RCI Hospitality Holdings Inc (RICK) 2007 Q4 法說會逐字稿

Greetings and welcome to the Rick's Cabaret International fiscal year 2007 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Allan Priaulx, Investor Relations Counsel for Rick's Cabaret International.

Thank you, Rob. Welcome, ladies and gentlemen, to the fiscal year 2007 conference call and earnings report for Rick's Cabaret. Before we begin, I would like to remind you of our Safe Harbor statement. In this conference call, you may here or see forward-looking statements that involve a number of risks and uncertainties that could cause the Company's actual results to differ materially from those indicated in the call. The details of our Safe Harbor statement are fully explained on slide 2 of our PowerPoint presentation and they are also included in all of our press releases.

I would like to remind everyone also that if you wish to participate in this call by asking questions of Eric Langan or Phil Marshall, please call 877-407-8031. You will not be able to post questions from the webcast itself.

On the call today are Eric Langan, our President and CEO, and Phillip Marshall, our CFO. He will be available -- Phil will be available to answer questions as necessary from you. It is now my pleasure to introduce you to Eric Langan, who will present our fiscal year 2007 results.

Thank you, Allan. We will begin our presentation today with a review of our fourth-quarter '07 results, followed with our fiscal year '07 results. We will discuss the drivers of our increases, the effects of new clubs on our income, update our acquisition strategy, and review our guidance for 2008.

Fourth quarter 2007 was a fantastic quarter for us. Fourth-quarter revenue increased $8.97 million, up 41.5% over 2006. Fourth-quarter net income was $1.180 million versus a loss of $114,000 in 2006. Our fourth-quarter basic earnings per share up $0.20 versus a $0.03 loss last year.

For the fiscal year 2007, revenue increased to $32 million, up 30.7% over 2006 net income of $3 million versus net income of $1.75 million in 2006 or basic earnings per share of $0.54 versus $0.38 in 2006.

We completed two acquisitions in calendar 2007 and adjusted our acquisition strategy to include purchasing mature clubs that were already up and operating and become immediately accretive to our earnings. We also became a taxpayer in 2007.

The driving factors behind our 2007 results were our New York City club, which had record revenue month after month and we're still continuing to see increases in our sales at that location. Also, Fort Worth exceeded our expectations and we're actually seeing more revenue and more earnings out of that location than we originally anticipated. We currently have an expansion going on at that location. We'll add about 4500 to 5000 square feet of additional space on the second floor in a VIP capacity, which we believe could add additional $1 million a year in income to that location. Our overall same club, same period sales improved 11.8% and our operating cash flow in 2007 was $4.38 million versus $2.73 million in 2007.

On the acquisition front, we closed Tootsie's Cabaret in Miami Gardens, Florida, and it became accretive on December 1. It's a fantastic location, 47,000 square feet, doing unbelievable revenues. The December revenues are going to exceed the revenues that we based the acquisition on. Fort Worth continues to do very well. We're going to be rebranding that as a Rick's Cabaret on January 1 and doing the grand opening of the second floor around January 15.

What has been amazing for us is the pipeline of future acquisitions. After announcing the Tootsie's transaction as a $25 million transaction with $15 million in cash and our stock performance over the past few months, owners are calling us every day with offers to sell us their clubs or merge their clubs in and we're seeing a lot of owners that are really looking to do equity transactions with us more than cash transactions. So we are weighing the differences and the costs -- and benefits to our existing shareholders of those acquisitions.

To give you an idea of the impact of the Tootsie's acquisition, we paid $25 million or 2.8 times EBITDA. The transaction closed November 30 and we assumed management on December 1. Revenues from Tootsie's are expected in be approximately $18 million with annual EBITDA of $8.8 million, which puts Tootsie's current margin -- EBITDA margin at 48.9%.

Now, in December, like I said, we're seeing an increase in those revenues over that $1.5 million average and we hope to see that continue to increase as we go. We have made a few changes in the management and some of the things that we do different than they did, and we think we will continue to see increase from those revenues -- or those changes.

Our acquisition strategy going forward is going to be focused on clubs generating $10 million or more in annual revenue. Now that doesn't mean we won't purchase clubs that are smaller like our Fort Worth acquisition if the profitability and the other numbers are right, but our main focus is going to be on acquisitions of $10 million in annual revenue or higher because we believe once those acquisitions are made, there is only a certain number of those available out there and we want to be the one to buy those acquisitions first.

We're also going to be targeting profitable clubs in major metropolitan areas. We continue to target our three to six times earnings depending on potential and zoning and licensing and potential for new competition and we've continued to use our equity, combination of cash and debt. We made a little mistake on this slide here. We say cash and stock on that slide, but we will be using cash and debt in addition to our equity to make these acquisitions.

Our guidance update for 2008 was very tough for us today because we have a very good pipeline of future acquisitions. So what we decided to do today was to give you a snapshot of the Company as of where we are today with no other acquisitions. In our guidance for fiscal 2008, our revenue will be $54 million with net income of $7.7 million or earnings per share of $1.03 for fiscal 2008.

Our calendar year 2008 guidance revenue will be $60 million with $9.8 million in income or earnings of $1.30 per share. Any future acquisitions will impact this guidance. So our plan is to reissue the 2008 guidance in January sometime based on the acquisitions that we believe will close in the calendar year 2008 as we have time to review this after the holidays.

That will conclude the formal portion of our presentation and I will be happy to answer any questions that anyone may have at this time.

(OPERATOR INSTRUCTIONS) Eric Wold, Merriman Curhan.

Just a little follow-up on your commentary on the acquisition plans. You mentioned that you are only looking for clubs kind of doing $10 million or more in annual revenues. In the guidance you gave at the end of October, you gave '08 and '09 guidance and talked about one more acquisition in '08 and two more in '09 in that guidance. Can you give a little more detail on what the assumptions are behind those acquisitions?

Basically, that guidance in October, we had no idea that Tootsie's was going to be adding the type of revenue and increase in earnings that it has. Also, our New York location has continued to increase and is above what we thought it would be in October of 2007 when we put that guidance out. So right now, we feel that, without any acquisitions, we are in the $1.03 range, $7.7 million in net income based on 7.5 million shares outstanding that we have outstanding today.

Going forward, we have several acquisitions. We're looking at $10 million plus acquisitions in revenues. Now, we are also looking at some other smaller acquisitions as well, but we are going to keep our focus. It takes us the same amount of time to go do an acquisition and buy $18 million in revenue like we did in Tootsie's as it does to do an acquisition in Fort Worth where we've bought basically $4 million worth of revenue.

So we're going to try to keep our focus on the larger acquisitions because it takes the same amount of time to do those acquisitions. So we can grow at a much faster pace by focusing on those larger acquisitions. But that doesn't mean that if an acquisition like Fort Worth comes along, that we're going to ignore it. We're going to be looking at those acquisitions too. I believe that we can probably acquire in calendar 2008 four acquisitions fairly easily.

Okay, but just to make sure I understood, the $1.03 you're talking about for fiscal '08 includes no additional acquisitions beyond what you've got?

Exactly.

Does it include Philadelphia or no?

Yes.

Okay, it includes Philadelphia, but nothing beyond that?

Right.

Okay.

Keep in mind, Philadelphia does not really contribute a lot to the bottom line. It would increase our revenue, but -- it would increase the revenue a little bit, but it is not a big bottom-line deal, which is why we've kind of -- right now, we're really trying to talk to the owner to purchase 100% of that allocation, and that is why we've kind of held off on the closing at this point.

Okay. And then on the inquiries coming into -- the deal was done and the Miami Club was acquired, are the large clubs you want to acquire, are these the ones that are coming in with the inquiries or are those ones you really have to reach out to?

We are getting those phone calls now. We were reaching out to them. Now they are calling us.

Okay. Then lastly, this is just a number question for now. Can you give the -- you or Phil give the weighted average diluted share count for the fourth quarter?

What is the weighted at? 6 point --?

In the fourth quarter?

I believe it is 6.245. Can you hear me?

Yes.

The weighted average -- it is on the bottom of the consolidated statement. At the end of the fourth quarter, the weighted average of shares outstanding was 5,700 -- 548,000 (sic).

I apologize. Not for the year, for the fourth quarter only.

Oh, for the fourth quarter? Phil, do you have that?

No, I'm sorry. I don't. Let me see if I can find it.

I know I've seen it somewhere. I'm pretty sure it is 6 --. It's fully diluted at 6.245 million, Eric. I'm fairly certain of that number.

Phil Marshall I think that is about right.

I can verify it with you later if you'd like, but I am fairly certain that is the number.

That works for me. Thanks, Eric. Appreciate it.

I just don't have the page in front of me that I've seen it on, but I'm fairly certain that's the number.

I like the memory. Appreciate it. Thanks.

David Mau, Montgomery Street Research.

Hey, Eric, congratulations on a great year.

Thank you.

You have talked a little bit about the refocused acquisition strategy. Can maybe you give us a little feeling for how many opportunities are out there of that size? I have heard that there 3500 clubs out there, but --

We figure that in the $10 million to $20 million range right now, there's probably somewhere between 75 and 100 locations in the United States that are doing revenues of that magnitude.

Okay. It also seems to me that over the last year, year and a half that the acquisition cycle has very quickly accelerated there. It used to be we waited four or five months before an acquisition. Now you seem to be announcing them much more rapidly than that. Can you comment on what is going on in the world?

Certainly. It used to be -- a year ago, we would buy an acquisition. We'd have to wait six months for the stock to react to it before we could use our equity to make an additional acquisition. Now we're making these acquisitions. We're letting the market know the general scope of it. The market is reacting a little bit. Then as soon as we close the transaction like we did with Tootsie's, the market immediately reacts and gives us the value for that new acquisition.

Well, when that happens, that allows us to immediately go and buy something else. So as long as the market continues to value our acquisitions as we do them and give us a fair value for that work and for those acquisitions in this timely manner, we will continue to purchase new locations in the same manner.

Okay, would you also say that the number of opportunities being put in front of you has accelerated also?

Absolutely. Here is the deal, David. Give you and idea. If you take the average club owners that I'm talking to these days and they realize that their business is worth $10 million, okay? They realize three years from now their business is still going to be worth $10 million. However, if they take equity in Rick's and hold that equity for that same three-year period, then our growth rate could change their value to $20 million or $30 million. So they are seeing it as a way to double or triple their asset value by rolling their assets in and merging in with us.

Excellent.

That is what we're really starting to see the owners talk about now. I'm answering more questions to owners and they've become -- the owners that I'm talking to are becoming much more sophisticated in that they are not looking to cash out. They are looking to gain full value in the public markets of their assets.

Excellent, very good. Well, I appreciate it and congratulations again.

Thank you.

[Chuck Lipton], [CSL].

Hi, there. Nice quarter. You acquired Tootsie's for 2.8 times EBITDA. What kind of price would you have to pay for most clubs? I know that was sort of a special situation.

Normally, we're paying three to five. The smaller deals are doing closer to five and the larger deals are going closer to three. In most people's lives, it would not make sense, except for when you get into an acquisition of $25 million in our industry right now, there's no buyers. So in order for someone to cash out to that magnitude, they do not have as many people talk to. So were able to negotiate a little better deal and keep those multiples down a little bit.

Who else might they be going to? Is there anybody else out there looking at those deals?

I'm sure PTTs -- VCG Holdings is out there looking at similar type acquisitions, but I think other than the two of us, the public companies are the only ones right now that are going to come up with that type of money, so they have to talk to one of the two of us.

Lastly, you are doing some licensing deals in Latin America or South America I should say. Is there anything in your numbers for potential revenues from that source?

No, we didn't put anything in there from that at this point. This -- these -- this guidance is what we will do with what we currently have open and operating.

Would you expect any clubs to open under your name in South America?

They anticipate -- according to them -- of course, it is out of our control. It's just a licensing company, but we are being told that they're going to open in mid-February in Buenos Aires and they have signed a lease on a second location outside of Buenos Aires in a tourist area. I forgot the name of it. I'd have to go look it up, but I'm waiting for them to get the first one open, then I will really get excited about those guys. They have the money. They have the resources. I think they are definitely -- they're moving forward.

I went down about a month and a half ago and looked at this new location that they picked out in Buenos Aires. It is a fantastic location. It's right by the convention center. There's 25 million people in Buenos Aires, so there's plenty of population. We went and checked out some of the what would be considered competition, which really is not really competition for a U.S.-style gentlemen's club, don't really have the food services. They don't have the things that -- the higher-end quality stuff that we have, and their prices are higher than what we charge in New York City. So I believe the pricing pressure is there. Everything is there to make it a very successful operation once they get started.

And you get 10% of those revenues?

10% of gross revenues after value-added tax is deducted. They have a 21% value-added tax. So basically take the gross revenues minus 21%, we get 10% of whatever's -- of the remaining gross.

Keep up the good work.

Thank you.

Peter Siris, Guerrilla Capital.

I am new to your story. Could I get put on your e-mail list so I know about these conference calls?

You're not getting our e-mail?

No, no. I guess sometimes when you're new to a story, they don't -- they don't get you on the e-mail list, but now that I am on the call, maybe one day I'll actually come to one of your clubs. I wanted to ask a couple of questions. First question is -- I want to ask a management question, which is, as you expand the infrastructure of your Company, how are you going to handle that?

Well, right now, we could easily expand three or four more clubs without any problem whatsoever. As we buy these larger clubs, we are actually picking up some pretty strong management. Most of the clubs that are operating have good systems in them already, so there is not a lot of work. We'll integrate Miami. Our POS system was changed over last Sunday night, so basically everything at that location has converted to our system probably by the end of December. Basically in the first 30 days, we've integrated everything on that location. We're ready to move as far as our infrastructure is concerned to the next location without any problem.

The next question I have is you talk about these large sized clubs. I don't mean this facetiously, but are there bigger than large sized clubs? How big does the biggest clubs do? How big are the biggest clubs?

I do not think there is one bigger than 47,000 square feet that I know off offhand any way. I mean Miami's definitely one of the largest clubs in the country

And in volume, would be the biggest size in terms of revenues and things?

The highest grossing club that I know of, that I have actually seen numbers on, was Scores New York City in 1999 did $28 million. I have heard that there are other clubs in Vegas that are in that range, that are doing the $22 million to $28 million in revenue. I think the average is going to be in that $10 million to $12 million or $10 million to $20 range, in between those numbers.

As long as you just mentioned Vegas, people have talked for awhile about one of these clubs going into a casino at some point in time. Is there -- is that a pipe dream? Is that something that could happen in the indefinite future?

We're talking to guys that are familiar with the Vegas market and the casinos and they think it is a definite possibility. The market is warming up to the idea. I think as we continue to grow and become a larger publicly traded company and we continue to increase the general acceptance of our industry, that it is just a matter of time. We have been saying for about two years now that we think that is the future of Las Vegas, that eventually the clubs will be on casino properties or in casinos. We continue to believe that and we will continue to explore those opportunities.

I would think if you could put a property in a casino that that property would probably do more volume than say the number you throughout for the Scores.

Oh, I think if you were in a casino -- if you're in say Caesars Palace or the Wynn or even something like Planet Hollywood, you would be looking at revenues probably in the $40 million to $60 million range easily.

Going back to your comment about when you were talking about the acquisition, would -- I have been a director of a casino company so I know all of the rigamarole you have to go through to get licensed. But would you assume that guys like you and PTT would have an advantage because you are public and that gives you a certain both credibility and visibility?

I believe -- I think so. Our financials are audited, which has to be a plus for them. We are governed and reviewed by the SEC. All of those watch things have to help. Do they give us a direct advantage? I am not sure. I would like to believe they do, but I guess until we can really sit down with the casino executives and really they start exploring this idea first-hand then we will have a much better idea of where we rank versus other operators in the country right now.

Okay, I have one just last comment I want to make, which is I just want to -- I hate guys who do this on calls, but I want to congratulate you because when we first started talking about this industry a reasonable amount -- what seems like a long time, although I guess it wasn't, nobody really was able -- willing to give this industry any respect at all and I think that you have done a superb job and so my compliments to you.

Well, thank you very much. We're certainly trying and we appreciate all your advice throughout the past and we will continue to look for you in the future too. Thank you.

Peter, if you or anybody else on the call would like to get information, you are actually on our list, but for some reason it may not be getting through. Just send an e-mail to IR@Ricks.com and we will make sure that you are on the list.

Thanks, Allan.

(OPERATOR INSTRUCTIONS) Anis Arella, Outpoint Capital.

Hi, Eric. Good job with the quarter and the year. I wanted to know if you guys have room to raise drink prices and improve margins from that end of it and where else you can see margin improvement?

Yes, I think we can. Right now, we're trying to stay very competitive. We had a recent price increase in New York in September. We will probably be looking -- reviewing those prices again in March. We are still a little low in that market I think. Some of our other markets, our more mature markets, I think we're pretty competitively priced. It really just depends on the conditions at the time. We have been pretty happy with most of our operations. We have a few locations we definitely could see some margin improvement on, but overall we have been pretty happy. To answer your question, I think we could easily raise our prices a little bit. We tend to be the leader in most of our markets, and so if we raise our prices, our competitors tend to do the same. I think we definitely have that pricing pressure.

Right, and you haven't seen any pushback in New York at all on higher prices?

No, not at all. The business there is just growing. It is fantastic. We always thought -- typically, most of our markets, it's an 18 month to 24 month breakout period. I think New York, just because people are so inundated with marketing -- I did a little show up there. We visited a bunch of funds and went on a roadshow and I was amazed. We met with 11 funds and only four of them knew that I had a location in New York City. So when four out of 11 know I have a location in New York City and they are interested in my stock, I have to go how many people in New York City still don't realize that our location is there? And we do a lot to market it. 40% year-over-year growth, so it is not like it is not growing. I think there's just tons of room to still grow there.

Right and then do you guys see a strategy of clustering stores to be more effective than penetrating new markets? Will you get a lot of leverage out of clustering on marketing dollars and things like that?

Yes, do a little bit, but the reality is in order to build the Rick's brand, we're going have to be in 30 major markets or 25 major markets, so as much as we look at clustering, we are also looking at expanding the brand into these new markets. I think they could get some advertising benefit and you get the ease and use of changing employees and moving employees from location to location and those types of management benefits, but as far as for the real process of building the brand, we must continue to move into new markets as well.

Right. What do you think are the top two or three cities that you'd look at next?

I think we're going to continue to look in the New York market, definitely continue to expand in Miami. We're probably going to look for new markets. I'm starting to look in Vegas. I'm starting to look in Chicago, other Midwestern cities as well. Outside of Texas, we are pretty focused in Texas right now. We will probably really start working on continuing to expand outside of Texas.

Alright, great. Good job. Keep it up.

The East Coast, that's our -- I think our big focus is the East Coast right now. Anywhere on the East Coast that we can expand into a new market, we are looking.

Great. Thanks, Eric.

(OPERATOR INSTRUCTIONS) William Sebator, Private Investor.

Hello, Eric. I have a couple questions for you. The first is with the recent acquisition of Tootsie's Cabaret, do you plan on staying with that name or do you plan on rebranding it Rick's and what is your -- along that line, is the plan to develop the Rick's brand or more acquisition focus and the brand isn't as important?

I think -- I will start with your first question with Tootsie's. We're going to leave Tootsie's Tootsie's Cabaret. We do not intend putting the Rick's name on the club. In the future, we may do Rick's Cabaret Presents or what we may do is take what is now called the Next Level, which is the second floor of the cabaret, and maybe brand that as a Rick's Cabaret. So we would actually have a Rick's Cabaret section inside of Tootsie's. Tootsie's is just a landmark in Miami. It is very well-known. The name has operated -- they have operated clubs there for 17 years. Even though this new location has only been there for about two years, the existing -- the other location was just right down the street. It was very popular. So we do not really foresee changing the name of Tootsies at this time. That doesn't mean we never will, but this time, we won't.

As far as the branding and acquisitions, I think it is a little combination of both. We want to continue to grow our revenue and earnings and we want to continue to build our brand. However, when we come across one-offs like Tootsie's that we can buy at such a great multiple, it is going to be very difficult to pass those types of deals up just in lieu of building our brand. The earning potential at Tootsie's and the revenues that it is generating are fantastic. So if we come across another city were there is a one-of-a-kind type location, we will continue to -- we will buy that location as well without necessarily having to brand it a Rick's Cabaret.

But our real focus needs to be and we want it to be continued on building the Rick's brand. We want to create that national brand. We want -- when you to a city, your -- the first thing you're going to do is a guy says, oh, what clubs are in this town? They name off two or three clubs and soon as you hear Rick's -- oh, let's go to Rick's, we know that location. That's what we want to create, it's that branding so that you know exactly what to expect when you go to one of our locations and when you go to a city, that is the location you want to go to.

Okay. My other question is what effects, if any, do you see the legal uncertainties in Houston having on the Company?

In Houston? Well, right now, we do not know what is going on in Houston. We're currently preparing the petition to the Supreme Court. Right now, the stay is still in place, so there hasn't really been any changes to status quo. We do not know if changes in status quo will come six months from now, three years from now, or six days from now. We have got a contingency plan that we don't really want to discuss. We have a contingency plan that we believe will minimize any effect whatsoever on our operations. We only have one club that we think could even be negatively affected at all. It does about $60,000 a month in revenue, so it is not a big deal. One of our other locations that we had purchased that is outside the city of Houston would benefit greatly from any type of harm that would happen to the other location. So really it's awash for us and we don't really feel that, at this time, that that is going to have any major impact -- the Houston ordinance is going to have any major impact on the Company at all. It is really becoming less and less a portion of our total revenues any way as we continue to expand outside of Texas and Houston.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Peter Mork, Mork Capital Management.

Just one quick question. You mentioned a market you guys are looking at is Vegas. I know when we've talked in the past, you were pretty negative on it just in terms of competition and just it is hard to make money there, it sounds like. Would you only go in there if you could get in a casino or is it something you need to do to help establish the brand name?

To answer your question, I would like to say that I would only go there if I could get in a casino, however, we are looking at a couple of locations out there that meet our parameters and so I am not going to say no at this time that we wouldn't purchase a location that is not in a casino because we are looking. We're exploring the opportunities. If we can find the right opportunity, I think we would actually operate outside of a casino. But your concerns are -- my past concerns are still my major concerns today in that there are a lot of clubs out there. There is a lot of competition. It has slowed down. Two years ago, there were 10 new clubs supposed to be opening every year. That has slowed down. There's not as many new clubs opening. The shakeouts are starting in that market right now, and that is why we are looking. If we buy a location, it will be profitable already. We're not going to buy a location that is not already making money out there. We're not going to try to buy something we think we can fix up or make better. We want to buy something that is already in one of the top spots and profitable.

Okay, so it is something you guys are looking at, not a definite for '08?

Right, there's nothing definite on it yet, but this is definitely a market we're interested in. It's the next logical step. We've got into Miami. We are in New York. Las Vegas is the next logical major market to break into.

And you guys have just the same kind of parameters, looking for it to be at least mildly accretive?

Exactly.

Okay, thanks a lot.

(OPERATOR INSTRUCTIONS) Gentlemen, there are no further questions in queue at this time. Do you have any further comments?

I'd just like to invite anybody on the call to come down and see any of the clubs anytime and thank you. Will talk to you again in a few months.

Just one final thing. If any of you were having trouble accessing the PowerPoint, there is a link to it on our website, www.ricks.com, and you can also ask me directly at IR@ricks.com and we'll take care of it for you.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.