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Edited Transcript of CEC^B14 earnings conference call or presentation 14-May-19 12:00pm GMT

Q1 2019 CEC Entertainment Inc Earnings Call

IRVING Jul 9, 2019 (Thomson StreetEvents) -- Edited Transcript of CEC Entertainment Inc earnings conference call or presentation Tuesday, May 14, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James A. Howell

CEC Entertainment, Inc. - Executive VP, CFO & Principal Accounting Officer

* Thomas Leverton

CEC Entertainment, Inc. - CEO & Director

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Conference Call Participants

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* Karru Martinson

Jefferies LLC, Research Division - Analyst

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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. First Quarter 2019 Earnings Conference 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'll open the call for questions. (Operator Instructions)

Now I would like to turn the conference over to Mr. Jim Howell for opening remarks.

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

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Thank you, Michelle, and thank you all for joining us for CEC Entertainment, Inc.'s First 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 meanings of federal securities laws. Forward-looking statements are based on managements' 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 statement.

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.

And now I would 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. Q1 was a big quarter for CEC Entertainment in many ways. We certainly were pleased with achieving our fourth consecutive quarter of positive same-store sales growth. We believe that guests are rewarding the business because of the many improvements we've made, including our 2 new products: All You Can Play and More Tickets. We're also excited by the prospects of completing the transaction with Leo Holdings to return CEC Entertainment to the public equity markets.

There are 3 areas that I'd like to cover for Q1. First, on our sales performance, CEC posted very strong numbers for the quarter. While the business benefited from lapping negative comps in the quarter last year and favorability from the Easter shift and school breaks, we certainly have seen that our guests are enjoying Chuck E. Cheese's new products. We now have 57% of guests choosing All You Can Play, up from 50% during the first 6 months it was offered. While we don't push All You Can Play on guests at the counter as we want them to pick the right experience for themselves, we recognize that the number is growing because of the excellent experience we're delivering.

Our More Tickets initiative continues to drive sales and contribute to record-setting NPS scores. In addition to the modest ticket price increases at merchandise counters, our general managers have done an excellent job managing costs. Q1's reported 7.8% consolidated merchandise COGS as a percent of sales is better than expectations, and we're actively working on initiatives in this area.

Second, our remodeled stores continue to perform very well. We continue the trend well over 20% cash on cash returns with double-digit sales growth versus our core stores.

Third, we had a terrific quarter for our international business. We signed 5 development agreements for 16 stores over the next 5 years. These agreements will bring new Chuck E. Cheese venues to Kuwait, Bahrain, Chile, Peru and Mexico. We're very bullish on this part of our business going forward.

Before I hand it back to Jim, I also want to discuss the announcement about a proposed business combination with Leo Holdings, a special-purpose acquisition company listed on the New York Stock Exchange. We believe that this is a great way for CEC Entertainment to return to the public equity markets. I've also been pleased get to know Lyndon Lea who would join Andy Jhawar as Co-Chairman of the Board upon completion of the transaction. Lyndon founded Lion Capital and Leo Holdings and has been active in the investment area for the last 29 years having personally led over 30 acquisitions. He brings a lot of experience helping brands succeed, including brands very relevant to CEC like Round Table Pizza. We all look forward to working with Lyndon in the future.

I'll now hand and get back over to Jim who will walk through our financials.

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

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Thank you, Tom. In the first quarter of 2019, company venue sales increased 7.2% to $267.5 million in the first quarter from $249.5 million in the 2018 quarter. Total revenues were $273.3 million in the first quarter of 2019 compared to $254.9 million for the first quarter of 2018.

Same-store sales in the quarter were positive 7.7%. We believe the shift in Easter and school breaks contributed more than 1.5% same-store sales to the quarter. We did see a shift in spending with entertainment and merchandise as a percentage of total revenues, increasing to 54.8% from 51.4% in the first quarter of 2018. This shift is attributable to the customer enthusiasm around All You Can Play and More Tickets.

Food and beverage costs for the first quarter 2019 decreased approximately 50 basis points from the 2018 quarter driven by favorability in commodity prices and volume. Entertainment and merchandise costs increased roughly 60 basis points driven by the 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 increased approximately 10 basis points with improved productivity helping to offset a 5.2% increase in average wage rate. Our sales per man hour improved approximately 14% from the first quarter of 2018 with hours decreasing approximately 5% on higher sales.

Turning to profitability. First quarter 2019 adjusted EBITDA was $76.1 million compared to $66.3 million in the first quarter of 2018, an increase of roughly 15%. We are pleased with the flow-through we achieved as the year-over-year increase in total revenues of $18.4 million resulted in a year-over-year increase of $9.8 million in adjusted EBITDA versus the same quarter last year. I would note that our first quarter adjusted EBITDA benefited from $1.3 million in deferred revenue. As you may recall, when guests buy points, a portion of their purchase is deferred for future periods. This is a reserve for the points that leave the building that aren't played 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.

In 2018, $3.2 million of first quarter revenue and adjusted EBITDA was deferred into the second quarter. This year, in 2019, only $1.9 million of revenue and adjusted EBITDA is shifting into the second quarter. For year-on-year comparisons, that is a positive to Q1 and will be a negative to Q2.

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. Effective this quarter, we adopted the new lease accounting guidance, which requires us to recognize on our balance sheet right-of-use assets relating to operating leases of approximately $545 million and operating lease liabilities of approximately $577 million at the -- at the end of Q2 -- Q1, excuse me.

We ended the quarter with 748 venues worldwide, of which 606 were Chuck E. Cheese's and 142 were Peter Piper Pizzas.

Cash at the end of the quarter was approximately $112 million. The principal outstanding on our debt at the end of the quarter was $977 million consisting of $722 million on our term loan facility and $255 million in senior notes with net availability of $86.5 million on our undrawn revolving credit facility.

As a reminder, in connection with the proposed business combination with Leo Holdings announced in April, we plan to deleverage our existing capital structure by using the proceeds to redeem senior notes which mature in 2022.

First quarter capital expenditures were $18.6 million, of which $4.9 million related to growth initiatives, $0.4 million related to various IT initiatives and $13.3 million related to maintenance capital.

Finally, as you may have already seen in our investor presentation related to the business combination announcement on April 8, we issued annual guidance for 2019 that we are pleased to be reiterating this morning. That outlook consists of the following: total revenues of $929 million, comparable venue sales of 4.2%, adjusted EBITDA of $187 million, 4 net Peter Piper Pizza openings and 11 net international franchise Chuck E. Cheese's openings and capital expenditures of $95 million to $105 million.

So to conclude, I hear Tom's positive sentiment with our first quarter results. We were very pleased with our comparable venue sales growth and adjusted EBITDA. With 4 consecutive quarters of same-store sales growth, we believe the business is going in a great direction.

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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Looking forward to the rest of 2019, there are 4 items that we believe represent big opportunities for CEC. First, we're on track to complete 60 remodels this year in Q3 and Q4. These remodels will have the same great look and feel of our 2018 remodels, and we're excited to see the results.

Second, we have some great product extensions and test, leveraging off of our recent wins. We already have a small number of venues in test for all-time Play, which takes our All You Can Play offering to the next level by completely doing away with points.

We also have test locations with 7 and 8 tickets per game play versus the current 5, which would expand our already-successful More Tickets initiative. We're also exploring pricing opportunities that could be very attractive based on guest perception of these products.

Third, at the start of Q2, we launched Unicorn Churros as our LTO. This product has the potential to be our most successful LTO to date, providing a great fun product which tastes great, which also ties to the strong current popularity of unicorns. We filled 437,000 units of this product and what's even more important, we delighted many guests with this fun offering.

Lastly, the plan is to open 12 stores internationally in the back half of the year across Latin America, Middle East and India.

That concludes our remarks. We're happy to take any questions. Operator, would you please open the lines?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Karru Martinson with Jefferies.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [2]

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Just a housekeeping, what has to transpire here for the Leo Holdings shareholder? What's the mechanism that you guys will use for this?

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James A. Howell, CEC Entertainment, Inc. - Executive VP, CFO & Principal Accounting Officer [3]

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So we've filed materials with the SEC a couple of weeks ago. They have to go through SEC review. Then a proxy will go out to the SPAC shareholders who will then vote on the transaction. If there is -- they require a number of votes, the transaction moves forward. We think that time frame will be somewhere around July, anywhere between July 3 and July 9, I guess, early July.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [4]

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Okay. And then the ones we call thereafter.

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James A. Howell, CEC Entertainment, Inc. - Executive VP, CFO & Principal Accounting Officer [5]

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Yes, that's correct. We do intend to use the proceeds to pay down the bonds.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [6]

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Okay. Just lastly, competitive front, it's always been an issue for you guys, clearly, not so much this quarter. But what are you seeing out there on the competition?

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

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So our competition is very broad when you think about it, very specifically with kid-focused businesses, you have bounce houses and trampoline parks. And we have continued to see, over the past few years, some growth in the number of sites for bounce houses and trampoline parks. We feel qualitatively and from our operators that, that growth is starting to level off, which would be a positive. You also -- we also do compete with many other entertainment options like movies and even older kid-targeted businesses. And those again are headwinds to us when they open new sites, but we are not seeing tremendous growth in that industry either.

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Operator [8]

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There are no further questions at this time. I would like to turn the call back over to Mr. Leverton for any closing remarks.

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

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Well, thank you all for coming out this morning and participating in Q1 for CEC Entertainment. We look forward to releasing Q2. Thank you so much.

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Operator [10]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.