Melville Hope, III

The $0.14 or the range that I gave was for what we would expect to realize in gains on the sale of all of the company restaurants. Our plan now is to market them as markets and might be also our expectation would be that we’re going to market every store that we own presently.

Michael Gallo – C.L. King & Associates, Inc.

Okay. So, the plan is to go fully 100% franchise?

Cheryl A. Bachelder

Yes it is Mike.

Michael Gallo – C.L. King & Associates, Inc.

Perfect. The second question I have is I guess as we look at the G&A I think I heard you say that you expect $5 million of G&A reduction once you get to 100% franchise, did I hear that right?

Cheryl A. Bachelder

$4 to $5 million.

Michael Gallo – C.L. King & Associates, Inc.

Okay. Do you have a cap ex number at this point Mel for 2008?

H. Melville Hope, III

We don’t typically guide to that. Our cap ex last year – are you talking about maintenance cap ex or total exposure?

Michael Gallo – C.L. King & Associates, Inc.

Well, I guess based on the plan I wouldn’t expect that you’d be building any company units?

H. Melville Hope, III

Right. We’ll complete the projects that we entered the year underway which was really just one store and so we’d have a much more diminished cap ex expenditure for the year.

Michael Gallo – C.L. King & Associates, Inc.

Okay. Then just final question and then I’ll head the floor, the 27.2 million shares, that was before the ASR, correct?

H. Melville Hope, III

Yes.

Michael Gallo – C.L. King & Associates, Inc.

Is the ASR, included in the guidance?

H. Melville Hope, III

In terms of our earnings per share guidance?

Michael Gallo – C.L. King & Associates, Inc.

Yes.

H. Melville Hope, III

Yes.

Operator

Your next question will come from the line of Chris O’Cull representing Suntrust. Please proceed.

Chris O’Cull – Suntrust Robinson Humphrey

First let me just get some clarification on the sale of the company stores. Mel, the proceeds that you’re planning to get from the sale of those stores, have you reflected the use of those proceeds in terms of a share repurchase or debt repayment in your guidance? Is that in the $0.08 to $0.14?

H. Melville Hope, III

No. Nothing about the store sales are included in our guidance simply because we don’t know exactly what the timing of those would be and so we’ll adjust as we sell.

Chris O’Cull – Suntrust Robinson Humphrey

Okay. What is a reasonable timeline for the sale of the units?

H. Melville Hope, III

You know, I think that’s a good question because we’re ambitious that we want to tailor the company structure around the new strategic plan so we’ll push forward quickly but it is not a fire sale. We’d love to do it this year, it’s just 65 stores and we’d love to add that dime or more to earnings per share this year and we’ll push forward on that but this isn’t the sort of economy or lending environment that I think we can be certain of the timing at this point and I’d trouble speculating about exactly when that would be.

Chris O’Cull – Suntrust Robinson Humphrey

Are you all in discussions with potential buyers now?

H. Melville Hope, III

Not yet.

Chris O’Cull – Suntrust Robinson Humphrey

You know in the past you’ve given us kind of an expectation for free cash flow. Assuming the company units are all sold here and you’re 100% franchised what would you expect in annul free cash flow run rate to be with that kind of model?

H. Melville Hope, III

I don’t think that we’ve guided to that number so much as just talked about it in general. Historical we’ve said that our free cash flow would be in the range of $28 to $30 million, something like that. I think when all is said and done after we manage through the changes and that’s working we’d probably come back close to the same place or actually a little bit better. But, it also gives me a chance to talk about what I think is really a point I don’t want you to miss which is our company stores operate in underpenetrated markets. While we generate a strong free cash flow we are obligated in those under penetrated markets to continue to grow them out and so we’ve had a considerable amount of investment the last few years in opening new stores in those markets. The availability of our free cash flow for use in other things is going to be greatly enhanced by virtue of the fact that we are completely focused on servicing the franchisee community and strengthening the brand.

Chris O’Cull – Suntrust Robinson Humphrey

Okay. Cheryl forgive my ignorance but will it be more difficult to test new product ideas in creative without any company owned stores? Can you kind of talk a little bit about the plan to look at that?

Cheryl A. Bachelder

You know Chris, that’s probably a common assumption. But, because our existing corporate stores are not in what I would call kind of model test markets we have been largely testing with our franchisee partners to date and we would continue to develop and test both marketing and operation initiatives with our franchisees. I believe that results in stronger initiatives that are better prepared to run in the restaurants when we do those things together. So, I do not anticipate that being a difficulty for us.

Chris O’Cull – Suntrust Robinson Humphrey

Great. Lastly, it looks like chicken prices are expected to be lower this year, at least they’re trending that way now. Is that true for the coop too?

H. Melville Hope, III

Our chicken prices under our cost plus contracts appear to be running a little bit higher than the Georgia dock which is the common – that’s the metric for daily purchases, that’s kind of the spot rate. So, it is running a little bit higher and our commodities across the board for the year are expected to run 5 to 6% higher which is really why Cheryl talked about our initiatives around strengthening unit economics. It’s very, very important that the task force that she has assembled to address the cost structure of the restaurants and identifying ways to improve restaurant operating profit for all our operators is very, very important because they will be facing the headwinds of this economy with higher food and labor costs and this pillar is very, very important because we want to work closely with them and with our suppliers to shave as much cost out of their unit economic model as we can.

Chris O’Cull – Suntrust Robinson Humphrey

Will it make it more difficult to try to do value offerings because of the commodity issue? Do you need to see some savings in other areas of the cost structure in order to implement value messages?

Cheryl A. Bachelder

Chris, there will need to be value in every message that we say this year. That’s the marketplace we’re in. But, I see opportunities to do that with sound food costs. Just to elaborate on what Mel said, I see opportunities in our restaurants to strengthen the way we manage, the way our food and paper runs through our P&L, tighten up waste, tighten up inventory management, tighten up food drops, the mechanics of running a tight unit economics. And, I think that will largely be where we find our savings.

Operator

(Operator Instructions) Your next question will come from the line of John [Curtay] representing Principal Global Investor. Please proceed.

John [Curtay] – Principal Global Investor

It looks as though 08 will be another year of fairly heavy store closures and you talk in your prepared remarks about 4 to 6% net unit growth at some point in the future. When does that look like a reasonable possibility? And, are you fairly well finished with the store closures in the Korean market?

H. Melville Hope, III

Well, let me take those in reverse order. With respect to Korea, we’re always going to have a certain amount of churn there but for the most part the Korean market is fairly stable and in fact, they’re improving. That has become one of the pieces of good news that we have enjoyed sharing during 2007 and continue to see improvement in 2008 there. I think they will have a certain amount of churn just because the retail leases, or leases for retail space in Korea are much shorter term than they are with what we’re use to in the United States, three, five year terms, that sort of thing. But Korea is much more stable. In terms of the timeline for closing underperforming restaurants, we don’t have a timeline to tell you there. I think as we analysis it we may have more information but certainly all of 08 as we’ve indicated we’re going to continue to push our restaurant standards and we will see closures similar to those that we’ve seen in the past several years.

Cheryl A. Bachelder

John, I just want to be cautious in that arena until we’ve fully implemented our new operating standards and then I think we’ll be in a better position as the year goes on to talk to you about what we’re doing in the development area to set up our accelerated growth. So, right now I’d like to defer that but only so we can strengthen the sale probability of our current units and set up for accelerated growth.

John [Curtay] – Principal Global Investor

In the past, I know that the company had taken a look and done some work at redesigning the restaurants and lowering their costs. Anything more that can be done in that area? You talked about reducing operating costs and becoming more efficient. Anything to do on the capital investment side on the store?

Cheryl A. Bachelder

I think there may be some selected investments in the back of our restaurants to make them more efficient but we plan to work off the basic current platform as we move forward.

Operator

Your next question comes as a follow up from the line of Michael Gallo representing CL King. Please proceed.

Michael Gallo – C.L. King & Associates, Inc.

Just had a follow up question, I was wondering whether you expected the $3.5 million, or really the $6 million of investments to be front end loaded or relatively even throughout the year? Or, how you expected those to kind of evolve?

H. Melville Hope, III

Most of the $3.5 million non-recurring investment is towards the front end of the year.

Michael Gallo – C.L. King & Associates, Inc.

So you would expect that those would sort of by the back half we would have already seen most of those?

H. Melville Hope, III

Yeah. It would probably tend to moderate.

Michael Gallo – C.L. King & Associates, Inc.

Then just one other follow up question, obviously you mentioned in the plan that you’re planning for same store sales from zero to up one. I was wondering again whether that assumes a significant improvement in the back end half of the year? Or, have you seen some improvement in trends since the fourth quarter?

Cheryl A. Bachelder

It does assume an improvement in trend in the back half of the year. As I mentioned earlier, our new marketing initiatives really kicked in beginning in April with substantial new menu innovation in the second half.

Operator

Ladies and gentlemen this concludes the time we have for questions today. I would now like to turn the call back to Ms. Cheryl Bachelder for closing remarks.

Cheryl A. Bachelder

I want to thank you for being on this call today. We had a lot to talk about and to share with you. We hope that you received the information you need to fully access the impacts of our strategic plan. We leave this call excited to go back to work and make this plan happen so that you can see the kind of accelerated returns that you expect from a great, well run restaurant company. Thank you and have a great day.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.

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Source: AFC Enterprises F4Q07 (Quarter End 1/31/2008) Earnings Conference Call Transcript
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