Welcome to CEC Entertainment teleconference call. (Operator Instructions) As a reminder, this conference is being recorded today, Tuesday, July 22, 2008. I would now like to turn the conference over to our host, Mr. Mike Magusiak, President. Please go ahead.

Thank you. Welcome to our conference call. I'm Mike Magusiak, President of the company and I'm joined by Dick Frank, our Chairman and CEO, and Chris Morris, our Executive Vice President and Chief Financial Officer. Before we begin today's discussion, I would like to make you aware that some of the information presented today may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those implied in the forward-looking statements. Information on the company's risk factors was included in our press release and is also included in the company's filings with the SEC. Additionally, in today's discussion, we may refer to an adjusted EBITDA, adjusted EBITDA margins and free cash flow figures, all of which are non-GAAP financial measures. For reconciliation of our reported results to such non-GAAP financial measures, please see the earnings release filed earlier today or the Investor Information section of the company's website. The primary objectives for today's call are first, to discuss our financial performance during the second quarter of 2008; second, to summarize the three broad components of our strategic plan to maximize long-term shareholder value, including increased comparable store sales; grow our concept with new units, and return capital to shareholders with a share repurchase plan. Next, Chris will discuss our outlook for the business. And finally, Dick will provide some concluding remarks and then open the lines for a question-and-answer session. Now, I'd like to turn the call over to Chris Morris, our CFO, who will review our financial performance for the second quarter.

Thank you, Mike. Good afternoon, everyone. I'd like to start by reviewing comparable store sales performance. During the second quarter, comp store sales grew 5.7%. On a year-to-date basis through the end of Q2, comparable store sales grew 4.5%. We believe this strong performance provides evidence that our sales strategies are working. We are particularly encouraged by the consistency of this strong performance throughout the year. During the first half of 2008, we grew comparable store sales in each of the six fiscal periods. In addition, on a year-to-date basis, each of our five operating regions delivered positive comp store sales, ranging from 2.8% to 6.4%. In a few moments, Mike will share with you our thoughts on the main factors driving our strong sales performance. I will now review the highlights of the second quarter P&L. During the second quarter, total revenues grew 7% to $192.5 million due to positive comp-store sales growth and an increase of four units through our weighted average unit base. Cost of sales as a percent of company store sales increased 10 basis points, from 16.2% to 16.3%. This increase is primarily due to a $0.29 increase in the average price per pound of cheese and a $0.15 increase in the average price per pound of dough. Such increases were partially offset by a 40 basis point reduction in pizza costs, which resulted from the enhanced cheese blend discussed in our last call and a one-half inch reduction in the size of the company's medium and large pizzas. Labor expenses, as a percent of company store sales, decreased 50 basis points from 28.9% to 28.4%, primarily due to leverage from the strong sales performance. A 3.7% increase in the average hourly wage rate was fully offset by a 3.8% increase in revenue per hourly…

Thanks, Chris. The three broad components of our strategic plan to increase earnings per share and maximize long-term shareholder value are summarized as follows. First, to increase comparable store sales; second, to grow our concept with new company and franchise stores; and third, to return capital to shareholders with a share repurchase plan. The first component of our strategic plan is to increase comparable store sales. Despite a difficult economic marketplace, our comparable store sales have remained very solid, increasing 3.6% in the first quarter, 5.7% in the second quarter, and 4.5% in the first six months of 2008. The first three weeks of the third quarter are at a positive 2.2%. We primarily attribute our first half of the year 4.5% increase in comparable store sales growth to five specific sales initiatives. Because there are a number of initiatives positively impacting sales, we believe that this sales momentum will continue throughout 2008 and position us well for 2009. In addition, this sales momentum is widespread, with each of our five regions producing positive comparable store sales ranging from an increase of 2.8% in the Southeast region to 6.4% in our Midwest region. The primary sales strategies that we believe are positively impacting our performance include the continued execution of a strong capital plan; a refocused strategy of increasing birthday sales; the execution of a comprehensive strategy to increase school fundraising sales; the implementation of a suggestive sales program; and finally, the enhancement of a marketing plan, including moms targeted television advertising and online media. The first initiative to help drive comparable store sales is the continued execution of our capital plan. We continue to believe that our physical assets, including entertainment attractions, are in the best condition in the history of our company, and our capital plan will ensure…

All right, thanks, Mike. In our last conference call, our outlook for fiscal year 2008 was that diluted EPS would be in a range of $2.33 to $2.40. Based on everything discussed today, we are increasing this guidance $0.24 to $0.25. We are now estimating fiscal year '08 diluted EPS to be in a range of $2.57 to $2.65, reflecting a 32% to 36% growth rate from the prior year, after excluding asset impairment charges from the 2007 fiscal year. In addition, our estimates for Q3 '08 diluted EPS, is in a range of $0.56 to $0.60, and Q4 '08 diluted EPS is in a range of $0.20 to $0.22. Incorporated into this guidance are the following items, comparable store sales growth assumption of approximately 2% to 3% for the second half of fiscal year 2008. This guidance is below our current trend, as comparable store sales are up 4.5% for the first half of '08. While we are encouraged by the results for the first half of the year, we recognize the challenges presented in today's economic environment. Given these challenges, we remain cautious in our near term outlook for sales growth. We hope our assumptions prove conservative, given the strong financial results to date. We're assuming the average price per pound of block cheese will be in a range of $2 to $2.10 for the last six months of '08. In addition, we have locked in dough costs for the remainder of the year at a price higher than prior year levels. As a result of this outlook for higher commodity prices, we would typically expect cost of sales to increase approximately 40 basis points. However, the enhanced cheese blend and smaller pizzas are expected to benefit cost of sales approximately 50 basis points for a net reduction in cost of sales of approximately 10 basis points for the last six months of the year. Labor expense as a percent of company store sales is expected to increase 50 to 70 basis points in the last half of 2008, driven primarily by minimum wage increases and favorable adjustment to health insurance reserves occurring in the second half of the prior year. We are targeting five to six new company units and four to five new franchise stores in '08. We are estimating total capital expenditures to be in the range of $80 million to $85 million and we are assuming our effective tax rate will be between 38% to 38.5% for the remainder of the year. With that, I will now turn the call over to Dick for his concluding comments.

Thanks, Chris. We are obviously pleased with the strong comparable store sales performance of 5.7% in the second quarter over the same period in the prior year. We believe this momentum speaks directly to the health and vitality of our brand in the marketplace today and is further evidenced by the fact that each of our five regions posted positive same-store sales for the quarter. We are also encouraged by the belief that each of our strategic initiatives are working and adding to our comparable store sales performance. As Mike shared with you, these sales strategies include a capital plan impacting approximately 160 core locations, an aggressive approach to birthday parties, reinforced with national television support; an enhanced focus on school fundraising and suggestive sales programs, all reinforced by a solid marketing plan incorporating a strong multi-media effort targeted at moms. This strong sales performance resulted in fully diluted earnings per share increasing 85% to from $0.26 in Q2 2007 to $0.48 in Q2 2008. During the first half of the year, the financial strength of the company is evident as the business generated $104 million in operating cash flow, repurchased $161 million of its company stock and achieved its targeted level leverage ratio of debt to adjusted EBITDA of 2 to 1. Our 2008 financial performance of earnings per share growth of 85% for the quarter and 46% for the first half of the year demonstrate the compounding effect of combining significant share repurchases with strong operating performance. Forecasting earnings for the second half of the year is difficult. We are extremely pleased with the underlying sales momentum achieved in the first half of the year, yet we remain cautious given the current economic environment. Management remains committed to the quality and timely execution of our strategies and we look forward to continuing to update you on our progress. At this time, Mike, Chris and I will be glad to answer any questions you may have.

Thank you, sir. (Operator Instructions) Our first question is from the line of Robert Derrington with Morgan Keegan. Please go ahead sir.

Thank you. Dick, Mike, Chris, phenomenal numbers. Congratulations. What I'm curious about, and I'm not sure who to direct this to. When we look at the sales trends, obviously these look like the strongest quarterly results since I think first quarter of 2001. Can you give us some color on why it is that the trend is so strong now? Obviously you laid out a number of things. Dick, it seems as though the business has responded to these sales initiatives unlike anything I've seen in almost a decade.

Bob, I think we would agree with that. What's really encouraging to us is all of the sales initiatives seem to be working and working in concert with one another. The other thing that I think is also at play is, as you will recall, back in the middle of 2006, we changed our strategic direction a little bit when we slowed down our new unit growth to really focus on the core. I think that, since that time, our operating people have really been able to focus on their specific stores and areas of responsibility. We haven't had the movement from store to store that is required when you are growing your store base 30 stores to 35 stores a year. So, I think that our operators have just done a great job. I think people are well entrenched in their locations and focused on their responsibility, and I think it's all just coming together for us. And we see that in the momentum that we have today in our same-store sales performance.

Dick, could you kind of break down the 5.7 for me for a minute? A piece of that is, I think there's a little bit of menu pricing that you took in the first quarter. Plus, you also had platters, plus you also had obviously birthday sales increases. Are any of those especially working beyond the menu pricing?

I think, too, as Mike said in his comments, I think we believe that all of them are working. The menu pricing, on an annualized basis or in the quarter, is running about 1.8%.

Okay.

So the rest of it is either a result of an increase in average check or increased traffic.

Okay. Listen, I will get back in the queue, but again, congrats on terrific numbers.

I have to apologize. I got disconnected at the beginning of the call, and when I got back on, it sounded like you were saying there was something like a 40% cut in pizza costs, but I didn't hear what that was attributed to. Did you explain that any further than that?

This is Chris. I will start off, and I will turn it over to Mike. I was explaining the fluctuation in our cost of sales year-over-year. Basically what I cited is that cost of sales benefited 40 basis points from a reduction in pizza costs related to our enhanced cheese blend, as well as a half-inch reduction in the size of the company's medium and large pizzas.

Okay, that's what I missed, was the half-inch reduction. Okay. Then moving onto the remodels and game enhancements and all of that, what did you say your CapEx number for that was this year, for the 160 stores?

$52 million.

52 million?

Yes.

And beyond that, trying to breakdown same-store sales, is there a number that you can quantify that came from these remodels, game enhancement expansions versus just the more refined marketing program and suggestive selling program?

Yes, let me take a stab at that and let me just step back for a moment and go through and dissect our comp store sales performance from our perspective. As we cited, in the second quarter, total comp store sales were up 5.7. If we first start with the breakdown between check and traffic and as we've mentioned several times in the past, it can be difficult for us to know with certainty what that breakdown is. It's not as easy for us as it maybe for a casual diner that actually has a dining room and actually counts seat counts and etcetera. But our best estimate is that our average guest check increased 3% in the second quarter and then traffic increased 2.7%. So let's dig into the price increase for a moment for the average guest check increase. We mentioned that our menu price increases were up 1.8%, and we do believe that we've been able to pass-through most if not all of that menu price increase. There are two other items impacting our check in the second quarter, and both of them are directly related to the initiatives that we've implemented this year. First, birthday parties. On birthday parties, we've changed our package around. We used to include a birthday cake in our birthday package. We pulled that cake out, replaced the cake with other items that customers will value perhaps more than the cake. And then, we've trained our operating personnel to up-sell our guests on the cake. And that's just been a big success for us, and it is driving check. Secondly, as Mike mentioned when he was outlining the suggestive sales program, we've introduced food platters across our system, and then we've trained our employees to promote food platters specifically for birthday parties, because we think that product will work really well on birthday parties. That is also driving check. So if we just look at birthday transactions, we are seeing a significant increase in our average guest check. And that's contributing to 0.8% of that 3% that I mentioned earlier, so we have menu prices up 1.8%, birthday transactions are contributing 0.8%, and then just food platters sales for other transactions, transactions other than a birthday party, are growing our check approximately 0.5% at the company level. So those are the three components of check. Then past that, it's just traffic. The traffic growth of 2.7%, we believe that's just a combination of not only capital initiatives but our marketing efforts and all of our other initiatives that we've implemented.

Okay, well, thank you very much.

Our next question is from the line of Robert Derrington with Morgan Keegan. Please go ahead.

Back again. Hey Chris, when you ran through the discussion on labor cost earlier, I missed, if you could kind of rehash that. Originally, I think labor costs were expected to be up, was it 70 basis points to 80 basis points?

That's correct.

I mean, is that the guidance still?

No, the guidance -- for the first six months, we've held the line on labor.

Right.

But the prior year. Then from this point forward for the second half of the year, we are expecting labor expenses to exceed prior year by 50 to 70 basis points for the last half. But you are absolutely right, Bob. Early on in the year, we were expecting more labor pressure this year than what we are actually seeing.

Is it principally reflecting the leverage based on the better-than-expected sales?

That's a big part of it; that's a big part of it, but I also will tell you that labor performance at the store level has been exceptional this year.

Interesting. Well, that's great. Obviously, you've got your managers focused on that line. Anything other within the other expense line? The fact that it was down about 150 basis points. Was there a gain somewhere in there, Chris?

There was; there was a gain of approximately $800,000.

Can you give me a little color on that?

Sure. Back in 2007, we closed our TJ Hartford's store and we took a charge when we closed that store. Fortunately, we actually owned the dirt, so we were able to sell the property for a gain here in the second quarter.

Okay, so that credit came through that other operating expense line?

That's correct.

Okay, I got you. Okay, very good. Thank you.

Our next question is from the line of Barry Stouffer with BB&T Capital Markets. Please go ahead. Barry Stouffer - BB&T Capital Markets: Good afternoon, gentlemen. What's the current average interest rate on your borrowings?

It's slightly below 4%, 3.95%. The way that breaks down -- our incremental borrowing rate right now is 3.6%, and then you might have noticed, during the second quarter, we implemented or we executed a $150 million, three-year interest rate swap. We effectively have locked in rates over that three year time period at a 4.6% rate. Barry Stouffer - BB&T Capital Markets: Okay. Can you tell us, what percent of sales were birthday parties in the second quarter?

It's roughly 12%. Barry Stouffer - BB&T Capital Markets: Okay. And then any comment on why sales trends would be slower so far in the third quarter, anything unusual with respect to weather versus the prior year, or kids movies?

No. You know, it's such a short period of time, if you go back to the last earnings release, the first three weeks of the second quarter were actually slightly negative because of spring breaks. When you look at such a short period of time, there are a lot of things that can impact that, such as the Fourth of July falling on a Friday this year that we know it impacted negatively Friday and Saturday of this year. Last year, it fell on a Wednesday, which is not as heavy a day. But when you look at a three-week period in our business, it can move. I would say that, from my perspective, the best indication of our performance year-to-date is year-to-date through the first six months. Barry Stouffer - BB&T Capital Markets: Okay. And then can you share what the rationale was for reducing the pizza size for the medium pizza?

Yes. First of all, we are very proud of our pizza product. We use the highest ingredients; we feel great about our product. About a year or so ago, we started testing that in Canada, had unbelievable success in Canada. We made a slight modification to our large and medium pizza; we reduced the large from 15 inches to 14.5, and our medium from 13 to 12.5, and we still used actually the same serving tray because that half an inch is so miniscule and with all of the cost pressures, we made that change and we feel that we are right in line with the marketplace and feel great about our pizza products. Barry Stouffer - BB&T Capital Markets: Okay, thank you. That's all I had.

Our next question is from the line of Greg Ruedy with Stephens Inc.

Good afternoon. If my math is right, I have the repurchases in the second quarter at about $36.50 per share. You have room left on your revolver and you've hit your 2-to-1 debt to adjusted EBITDA target. So, how should we think about your appetite for repurchases going forward, and do you revisit sort of the way the capital structure is?

Greg, this is Chris. The first thing I will tell you is, as you know, we don't comment on when we are going to be in the market and when we are not, what we are thinking about doing with respect to buying back stock. I will also tell you that we are very committed to completing the remaining balance of our share repurchase authorization. When we make a decision to be in the market, we do so based on where the stock price is, relative to our valuation, as well as many other factors. So, we just don't comment when we are going -- what we are planning on doing.

Okay. And then with you hitting that 2-to-1 target, any thoughts to take up the amount of leverage?

The 2-to-1 target is, our perspective is, that's more of a longer-term targeted leverage ratio. Long run, we are going to manage the business to debt to EBITDA of around 2-to-1.There may be times where we are slightly above 2-to-1; there may be times where we are slightly below. It all depends on the particular circumstances in front of us. But I think we will continue to repurchase our shares on an opportunistic basis, but I would not look for us to adjust our long-term targeted leverage ratio.

Okay. On the couponing, can you quantify the sales mix from coupon redemptions in the quarter?

What we typically quantify there is the year-over-year increase. And starting last year, we did see a fairly significant increase in our sales mix from coupons. In fact, I believe, in the first quarter, we cited that there was a 5% increase. In the second quarter that started to taper down; the increase was only 3% year-over-year. And we are expecting for the last six months of the year, to be very little difference this year compared to the prior year. And that's simply due to a year ago, the lack in the anniversary of when we started distributing electronic coupons in a fairly meaningful way.

Okay, that's helpful. Thanks so much.

Sure.

Our next question is from the line of Michael Gallo with CL King and Associates. Please go ahead.

Hi, good afternoon and congratulations on another terrific quarter. A question I guess for Mike, Mike I was wondering if you are seeing any quantifiable trade-down benefit, perhaps more families staying locally and doing things with the kids and curtailing longer vacations. Anything anecdotally there that you think you are picking up on the trade-down set?

We've talked about that as a management team, and we may be benefiting from that. What I would tell you, though, is when we look at each of our strategies; we see meaningful sales increases from each of the strategies. So, if I look at year-to-date comparable store sales, the primary driver of that, from my perspective, is the execution of our strategies. Then when you take all of the other factors, gas prices, people maybe staying around. It's my opinion that, if the economy was better, our actual performance would be better. So, it's tough to dig out one specific item, but if I look at the sales the first half of the year, it's primarily driven by our strategies.

Okay, great. And then just a second question, I want to just dig in again on the remodels. I know for a few quarters, the comp trends on the remodeled units had kind of come back together with some of the non-remodeled units. I was wondering, with such a strong comp this quarter, whether you started to see those remodeled units or that gap start to widen out again.

If you look at expansions, major remodels and game enhancements, we've had strength the entire year. I think that those are attributable to the product in the marketplace. And then we've got great marketing plan advertising to moms on the television and online media. There's no doubt that our capital is helping drive comparable store sales, but the suggestive sales and the birthdays, the media plan is not only driving the capital side of our business, but literally all of the stores in our system.

Okay, great. That's helpful. And then just a final question, you mentioned, I think in your prepared remarks, that your marketing spend was up 16% in the first half of the year. I think you previously were targeting a 10% increase on a full year. Is that still what you are targeting? That would suggest some flattening out in terms of the year-over-year increase in marketing spend in the second half. Thank you.

Yes, we continue to look at marketing to drive sales. We've got a good marketing plan in the second half of the year. Our point levels are up about 5%. We continue to advertise, throughout the second half of the year, birthday parties which we know that marketing has driven birthday parties here in the second quarter.

Okay, thanks a lot and congratulations again on a terrific quarter.

You are welcome.

Our next question is from the line of [Paul Carpenter with Artis Capital]. Please go ahead

Thank you. I have a couple of questions. I have what I'll call an income statement question and then a question about the balance sheet. The income statement question, I was wondering if there are any other items like that $800,000 gain and other operating expenses. Because the results I get and you seem to be leading a pretty charmed life in terms of other folks having to face an economic slowdown and falling discretionary consumer spending, higher utility costs, etcetera. That just doesn't seem to be flowing through your income statement at all. You are getting better sales on, frankly, what you expect to be reduced CapEx. This year, you are getting growth for free, somewhat, so I was wondering if you could walk me through if there's anything else in there. Are you facing higher utility costs? And how long do you think that can continue?

Well, the short answer is no, there are no other unusual items in other operating expenses. I think what you are seeing in the second quarter is what's highlighting. Our comp store sales performance is highlighting the operating leverage in the business and where we tend to get leverage when sales are strong, is in the other operating expense line and that's primarily because the costs in that line are predominantly fixed costs at the store level. So the items, it's simply leverage on those high sales dollars and then it's a gain and then there is a 20 basis point pick-up in asset write-offs.

Okay. The other reason I asked the question was really based on something you said earlier in the call. You said, you would make your decisions to be in the market purchasing stock based on where the stock price is relative to your valuation, which I assume means what you think is good value repurchasing the stock. Granted, you were under-levered before and the business needs to be levered to some degree to have an efficient capital structure. The question I have for you is, by levering up to buy back stock in the last couple of years, it looks like the management team really sold out of a very large portion of their option holdings, something like I think 60% or so, or maybe more than that. I think you changed the disclosure from year-to-year, so we couldn't see this year how much you had relative to last year, but if I recall, you had something like 5 million or 6 million option shares and then last year management sold on awful lot, getting it down to something in the 2 million. So, how do you reconcile that for a shareholder? How do you reconcile the fact that you saw it prudent to lever up and increase, somewhat the risk of the business but it's really the shareholders who are left with the debt because management has cashed out of a large portion of their stock?

Yeah, those numbers that you are stating are not correct. First of all, if you look at management, we have options that have a five year life and the executives, the vast majority of any options were options that were expiring at the end of this year. So we held those options for about 4.5 years. And then the other thing about, if you look at not only the second quarter but the first half of this year, we produced an awful lot of free cash flow and we buy back our shares to drive long term shareholder value. So, I'm not sure where you're getting your numbers, but if you look to the filings, your 60% is nowhere near accurate. The vast majority of those options were held for over four years, that we're expiring this year.

I've got the filings in front of me, and I would appreciate just a little more clarity. I'm looking at 2004, '05, '06, 5.6 million, 5.1 million, 5.4 million and then at the end of the year last year, you're down to 2.8 million, which includes [period] outstanding, not just exercisable. So are you only awarded options once every five years? Is that what you are saying? They are not awarded on an ongoing basis?

Yes, a couple things is both Dick and myself purchased a number of options over the last couple of years and I think your numbers are impacted, I would have to look at specifically what you have in front of you but over.

It's just the 10-K for both, for last year and this year.

We've been awarded restricted shares, not options. So, what you're seeing is less dilution from options, because those options are expiring and now we've been issuing restricted shares over the last, is it three years, Chris?

Right, starting in 2006. One comment I will make, just to address a comment you made earlier with respect to leveraging risk in the business, we are very comfortable with our leverage ratio of 2 to1. We don't believe the added leverage as being unnecessary risk, or introducing significant financial risk to the organization and we base that belief on long standing EBITDA margins. Over the last five years, our adjusted EBITDA margins have consistently been in the 25% range. In fact, over the last four quarters, our EBITDA exceeds $200 million. So we feel very comfortable with the amount of debt that we have and we think that, for the reasons you cited earlier, it's a very efficient capital structure, given the strategies that we have laid out over the near term.

It's a great point, Chris.

Thank you for answering the questions.

Are there any other questions?

(Operator Instructions) Our next question is from the line of Alex [Ford] with Izara Capital Management. please go ahead.

Hi, it's actually Alex Fodor from Izara Capital Management. How are you?

Good, how about yourself?

Good, thanks. Congratulations on the performance, great comps, 5.7% seems pretty, I guess unique in this environment. I was curious, regarding the birthday parties, you've thrown out a bunch of different numbers. What was it as a percent of sales this quarter? I missed that.

Sales from transactions involving a birthday party represent approximately 12% of total revenues.

Okay, and what was of a year ago?

Well, what we've said is comp store sales performance, comp store birthday sales have increased 8%.

That's the year-to-date, right? I thought it was up 13% for this quarter.

That's exactly correct.

Yes, year-to-date.

Okay. So I guess what I'm trying to ask you is the second quarter of last year as a percentage of your total sales, what were birthday party transactions?

Approximately 11%.

11%? Okay, great. Thanks.

You're welcome.

Our next question is from the line of Brad Ludington with KeyBanc Capital Markets. Please go ahead.

Just, I came back to confirm that I got one thing right. On the same-store sales for the first three weeks of the third quarter, you did say 2.2%, not 3.2%, correct?

That's correct.

Okay, thank you very much.

You're welcome.

(Operator Instructions) I show that there are no further questions at this time. Please continue.

We appreciate your time and support. If you have any additional questions, please feel free to contact Dick, Chris or myself. Thank you. Good-bye.

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.