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AFC Enterprises Inc. (AFCE)

F3Q 2008 Earnings Call

November 13, 2008 9:00 am ET

Executives

Cheryl Fletcher – Director, Investor Relations

Cheryl Bachelder – Chief Executive Officer, President

H. Melville Hope III – Chief Financial Officer

Analysts

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

Chris O’Cull – Suntrust Robinson Humphrey

Presentation

Operator

Good day ladies and gentlemen and welcome to the third quarter 2008 AFC Enterprises Incorporated earnings conference call. My name is [Stacy] and I will be your conference moderator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Miss Cheryl Fletcher, Director of Investor Relations. Please proceed.

Cheryl Fletcher

Thank you Stacy and good morning. Before we begin I’d like to read the following forward-looking statements. There are statements made on this call regarding future events and developments that our future performance as well as management’s expectations believe are 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 other restaurant concepts and food retailers; our ability to franchise new restaurant units and expand our brand; increases in food and labor costs; disruptions in the financial market; volatility of gasoline prices and other general economic conditions; and the risk factors detailed in our 2007 annual report on Form 10-K and other documents we file with the Securities and Exchange Commission.

You should not place undue reliance on any forward-looking statements since those statements speak only as of the date they are made. During this call, references may be made to non-GAAP terms of EBITDA and free cash flow. The company defines EBITDA 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 expenses.

The company’s computations and reconciliations to GAAP measures of the numbers referred to for those terms are contained in our earnings press release that can be found on the company’s website at www.AFCE.com. I would now like to turn the call over to Cheryl Bachelder, our CEO and President.

Cheryl Bachelder

Thank you and good morning everyone. We welcome you to our third quarter earnings conference call. Despite the significant economic slowdown in the third quarter, Popeye’s has delivered a solid earning performance in line with consensus expectations. We remain on track to implement the new strategic plan that we announced in the first quarter.

As you will hear today, we have launched the planned menu, marketing and operations initiatives that we believe will stem our traffic declines and build our market share. We’re confident that our strategies position us well in this intensely competitive QFR marketplace. These times also demand conservative financial practices. Accordingly, we have tightened up our G&A expenditures to the mission critical initiatives in our plan.

We’ve increased our cash position and made debt repayment a priority. Our highly franchised business model provides a steady cash flow stream, with low capital spending requirements. In times like these we believe we have a model that yields financial flexibility and stability for us and for our investors. I’ll now review our third quarter performance and update you on the four pillars of our strategic plan. Mel Hope, our CFO will then review the quarter and the year-to-date financials in more detail.

Our total domestic same-store sales were negative 2.8% for the third quarter. Our lower same-store sales during this quarter reflect two factors, the successful introduction of our new Big Deal value sandwiches at low, affordable prices that drew in traffic to lunch and snack day-parts and secondly the reality that our Popeye’s dinner guests cut back their business significantly during this quarter, as that is the more expensive day-part. In this day-part we sell our high ticket, family dinners.

So going forward we remain committed to our strategic plan to improve our guest count and grow our market share. And we’ll do that through a balance of core menu value offerings at dinner and these new, portable lunch and value menu offerings previously announced. On a full year basis, we expect our domestic same-store sales to be at the lower end of our guidance of negative 1 to 2% consistent with previous guidance.

Our international same-store sales increased 7.4% during the third quarter, due primarily to continued strong same-store sales in the Middle East where we benefited from the Islamic holiday of Eid, marking the end of the fasting period of Ramadan. Eid occurred last year during the fourth quarter.

Additionally, Latin America and Canada experienced strong same-store sales which were partially offset by negative performance in Mexico. Our international franchisees faced similar economic conditions to the U.S. including higher commodity costs. They are responding with similar strategies, raising prices where necessary to cover costs and also offering strong value offerings in their promotion windows.

During the third quarter we opened 28 restaurants, bringing our total year-to-date openings to 97 units compared to 85 during the same period last year. The third quarter openings included 12 domestic and 15 international restaurants in existing markets. With our progress year-to-date we are confident in our full year guidance of 115 to 130 global openings.

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