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AFC Enterprises, Inc. (AFCE)

Q4 2008 Earnings Call

March 12, 2009 9:00 am ET

Executives

Cheryl Fletcher – Director, Finance and Investor Relations

Cheryl Bachelder – Chief Executive Officer, President

H. Melville Hope III – Chief Financial Officer

Analysts

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

Sean Dodge - SunTrust

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the AFC Enterprises Q4 and full year 2008 earnings conference call. My name is [Keisha] and I will be your operator for today. (Operator Instructions)

I would now like to turn the call over to Cheryl Fletcher, Director of Finance and Investor Relations. Please proceed, ma'am.

Cheryl Fletcher

Thank you and good morning, everyone. Before I begin I'd like to read the following forward-looking statement:

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 other restaurant concepts and food retailers, disruptions in the financial markets, our ability to franchise new restaurant units and expand our brand, increases in food and labor costs, and the risk factors detailed in our 2008 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 to the date they were made.

During this call references may be made to non-GAAP terms like EBITDA and free cash flow. The company defines EBITDA as earnings before interest expense, taxes, 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 reconciliation to GAAP measures of the numbers referred for these 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 our CEO and President, Cheryl Bachelder.

Cheryl Bachelder

Good morning and thank you for joining us on our earnings call today. This morning we will discuss our fiscal 2008 fourth quarter and full year performance, update you on our strategic pillars and provide you guidance for 2009.

In 2008 we did what we set out to do - we stayed on course, executing against our strategic plan that we announced in March of last year, and we met our fiscal 2008 earnings expectations at $0.76 per diluted share. We generated more than $26 million in free cash and our EBITDA margins remained strong at approximately 28%.

During 2008 we put in place a strong leadership team and together we developed a new strategic plan around four pillars of running a great restaurant company - first, building a distinctive and relevant brand for our guests, a brand that invites them into our restaurants and drives their visit frequency; second, running great restaurants by delivering service that is as distinctive as our Louisiana food; third, strengthening our unit economics by improving restaurant-level margin profitability; and lastly, better aligning our people and resources in support of our restaurant system.

In 2008 we saw good traction around these initiatives. We updated our menu and filled the menu gaps by adding three new menu platforms - Big Deal sandwiches and wraps, Louisiana Travelers, our nuggets and tenders, and Big Easy chicken bowls and sandwiches, designed to address value, portability and lunch and snack [day parts]. We used national cable advertising to expand our media reach, consolidated seven regional advertising agencies to one at GSD&M Idea City, and we created a food-focused Louisiana Fast campaign.

Although total domestic same-store sales were negative 2.2% for the full year, since Popeyes started running national cable with our new menu platforms, independent data shows our same-store sales have outpaced the chicken category by nine-tenths of a share point.

With our restructured field in place we've completed over 3,000 restaurant operation assessments in the U.S. to ensure standard processes and equipment are in place. We've implemented a new guest monitor we call [Jim], a survey which is now in virtually every restaurant in our system. We saw steady improvement in our percent of guests delighted scores, which at year end were 61%, up approximately 9 points from the start. We put new disciplines in place to strengthen our unit economics and improve our restaurant margins.

2008 was impacted by historically high commodity costs. On a full year basis, food inflation for the Popeyes system was up 11% year-over-year, impacting restaurant-level margins by 300 to 400 basis points before price increases. To offset some of these pressures we launched a program called Finding Your 2%, which provides the restaurants an extensive workbook and a set of online tools to help them improve their restaurant profitability. One of those tools was rolling out a new cooking oil management process to maintain the quality of our food while saving time and money in the restaurant.

In 2008 our development team opened 140 new restaurants globally, exceeding our guidance of 115 to 130. These new openings consisted of 73 domestic restaurants and 67 international restaurants, evidencing the growth potential of this brand. We ended the year with 1922 restaurants globally.

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