AFC Enterprises, Inc. 2007 Annual Report

To Our Stakeholders

In November 2007, I accepted the opportunity to expand my role from AFC Enterprises Board Member to President and CEO. It is a true privilege to lead this Company, a Company that I believe is a gem just waiting to be polished and shined. The combination of the Popeyes menu steeped in the culinary excellence of Southern Louisiana and the passionate and experienced employees and franchise owners who embody this brand is a powerful one. With 2008 already underway, franchisees, employees, shareholders and our guests will begin to experience the benefits of our disciplined and dynamic operating plan.

The truth be told, 2007 was a tough year. Our same-store sales momentum of 2006 slowed in 2007, and rising food and labor costs industry-wide pressured the profitability of our restaurants. These challenges, coupled with construction delays in international markets and the U.S., further pressured new restaurant development resulting in 124 new openings.

That said, a challenging year also demonstrated the strength of our franchise business model. In 2007 we again posted an impressive EBITDA margin of approximately 30 percent, among the best in our industry. In 2007, we generated free cash flow of $28.5 million(1). And we were able to selectively buy back more than $39.4 million worth of shares of our common stock throughout the year, demonstrating our confidence in the future.

This year, 2008, will be about building on the strength of our franchise model to deliver more consistent growth and stronger shareholder returns. We have assembled a top flight executive team with more than 70 years of hands-on experience running restaurant companies and we have developed a focused plan to claim what I believe is our rightful position as the "better" chicken quick service restaurant—a cut above the rest.

Popeyes is positioned to compete in the “sweet spot” of the quick service industry, a $150 billion category with a three year compound annual growth rate of approximately 5 percent. Chicken remains America’s favorite protein and you might be surprised to note that the growth in chicken consumption is led by golden, crispy chicken, served in bites, nuggets, sandwiches, wraps and more.

1. (1)  EBITDA and free cash flow are non-GAAP financial measures. For a reconciliation of EBITDA and free cash flow please see "Financial Highlights" on page 8 of this Annual Report.

“We have developed a focused plan to claim what I believe is our rightful position as the ‘better’ chicken quick service restaurant—a cut above the rest.”

Successful restaurants are about great food. And the taste and quality of our Popeyes chicken is legendary. Our signature fried chicken is freshly prepared, marinated 12 hours in Louisiana seasonings, and then hand-battered and cooked to a golden brown. Our unique and flavorful sides, like red beans and rice, further set us apart from the competition.

For over 35 years Popeyes’ distinctive and consistent high-quality food is a direct result of the investments of our operators who have built restaurants, hired fine teams to run and support them, and kept those restaurants clean and up-to-date. Today approximately 85 percent of our restaurants have been updated to the bright and colorful, New Orleans-inspired building and dining room designs. As further evidence of confidence in our future, our franchise operators have built 380 new Popeyes restaurants in the last three years. We are deeply grateful for this special relationship with our restaurant operators.

Looking forward, we are working to strengthen Popeyes menu offerings to include more portable, convenient food choices with the everyday values our customers can afford. Popeyes is upgrading every element of our marketing and media plans to better communicate our food advantage over the competition. Building and protecting our great brand is our highest priority.

We are also working closely with our franchise owners to delight our guests every time they come to Popeyes by running great restaurants. We are currently putting in place new operations systems and tools to help our restaurant managers consistently meet the guests’ expectations for hot, delicious food served promptly, accurately and with the hospitality of your own home. By year-end every Popeyes restaurant will have an independent guest survey in place to give us monthly feedback from our guests.

It is no secret that food commodities, packaging and labor costs are putting a great deal of pressure on restaurant profitability. We are working with our purchasing and distribution cooperative, Supply Management Services, Inc. (SMS), and our suppliers to help keep a lid on pricing and freight increases. We are also refocusing our attention to helping each restaurant manager proactively manage food costs and labor scheduling for an optimal bottom line. This continuous improvement process is essential to staying ahead in our business.

In summary, 2008 will be focused on strengthening the Popeyes system—the menu, the operations, the profitability—so that we can accelerate Popeyes unit growth in the years ahead. To that end, we have announced the commencement of a process to identify experienced and qualified franchisees to purchase our company-operated restaurants so that we can re-purpose our resources towards the critical initiatives of our operating plan.

I am proud of the entire Popeyes team and their commitment to delivering our operating plan. Together with our franchise owners, we intend to make you a proud investor in our brand Popeyes.

Sincerely,

Cheryl A. Bachelder
CEO and President
AFC Enterprises