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Edited Transcript of CEC^B14 earnings conference call or presentation 7-Nov-19 2:00pm GMT

Q3 2019 CEC Entertainment Inc Earnings Call

IRVING Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of CEC Entertainment Inc earnings conference call or presentation Thursday, November 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James A. Howell

CEC Entertainment, Inc. - Executive VP & CFO

* Thomas Leverton

CEC Entertainment, Inc. - CEO & Director

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Conference Call Participants

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* Bryan Cecil Hunt

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* David Richard Hargreaves

Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst

* Luis Ricardo Chinchilla

Deutsche Bank AG, Research Division - Research Analyst

* Patrick Coleman

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the CEC Entertainment, Inc. Third Quarter 2019 Earnings Call. On the call today are Tom Leverton, Chief Executive Officer; and Jim Howell, Chief Financial Officer. After comments from both Mr. Leverton and Mr. Howell, we will open the call for your questions. Today's call is being recorded. (Operator Instructions) Now I would like to turn the call over to Jim for opening remarks.

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [2]

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Thank you, Christina, and thank you all for joining us for CEC Entertainment Inc.'s Third Quarter 2019 Conference Call.

Before we begin our discussion this morning, I would like to call your attention to the fact that certain statements made during this call may constitute forward-looking statements within the meaning of federal securities laws. Forward-looking statements are based on management's expectations, beliefs, estimates and projections. These statements are not guarantees of future performance and involve certain risks and uncertainties which are difficult to predict. Therefore, actual results may differ materially from what is implied in forward-looking statements due to a variety of factors. Additional information regarding these factors is contained in the company's annual report on Form 10-K for the year ended December 30, 2018, filed with the SEC in March. The company disclaims and does not undertake any obligation to update or revise any forward-looking statements.

In addition, our remarks will include references to certain non-GAAP financial measures, such as adjusted EBITDA. The company believes adjusted EBITDA is a measure that provides useful information to investors relating to its operating performance and its capacity to incur and service debt and fund capital expenditures. Further, we believe that adjusted EBITDA is used by many investors, analysts and rating agencies as a measure of performance. By referencing adjusted EBITDA, we provide a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance. The non-GAAP financial measures discussed during this call should not be viewed as alternatives or substitutes for the company's reported GAAP results. A reconciliation of net income to adjusted EBITDA is found in our earnings release and Form 8-K filed with the SEC.

Now I'd like to turn the call over to Tom.

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [3]

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Thanks, Jim, and thanks, everyone, for joining us this morning.

With remodels, new limited time offers and our new entertainment products, 2019 continues to be an exciting year for CEC Entertainment. As of Q3, CEC Entertainment is showing 2.7% positive same-store sales year-to-date, with Q3 registering at negative 0.9% same-store sales, which is 1.3% positive on a 2-year stack basis. While we're disappointed to break the streak of 5 consecutive quarters of growth, we believe there is a fundamental strength in the business due to these initiatives. As you're aware, we do not give guidance, but we will share that P10, which is in Q4, has shown some solid strength to start off the quarter, posting a 2.5% positive same-store sales, which is 4.2% positive on a 2-year basis. Some of the strength in P10 was from Yom Kippur shifting in -- from Q3 into P10, which brings some school holidays with it.

Driving those numbers, I'm pleased to share that our company hit another all-time high with our net promoter measurements at 92%. This is a result of heavy work in operations across our entertainment and food services, plus ongoing, great reception of our All You Can Play product. We're currently at 65% of entertainment revenue tied to All You Can Play. During Q3, we tested another product extension with all day, All You Can Play, which gave guests unlimited play, all day from open to close for one low price on select days. During this offer, the average guest showed 3 hours of activity, which is a tremendous value.

Our remodeled stores continue to show solid strength as well. We currently have 61 of our stores remodeled. Our newest class of stores, those remodeled in 2019, continued to perform in line with the previous classes of remodel locations. For the 8 stores opened at least 4 weeks, they're performing at 15.7% better than our core benchmark on same-store sales.

Lastly, I shared that -- the latest from our international team's effort. During Q3, we opened 4 international locations and sold development agreements in Peru, Morocco and Malaysia, which would cover an additional 7 locations in the future.

I'll now hand you back to Jim to walk through our financials.

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [4]

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Thank you, Tom. For the 9-months period ended September 29, 2019, comparable venue sales increased 2.7% over the prior year period. Total revenues for the 9-month period ended September 29, 2019, increased from 69 -- $693.2 million to $706.1 million.

For the third quarter of 2019, comparable venue sales decreased 0.9% from the 2018 third quarter. Total revenues were $217.6 million in the third quarter of 2019 compared to $220.9 million for the third quarter of 2018.

Food and beverage costs for the third quarter of 2019 decreased approximately 100 basis points from the 2018 quarter, reflecting favorability in commodity volume and higher average selling prices. Entertainment and merchandise costs increased roughly 30 basis points, driven by the third quarter 2018 national launch of time-based Play and More Tickets in all of our Chuck E. Cheese's company-operated venues.

Our overall venue labor cost as a percent of sales decreased approximately 40 basis points, with a decrease in labor hours helping to offset a 4.8% increase in average wage rate. Our sales per labor hour improved approximately 4% from the third quarter of 2018, with hours decreasing approximately 5%.

Turning to profitability.

Adjusted EBITDA for the 9-month period ended September 29, 2019, increased $9.1 million or 6.3% to $153.4 million from $144.3 million for the 9-month period ended September 30, 2018. Third quarter adjusted EBITDA was $38.9 million compared to $38.5 million in the third quarter of 2018. I would note that our third quarter adjusted EBITDA was negatively impacted by a decrease in the year-over-year shift in Play Pass related breakage revenue in the third quarter.

For the third quarter of 2019, we had a net deferral related to Play Pass of $0.7 million compared to $1.7 million in breakage for the third quarter of 2018. As you may recall, when guests buy points, a portion of their purchases defer for future periods. This is an estimated liability for the points and tickets that lead the building that aren't claimed or redeemed on the initial time of visit. With All You Can Play, guests use their entire card in 1 visit, thus, there is no deferred revenue. I specifically highlight this for year-over-year comparability purposes of our revenue and adjusted EBITDA. These shifts are just accounting issues and don't impact our operating cash flows nor our reported same-store sales figures. Adjusting for this noncash impact, adjusted EBITDA for the third quarter increased year-over-year by $2.8 million or 7.3%.

We ended the quarter with 738 venues worldwide, of which 610 were Chuck E. Cheeses and 128 were Peter Piper Pizzas.

Cash at the end of the quarter was approximately $105 million. The principal outstanding on our debt at the end of the quarter was roughly $1 billion, consisting of $760 million on our refinanced term loan facility and $255 million in senior notes. We had net availability of $105.5 million on our undrawn revolving credit facility.

On August 30, 2019, we entered into a new credit agreement, refinancing in full our secured credit facilities. Our new credit agreement provides senior secured financing, consisting of a $114 million revolving credit facility with a maturity date of August 30, 2024, and a $760 million term loan facility with a maturity date of August 30, 2026. Broadly speaking, the structure of the agreement is similar, but the new credit agreement also includes a springing maturity clause, whereby in the event that more than $50 million of the company's bonds, due February 5, 2022, remain outstanding on a date that is 91 days prior to the stated February 2022 maturity date of the bonds, the maturity dates of the secured credit facilities will spring to such earlier date. We communicated to you during our last call that we were going to address the term loan as it had been more immediate matured. We have now done that, and we'll turn our focus to the bonds. We still have some time and are actively engaged with our Board to address the outstanding bonds in an efficient and timely manner.

Third quarter capital expenditures were $26.2 million, of which $12 million related to growth initiatives, $1.7 million related to various IT initiatives and $12.5 million related to maintenance capital.

To conclude, I share Tom's sentiment on our third quarter results. Our year-to-date performance is solid. And while we fell short of our third quarter goals, we are encouraged with our positive same-store sales performance in the first month of the fourth quarter.

I'll now turn the call back over to Tom.

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [5]

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We have some exciting efforts underway as we look forward to the rest of Q4 as well as Q1 of 2020. First, this week marked the beginning of Every Kid's A Winner campaign. This campaign, which will run through December, gives every kid a winning ticket on entry to Chuck E. Cheese. They can win prices ranging from cotton candy to a play band with a year's worth of All You Can Play. And we're supporting this effort with TV advertising and a digital campaign. Second, we have some exciting food offerings coming into our stores. Our current LTO, which is bacon stuffed crust, has shown some real strength, taking our percent of stuffed crust pizzas from 15% to 20% over the past few weeks. This offer will continue through February. As we look to late Q1, we'll be launching a new dessert, our Oreo brownie, which is great tasting, fun, and importantly, attachment revenue to a guest's basic ticket. Third, I'll highlight that we're really leaning into holiday sales this year after a very strong 2018 season. Last year, our gift card sales totaled $4.1 million, which is a 45% increase from 2017. This year, we look to build on our strong gift card program, but are also offering 2 additional products intended to stocking stuffers. One of the new products is a prepackaged brick of tickets. We know the excitement that Chuck E. tickets create. And with this being put into our retail product, we think that mom and dad can create this excitement at home. And this will also turn into a future visit. Last, we'll be testing another product extension of All You Can Play over the holidays. Starting November 25, guests can buy a holiday pass at Chuck E. Cheese. For one set price, they can get unlimited play from Thanksgiving through New Year's. While this is just a test, we see it as a step towards building out a subscription model and are very excited by the prospect.

That concludes our prepared remarks. We'll now open it up for question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Bryan Hunt with Wells Fargo Securities.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [2]

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I was wondering if you could touch on the tempo of same-store sales throughout the quarter and whether you saw any regional weakness relative to weather.

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [3]

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There is always weather fluctuations in our business. And again, we have 500 -- or over 500 stores nationally, and so we do see some reasons from time to time, over a period, as long as the whole quarter. They tend to equal out. So I wouldn't necessarily highlight it.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [4]

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Okay. And then what would you attribute the October reacceleration to? Did you all do anything different? Or what would you attribute it to?

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [5]

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Well, one of the reasons that I highlighted, the 2-year stack nature is that when you do look at the business over a longer time frame, you can see some of the same strength in Q3 overall. So I don't really look at it as a divergence. You do have ups and downs in the business. But the reason that we took the unusual step of sharing P10 is to just show that nature. And now again, Yom Kippur did shift from Q3, which was a hit to Q3, into Q4, and especially in the Northeast, you do see some schools getting out around Yom Kippur, even for the whole week.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [6]

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Okay. Good. When I look at the entertainment cost, it's the highest it's been in quite a long time at roughly 8.5% of sale. But given that you've shifted to All You Can Play across the whole store network, is this a reasonable cost expectation going forward? Or is there some other anomaly in the period?

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [7]

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So I do think that it's within the range of what we will have going forward. There's 2 things going on on the merchandise line. One is All You Can Play, which does drive higher COGS percent, but it's certainly dollar profit positive. And what we see is guests can shift the amount of gains. I mentioned on the previous call, average kid, when they have points, play 60 games an hour. When they have -- when they have time, they play an average of 92 games an hour. So that does increase your merch COGS percent. But again, it does increase sales as well, so it's dollar profit positive. So All You Can Play does have that effect. But secondly, we continue to look at our More Tickets initiative. You'll remember that in August of last year, we shifted our average ticket payout in our games from 3 tickets per game to 5 tickets per game. And we also have been public in saying that we have been testing additional changes to that mix, including a very substantial portion of the chain right now that is yielding 8 tickets per game. So again, we still have that in test. We would only roll that out if we can really confirm that, like the others, even if it is COGS percent negative, that it will be dollar profit positive.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [8]

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Okay. And then lastly, and I'll hand it off to somebody else. Your improvement in labor costs per dollar sales, I believe you said, was down about 5%. Is there any more headroom in that? And how has that tracked kind of sequentially from Q1 to Q2 to Q3?

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [9]

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So our operators continue to do a great job in optimizing labor in this challenging environment. As you know, we, again, are national. We have a substantial presence in some of the states that are driving higher and higher minimum wages. And our operators and the team here in Dallas are doing a great job finding new opportunities to save labor hours. A good example is Kid Check, where we have a dedicated person at the front of the store that stamps the kid, making sure that every family that comes together leaves together. During school days, we have actually taken an investment and stretched Kid Check to the front counter, so we can use the same labor that is doing Kid Check to actually man the front counter and be able to process the transaction. Things like that change the equation at Chuck E., and we're continuing to work on the innovation side. There is still some headwinds there, but it does get harder and harder each year. And again, I would thank the team. They have a very long streak of improvement in sales per man-hour going through hard work and creativity.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [10]

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And when I look at the improvement that you're seeing sequentially, is this like a new -- is this a new level of productivity in terms of all the changes you've made?

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [11]

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Well, if you look at it sequentially, I think, in Q1, which is our biggest quarter. We actually saw labor expenses roughly flat as a percent of sales. Took a little dip in Q2 relative to the percent there, and Q2 is a smaller quarter. Q3 is sort of in between the 2, maybe closer to Q2. It's just -- I think the team is really, again, done a nice job of focusing on hours, focusing the teams on productivity. And so we did see a good result in Q3.

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Operator [12]

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And we'll go to our next question from Pat Coleman with Octagon.

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Patrick Coleman, [13]

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I was hoping you could just dive into the third quarter same-store sales number. It just seems to -- it obviously sticks out [versus using comps], I know you talked about the larger picture, but we're just -- I think a lot of people on the call are probably hoping just to get some clarity. Internally, what are you guys discussing as to what you could be doing better as it relates to third quarter performance?

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [14]

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So in Q3, we did lap the implementation of More Tickets and All You Can Play. And we had at the time, just tests in place for the next generation. We have maintained that All You Can Play as it is implemented today is only version 1. And More Tickets, like I said before, is only version 1 of More Tickets. When we went through Q3, we were lapping last year's July launch of All You Can Play and the August launch of More Tickets, still with version 1 out there. As we look toward Q -- late Q3 and Q4, that's when we're starting to see, as I mentioned, the next version of these products. All You Can Play, we have now several weeks of tests for all day, All You Can Play, which is enhancement. We have our next version, again, north of 100 stores on 8.0 tickets per game play. And I think that those are contributing to Q4, but it's really the next evolution in our product lines as we go forward.

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Patrick Coleman, [15]

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Okay. That's definitely helpful. And then as you've done in the past, is there any way to quantify what you guys pointed as the Yom Kippur impact? Just to give us some -- in prior quarters, you've kind of given us the -- either the year-to-date trend or something like that. So can you help us quantify that?

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [16]

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We don't have that broken out in front. It is not...

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Patrick Coleman, [17]

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What if you were to give us P9 and P10 year-over-year?

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [18]

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We don't typically give out the monthly comps. We did...

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Patrick Coleman, [19]

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Okay. I guess -- in prior calls, you've done. You've did it in quarters past to help us normalize for some of these adverse impacts. But I guess what you're saying is it's not material? But it is a bit of a headwind to P10? And -- or (inaudible) P10?

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [20]

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It's much smaller than when we did it for Spring break. So Spring break is a massive change across the country. And so yes, Spring break, if you remember, we said with a 1.5% hit to Q1 when the Spring break moved from Q2 into Q1, with the benefit. That one was large enough for the entire quarter. This one would be smaller.

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Patrick Coleman, [21]

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Okay. That's helpful. And then kind of walking down the income statement. Can you talk about what's going on in the other store expenses lines? Just anything to call out? It was obviously fairly favorable. So wondering if that's timing or just continued improvements in cost structure.

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [22]

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Yes. It's nothing that simple. It's -- what it really is, is the -- there's 2 lines on our income statement that are not comparable because we adopted the new lease accounting standard. And a part of adopting that lease accounting standard, we had to make an election on where to put CAM. So CAM, which was in other venue operating expenses is now in lease costs.

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Patrick Coleman, [23]

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So that's why lease is down. This lease is down?

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [24]

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Exactly. Yes. But let me give you the comparable numbers. So if you look at for the quarter, we're showing 16.3% if you normalize that, it's 17.9% or $3.4 million for the quarter. If you look at it on a year-to-date basis, if you look at the lease costs on a year-to-date basis, it's 10.7% in 2018 year-to-date. The comparable number for that is 10.4% in the 2019 year-to-date numbers. So it's roughly about $3.4 million for the quarter, swings between those 2 lines. And for the year-to-date period, it's about 10.4%. The only thing I'd call out...

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Patrick Coleman, [25]

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No. I mean (inaudible) on the math. But on the aggregate, is there -- should we just start lumping this together? Is that the way to think about it?

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [26]

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Well, they'll be comparable next year once we lap the implementation. So the implementation was done perspective, so '18 doesn't include it. But when you get to next year, '19 and '20 will be apples-to-apples.

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Patrick Coleman, [27]

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Okay. So is there a way for you to help us understand Q3 on an apples-to-apples?

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [28]

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Yes, you can lump them together. But I mean, again...

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Patrick Coleman, [29]

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Okay, okay. Fair enough, yes.

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [30]

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And we have disclosure in the 10 -- when you get the 10-Q, we'll have disclosure in there as well for both through periods.

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Patrick Coleman, [31]

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Yes. And then as we just look out into Q4, Q1, can you help us figure out if there's any timing issues that we should factor into the models as it relates to...

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [32]

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In terms of expenses or legal?

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Patrick Coleman, [33]

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No. Where the holidays are falling in fiscal year end?

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [34]

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So all in all, the holidays are somewhat similar to last year. We continue -- if you look at the calendar, Christmas and New Year's continue to shift out. Next year will be a year of the 53rd week, which shift them back deeper into Q4. But now we will have Christmas really blending up into that next week almost, which will shift the school calendars a bit out from Q4 into Q1, but not a very large change from last year. Last year, Christmas, I believe was on a Wednesday, this year, it's on a Thursday, and so they will shift out a little bit more.

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Operator [35]

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And we'll take our next question from David Hargreaves with Stifel Financial.

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David Richard Hargreaves, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [36]

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So this deferred revenue impact that you helped us adjust EBITDA for. I wanted to see what that would mean for attendance. I'm just trying to get a sense for, would same-store sales have been positive adjusted for that factor? And what happened with traffic?

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [37]

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Yes. We don't impact same-store sales. We don't -- any of the calculations in accounting around deferred revenue does not impact same-store sales. So what you see from a same-store sales perspective is almost cash basis. Then at a top side level, we actually layer on the deferred revenue accounting rules. So by stripping that out, you still do get a feel for what the performance could have been.

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David Richard Hargreaves, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [38]

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Would it be accurate then to say that the traffic has been subsiding sequentially throughout the year? Or -- is that the right way to think about that?

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [39]

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I don't know if I'd say traffic has been subsiding sequentially. I think, in general, like most other folks in our world, we are seeing traffic declines in the stores, and we certainly see that now. But it's been sort of ups and downs throughout the year. Think about the strong first quarter. And then more recently, the strong months. So it just kind of ebbs and flows a little bit.

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David Richard Hargreaves, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [40]

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I see. So should we be thinking about -- is it more competition? Or is it a change in consumer demand? I'm just wondering how you do things.

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [41]

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So the restaurant industry is talking about changes in consumer demand as people do go into grocery stores and all that more, given prices and given delivery. And we do think about that and talk about that. But our business is quite different than a stand-alone restaurant concept where it's much more difficult to Uber the overall Chuck E. Cheese experience. You do have pop up in local competitors, which we've talked about before. You do have alternatives pop up during a quarter like Q3, with something like a Lion King release that does attract our age demographic. And so those things can be temporary and impactful, and you overcome them. But no, nothing substantial or nothing systemic.

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David Richard Hargreaves, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [42]

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I see. And when we think about the period 10 comps that you gave us. So last year, I think the fourth quarter was up 3.3%. I'm just wondering if that was a 3.3% -- was consistent throughout the quarter? Or is that -- is that October comp -- is going up against an easier or tougher part of the quarter? Just so -- is there any way you could just let us know how meaningful that is?

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [43]

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So what I can share is the P10, we did post, again, like I said, it was positive 2.5%, and that's 4.2% on a 2% -- on a 2-year basis. So last year was around the 2% positive just in P10.

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David Richard Hargreaves, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [44]

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(inaudible) great. And with the new renovations, I'm curious if there's anything you could call out as to what's worked better or less than expected. And what kind of tweaks you're making. Do you think the 15.7% is the most you can do out of those lists? And what are you seeing in terms of sustainability?

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [45]

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That's going to be my favorite question. Thank you for asking that. Our remodels have a lot of components that are driving a lot of benefits. So first of all, we have experimented with different versions of the facade. And what we have certainly learned is you need a dramatic change out front. We do have some stores from a couple of years ago when we were first learning, where they were improvements to our facade, but they weren't dramatic. We have now leaned into this version where it is -- we use greens to have a freshness cue for our food. We have the new Chuck E. out there. It looks like a very different environment because it is. So the facade is absolutely critical. Inside, it has many more cues for a pizza restaurant, to make mom and dad comfortable while they're waiting for the child to play because, again, our dwell time can be well north of an hour. And so the seats are more comfortable. The lighting is better. The removal of the animatronics, our robot, and replacing it with the dance floor, which has a better live Chuck E. experience. All of these different components, which we have refined over the past 2.5 years, have really come together to create a fabulous experience. So to your question about, can we do better than the 15.7%? 15.7% is pretty good, and it generates a great cash-on-cash return. But as we go forward, we are really leaning into the stores that have the greatest need. And within the 15.7%, I will share with you, there are some stores that are absolutely blowing it out. There's a pretty tight distribution. We have those lumpy twosies that will stay well north of 20%. And we're really looking at those locations to see if there are any additional earnings that we can roll out to the rest of the chain.

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David Richard Hargreaves, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [46]

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That's exactly what I was looking for. Now lastly, I don't think you guys gave us a pace of expected remodels on for the year, next year.

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [47]

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So we're putting together our budgets and plans for next year right now, and we are going to be reviewing with the Board shortly.

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Operator [48]

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(Operator Instructions) And we'll take our next question from Ricardo Chinchilla with Deutsche Bank.

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Luis Ricardo Chinchilla, Deutsche Bank AG, Research Division - Research Analyst [49]

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The first one was related to what David was just inquiring. How do we think about CapEx for next year? Just -- I know that your budget's not ready, but at least from comparable to what you guys did this year to what you guys intend to do next year.

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [50]

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Yes. I think the answer there is similar to what Tom gave as well. I think we gave a range for CapEx this year, and we'll probably land within that range. Nothing's really too exciting there. But we're going through our plans right now and working through capital allocation with management and the Board. And so we don't really have anything to share right now.

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Luis Ricardo Chinchilla, Deutsche Bank AG, Research Division - Research Analyst [51]

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Fair enough. In terms of what you guys have seen with your same-store sales, I think that we are now lapping the great innovation that you guys introduced with your change in play. Do you guys expect like, with this new test that you're doing, all day passes, to have like a similar impact and to keep accelerating after a year time, to introduce a new innovation a year from now and keep it that way? Or how do we think about what you guys could do to bring in a lot of positive comps into the business?

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [52]

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So we have a test and learn approach. We have been constantly in test. And we implement the ones that drive the biggest benefit. I mentioned several of the key tests that we do have. The all day, All You Can Play is intriguing because that is a different product. And we've done it on a big school holiday. We've done it over the course of a whole week. We've done it during some weekdays now to see what kind of benefit that that can bring. Again, it is interesting to us that the average guest showed activity for 3 hours when we launched all day, All You Can Play. Now in our business, you get one hit of revenue when the guests first checked in. But over the course of 3 hours, you also do see a high likelihood of secondary orders on food or drink or other add-on, so it is an intriguing product. Again, still in test. We're looking at it for Q4 and for next year. And then the subscription opportunities are also intriguing. Some other players in the family entertainment center business, not necessarily in -- on our side of it with food and fun. But they are leaning in towards these subscription models, where you could have recurring billing on the credit card and you get, basically a pass. So in concept, you can come to Chuck E. Cheese every day in the month, again, we're still working on it, for 1 set price, probably get you video games, and then you would end up paying for food ala carte. And if we can get incremental visits from that, that would be very intriguing. Again, those are 2 examples of things that are in test, but by no means are we done with All You Can Play or More Tickets.

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Luis Ricardo Chinchilla, Deutsche Bank AG, Research Division - Research Analyst [53]

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Perfect. One last one for me. In terms of your inflation, I know that food doesn't represent that big of your cost base. But I mean what's your expectation for next year, given that we have some pressure in dairy products? And if you could comment like, what's your expectation with regards to the impact that increasing the number of price per tickets that kids will get will have on your overall costs looking into 2020?

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [54]

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So right now, we are seeing, like you mentioned, some pressure on cheese. For a dedicated pizza restaurant, that would have been our headline. But for us, given that food is only half of the business and pizza is a portion of that, we've actually been able to overcome that with our other food ingredients and not see significant pressure. And our team is doing a great job continuing to drive improvement on waste management, so there is still some opportunity there. So again, we are seeing it. We're watching it, but our team is able to overcome it just because it is a smaller portion of the business.

On the merchandise side, the key issue would be, if we do roll out our second-generation of More Tickets, and again, this is where we are currently evaluating 5 tickets per game play going up to 8 tickets per game play. If we did that, we would see a merchandise COGS change on a percent basis. But the reason we are not doing it unilaterally is because we want to make sure that we are going to get enough dollar profit to be able to make up for that. So that could be a change for next year, but it would only be implemented if it does pass a pretty rigorous test regimen.

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Operator [55]

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And it appears there are no further questions at this time. I'd like to turn the conference back to the speakers to -- I apologize. We do have a follow-up question from Bryan Hunt.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [56]

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Yes. I was just wondering if you could address -- I don't know if you skipped over it or if I didn't hear it, what the stickiness is of the kind of the original remodels that you've done so far? Are they maintaining this kind of 15% same-store sales growth?

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [57]

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Short answer, yes. The way that it works is that we are getting in our last 2 classes, 15% to 16% growth. The original class was about 12% growth. And then once they lap that, they are maintaining roughly flat in sales dollars. So said a different way, they get the 12%, 15% or 16% growth, and then they roughly maintain that level. We have seen in some of the locations, around a 2% giveback. So maybe a small, small halo, but that was one of the key factors we were examining for probably the exact reason you asked it. Would there just be a onetime benefit, a halo, and then you give it back and go back to old sales levels? We now have north of 20 stores, I think, that are in their second year, and those are maintaining their dollar sales with great, great strength. We're very pleased with that.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [58]

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That's fantastic. Second...

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [59]

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I agree.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [60]

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Second, when you -- there's a lot of news about tariffs this morning. I was wondering, did you -- and all your merchandise, and I remember my kids getting that stuff when they were Chuck E. ages. Behind the counter, lots of stuffed animals and plastics and candy and stuff along those lines. Were you hit by tariffs when they were implemented? And therefore, can we think of the reversion of tariffs to be a positive? How do we think about any potential tariff impact?

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [61]

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Yes. For us, the tariff impact hasn't been large. A lot of our "toys" haven't been classified that way for some of the tariffs. So we've seen a very small impact on the toys. We've seen an impact on some of our tickets, but we were able to source the tickets outside of China. So again, we were able to minimize that. So the reversal of the tariff isn't going to be -- it hasn't been a huge hit for us. It's not going to be a huge win for us on the other side.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [62]

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And 2 final questions. One, off-premise. Can you talk about how that effort is progressing? And what kind of sales growth you may have seen in the quarter?

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [63]

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Are you talking about delivery?

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [64]

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Yes, delivery or order to go.

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [65]

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So again, that is a tiny, tiny part of our business. We've been hovering right around, last time I looked, 0.38% of sales through the third-party delivery companies. We do look at it really as a marketing channel. You cannot, again, deliver the fun of Chuck E. Cheese. But we have listed ourselves on Grubhub, Uber Eats and DoorDash. So if people are searching for pizza, they are going to bump into our name, and maybe that would spawn a future visit. We remain thrilled with 0.38% of sales just because it exceeds our expectations, because, again, you can't deliver the fun that is Chuck E. Cheese.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [66]

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When you figure that out, I want to hear about it. And then lastly, you talked about addressing the Board about [refiling] the bonds. You've got this springing clause. I mean is this an event that we should anticipate sooner rather than later? Or could you talk about what you're thinking about in terms of new capital structure as well as timing?

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James A. Howell, CEC Entertainment, Inc. - Executive VP & CFO [67]

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Yes. I mean, look, we just got done with the term loan. We still have about 2 years to deal with the bonds. We certainly want to do it. We want to get to the end of that. But we're in discussions with the Board right now and advisers as to what's the best time and manner to address the bonds, but it is on the top of our agenda.

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Operator [68]

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And there are no further questions at this time. I'll turn the call back to the speakers for any additional or closing remarks.

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Thomas Leverton, CEC Entertainment, Inc. - CEO & Director [69]

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All right. Thank you all so much for the time. And we look forward to getting together to review Q4 results in the start of the new year. Thank you so much.

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Operator [70]

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This concludes today's call. Thank you for your participation. You may now disconnect.