RCI Hospitality Holdings Inc (RICK) 2008 Q1 法說會逐字稿

Greetings, and welcome to the Rick's Cabaret International First Quarter 2008 Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Allan Priaulx, Investor Relations Officer.

Thank you. You may begin.

Thank you, Joe.

I just want to remind everybody that our Safe Harbor Statement is posted at the beginning of our PowerPoint presentation. It reminds you that you may hear or see forward-looking statements that involve a number of risks and uncertainties. I won't go into the entire statement at -- on this call, but I do urge you to read it.

I'd also like to remind you that our press release is posted on our website, www.ricks.com, as is the PowerPoint presentation itself. And for any of you who are in New York City tonight, please join us after the conference call from 6:00 p.m. to 8:00 p.m. at Rick's Cabaret, 50 West 33 Street, where we're having a due diligence ball, where you get a chance to look at our operation up close and in person.

Now it's my pleasure to present to you our President and CEO, Eric Langan.

Eric?

Thank you, Allan.

Good afternoon, everyone. I'll begin with an overview of today's presentation. We'll be reviewing the first quarter '08 results. We look at the drivers of increase of revenue, the effects of the new clubs on our income, our acquisition update. We'll be reviewing our '08 guidance and will also review our 2009 outlook.

The first quarter of 2008 was a fantastic quarter for us. Our net income, $1.78 million, up 405% over last year, with earnings per share of $0.26 versus $0.07 last year. Our revenue increased to $10.95 million, up 56% over 2007, and operating cash flow was up 217% in the first quarter, to $2.26 million.

The main driving factors behind the revenue increase is, of course, our club operation, which increased the gross income -- gross revenue to $10.78 million. Tootsies was the real star of this quarter, even though it was only included in the December sales, so one month out of the quarter. When we bought Tootsies, their revenues were based on a $1.5 million monthly income -- or monthly revenues. In December we exceeded that, actually breaking $2 million in revenues from Tootsies. This has been a fantastic location for us, and as you can see from our January sales release, the sales at Tootsies continued into January.

New York City continued to have record revenues, breaking a million-dollar mark in December for the first time since opening in September of 2005. We've been very happy with the New York location, and we believe they'll continue to run year-over-year record numbers for the rest of this fiscal year and maybe into next year. We'll get to the end of this year and revisit that.

The Fort Worth location has been very accretive for us. The new VIP Room is now open, and we expect to see increased results from that location as well, going forward.

Same-club same-period revenue of $7.54 million, up 13%, and income before income taxes, exclusive of corporate overhead, $2.16 million, up 84.6% from the $1.7 million the previous year.

Our acquisition update, currently we have three letters of intent signed. We believe that our acquisition financing plans remain on course even with the market turmoil and the current credit crisis in the U.S. We've also moved forward on the Philadelphia acquisition, now buying 100%. We expect to close that transaction in the second quarter, and we have actually begun the buildout for the steak house and the sports bar at that location.

As our acquisition strategy moves forward, we will continue to be very choosy in our locations. We're targeting profitable locations in major metropolitan areas and locations that contribute to our national branding program, to increase exposure to the Rick's Cabaret brand and the Club Onyx brand. As most of you have probably seen in the recent week, we've hired Lonnie Hanover, who is adding to our public relations. We've been mentioned on the Howard Stern Show several times over the last few weeks, and we -- or last week, and we believe we'll continue to see additional exposure from that relationship, and that will help continue to build the Rick's Cabaret brand.

We're looking for clubs with $10 million plus in sales, but will acquire smaller clubs if they're strategic -- if they have strategic value either in our branding process or in the ability to be in markets that have limited competition. We'll continue to use a combination of cash, debt and stock to make these acquisitions.

Moving forward to guidance for 2008, we're comfortable in raising our revenue guidance to $55 million for fiscal year 2008. Our net income of $8.4 million that we believe will contribute $1.10 per share to our earnings per share for fiscal 2008. Our calendar 2008 revenue we believe will be $61 million, with net income of $10.4 million and earnings per share of $1.35. This guidance does not assume any additional acquisitions. Further acquisitions, if closed when anticipated, could add an additional $0.15 to these numbers.

And our outlook for '09 continues to be on a run rate of $100 million going into the beginning of fiscal '09, and earnings per share of $2.00 on an ongoing basis. As we close our acquisitions and continue to expand our acquisition pipeline, we'll give further outlook guidance for 2009.

And this concludes the formal part. I'd like to once again invite everyone to come down tonight to Rick's Cabaret in New York City, at 50 West 33.

And at this time we'll take any questions that people may have.

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question is from Eric Wold, with Merriman Curhan Ford. Please state your question.

Hey, good afternoon, guys.

Good afternoon. How are you?

Good. A couple questions, one on the Miami club, Tootsies, getting to $2 million in December and January, what would you attribute the main causes to that and how sustainable is it going to -- do you think there's going to be seasonality there or is this kind of going to go up from here throughout the year, or is this kind of a good level to think about as an annual number?

Well, I mean, it's too early to tell, to be honest with you. We do believe that we'll stay at this level. We're told by the locals that the actual season begins now in Miami, about mid-January, and runs through mid-June, and that December is actually not a really good month in Miami because of Christmas and the holidays and a lot of the northern travelers don't actually come down and settle down until mid-January. We have seen very steady numbers with not a lot of increase.

Obviously, sporting events and fights have affected the numbers on a week-to-week basis. As long as there continues to be some good fights out there, whether it's Ultimate Fighting Challenge or boxing and different sporting events -- the Super Bowl was fantastic for the club. So any of those types events I think we'll continue. I mean, if we have a month where there's absolutely no events we may have a little effect, but it seems to be very steady and still growing.

And what would you expect, kind of a -- if you look at -- when you acquired the club it was doing about $18 million, and now it's on a run rate of doing about, say, $24 million plus -- what would you kind of give the flow through, kind of the contribution margin, that incremental revenue has done to your bottom line?

Probably after taxes and cost of goods sold up to 70%. It's really been an unbelievable location for us. We were able to go in, to put our VIP systems in. The Miami Herald did a real nice article saying that Rick's was coming to town. A lot of people have seen that article. Word spread very rapidly that Rick's was coming and taking over Tootsies, that Tootsies was going to be changed to a Rick's Cabaret. We've actually kept the Tootsies name as a tradition. It's been in South Florida there for over 17 years. And so everyone knows it's owned by Rick's, which has been fantastic, because it's brought a lot of quality girls in. It's brought a lot of quality customers in that are used to the Rick's Cabaret way of doing things, the customer service, how the entertainers are treated. And I think we've seen a real nice increase in the revenues from that.

Okay. And then on the -- I know you probably don't give a lot of information on the three LOIs that are out there, but maybe either beyond or including that, however you want to phrase it, are these acquisitions, or the acquisitions you look to do this year, more likely to be brand new markets you were not in before or not in right now, or would some of them be fill-in locations?

A little bit of combination. We are looking in new markets. We're definitely looking to expand the Rick's brand. That's all part of the strategy with hiring Lonnie is to get ourselves more national exposure through the Stern Show and other media -- and other media that Lonnie's bringing -- introducing us to. So it's a little -- to answer your question honestly, it's a little bit of both. We're looking in some of the markets that we're in as well as new markets.

Okay, and then, lastly, before I hop in the queue, lastly on an accounting question, or a number question, the $7.7 million in diluted share count for the quarter, is there anything that's not in that number, or is that a good number for Q2, assuming you don't issue any more shares for acquisitions?

I think that's a good number. I don't think there's anything else out at this point, until we do another acquisition.

Okay. Perfect. Thanks, guys.

Your next question is from David [Foyer], with Montgomery Street Research. Please go ahead with your question.

Hi, guys. Great quarter. Really good quarter. I guess first, it seems like a really -- still [much] a buyer's market for you guys, for acquisitions. I guess on that, are you seeing a lot of (inaudible) queries from potential sellers in the market? And then, two, how long do you think this is going to last, this current environment right now for the acquisitions?

Is your question on the calls? Yes, we're getting tons of calls from owners that are looking to sell their clubs. Right now we're just really sorting through and trying to cherry pick the top locations. I think that the environment's going to stay for a while, until -- as the credit markets are tightening -- whether they continue or not remains to be seen -- but as they continue to tighten, there's less and less people out there that are able to come up with large sums of cash to buy these clubs. So I think it puts -- it keeps it a buyer's market. There's not a lot of people out there trying to buy especially the high-end clubs right now that can come up with the $22 million, $25 million, or even with using stock, $8 million to $10 million, to buy these locations.

Okay, and then, I guess, following up that answer, then, when you look at kind of that choosy bucket or that cherry picking segment of the clubs themselves, how big is that number? I mean, say there's 2,000 clubs in the U.S., of that 2,000, what percentage would kind of fall in that kind of bucket you're looking at, then?

There's estimated there's 3,500 to 3,800 clubs in the U.S. right now. We think that the top 20% are acquisition candidates. There's probably 50 locations out there right now that are -- that we're looking at, either that we're talking to the owner, that we want to buy or they want to sell.

Okay, great. And then I guess one last question, more on the international side. (Inaudible) towards international markets versus U.S. right now, or maybe looking forward over the next year or two.

The next year or two we're staying strictly in the U.S. with company-owned stores. We have a licensing agreement in Central and South America. We do expect the Buenos Aires location to open sometime in March. They have -- their management team is actually coming into the -- coming into the States next week to visit a few of our locations, spend some time with our management team and learn some of our methods of operation and how we do it. So I think we're getting much closer to getting that location open.

Great. Well, again, thanks for your answers, and it was a great quarter.

Thank you.

(OPERATOR INSTRUCTIONS)

The next question is from Jamie Clement, with Sidoti. Please state your question.

Good afternoon, Eric.

Good afternoon. How are you?

Good, thanks. With respect to your guidance for '08 and 2009, what kind of tax rate are you assuming?

Fully taxed.

Fully taxed. So --

I think 35% is the actual number that we --

Okay. So you'd expect that as this year progresses your tax rate would come up to that level.

Yes.

Okay. Okay. And with respect to guidance for this year, are you assuming, just for the purposes of your guidance, are you assuming that the Philly club hits the revenue stream kind of the first day of the third quarter? Is that how we should think about it?

Actually, we're hoping to open on April 1.

Okay. Okay.

Oh, yes, first day of the third quarter, yes.

Okay. Very good. And just with respect to the things that you mentioned in your prepared remarks to promote the brand nationally, and I know you mentioned the Howard Stern Show and that sort of thing, can you give us a sense of some other things you might be considering? Obviously there's -- you're a well-known company, becoming more well known by the day, so can you give us a sense of what your branding and marketing and that kind of stuff might be looking like over the next couple of years?

Well, a lot of it is through -- you know, obviously, through press, which we can never guarantee that we can get on a national level. But we are seeing the stuff like we did on Fox, the stuff we're doing with CNBC and those types of stories. We had an article on TheStreet.com. Just really a lot of things to continue putting our name out in front of more and more people and introducing ourselves. Our website, we're collecting a lot of names, a lot of contacts through our website as we move into new markets. And as we move into the new markets, we put new ads out that -- in those markets that help to continue --

Okay. Eric, thank you very much for your time.

Thank you.

The next question is from Chuck [Lipsing], with [CSL] Associates. Please state your question.

Yes, hi, Eric. Recently PTT bought a club for it says about $22 million for about four times EBITDA. I know you paid far less than that for Tootsies. Is that sort of -- would you visit the four times EBITDA for an acquisition, or is that a little high for you?

Yes, no, we definitely would. I mean, we've looked as high -- we paid as high as six for the Fort Worth transaction. It really depends on the market, the amount of competition and the size -- and the size of the acquisition.

So four times -- two and a half was -- Tootsies was the one-off, and (inaudible) somewhat higher.

I mean, I think -- it was the first time someone had bought in that price range, so I think we got the sweetheart deal. I think that woke up a lot of these other -- a lot of these other owners, realizing that, "Hey, wow, somebody out there can really write these $20-plus million checks." And we've gotten some phone calls. I'm sure that VCG got some phone calls. And they were able to lock that one up. I don't know what the -- I think they've put -- got a letter of intent on it. They -- it will remain to see if they get closed and we get some of the numbers how it all plays out.

Okay.

But I'm very excited about it. I mean, I think that it just shows and confirms what we've both been saying, is that there are clubs out there, there are owners out there, that are interested in monetizing their assets and that we are a viable exit strategy for them.

Now, some of these clubs, like the one that PTT just bought, or has its letter of intent down on, I guess they own more than just that club. Are you finding that some of the clubs that you have letters of intent out for, the owners might have additional clubs that might be for sale to you? Or are they usually just one club that they own?

We've kind of kept what we're buying kind of quiet. But, I mean, I think a little bit of both. I mean, we're seeing -- we're seeing everything. You're seeing the chain guys look at you. We're seeing the individual club owners. I mean, between the two of us, we're really the only viable exit strategy they have, whether they're a single club or a chain, unless they want to owner finance and carry a bunch of paper for an individual who's going to come in and run the business and pay them with their own money.

Well, maybe we'll see the two of you get together and then there'll only be one exit strategy for all these private clubs.

Well, that, right now, we like the peer comparison at the moment.

Okay. Well, keep doing well.

All right, thanks.

(OPERATOR INSTRUCTIONS)

The next question is from Eric Wold, with Merriman Curhan Ford. Please state your question.

Hey, guys, a couple of follow-ups. So if I think about -- I'm just trying to think about this right, the numbers for Q1. I know you're not giving guidance for Q2, but let me know if my thinking is incorrect. If you had Miami in -- Tootsies in Q1 for only one month and it did I think $2 million in a month, or $1.5 million in a month -- was it 1.5 or 2?

$2 million in December.

$2 million in a month. So you've got it in March for all three months. You should have an additional $4 million tacked on to kind of what you did in Q1, assuming nothing else really changes with the other clubs.

Right, but now keep in mind that the first quarter is always a little bit percentage wise better than the second quarter. So you probably won't get -- we probably won't get the full benefit of the $4 million --

Okay.

-- based on -- based on previous quarters, like January, February March versus last January, February, March, when you compare those quarters to the October, November, December quarter.

Fair enough. And in the January press release you talked about the Minneapolis club having some impact from the weather. You talked about (inaudible). So kind of revenue-wise, how much of an impact do you think that was in a month?

You know, I had it the other day and I just don't remember it off the top of my head, but it was considerable, because I think our same-store sales dropped down a lot from 8.8% that they would've been without that if they had just done their normal numbers. I want to say it was in the tune of about $80,000.

Okay. And then lastly, to make sure I heard it correctly, the three LOIs you have out there, if those do close, did you say it was $0.15 incremental or $0.50?

One-five. $0.15.

So that would be incremental to the fiscal '08 numbers. What would it be kind of on an annual basis?

A little more, simply because you're going to have another quarter in there. But we just -- we didn't really dig that far into it, because there's still a lot of timing, a lot of moving parts. As we close the transaction and we know exactly what they are then we can revise the guidance farther than that. We just wanted to give everyone an idea of where we are for the fiscal year 2008 provided we close the transactions as we anticipate.

Now, what's the likelihood of those transactions closing in this quarter versus next quarter versus Q3?

I think that probably we would be looking at maybe a transaction each quarter, at this point.

Okay. Thanks, guys.

Thank you.

Your next question is from Scott Coleman, with Credence Capital Management. Please state your question.

Hi, guys. I was hoping you could maybe walk us through in a little more detail what's been driving the, as you call it, same-club, same-period revenue comps. They're very impressive, and I was just wondering if there's particular clubs that are really driving that, or if it's the -- really what you're doing rolling out across all the clubs.

Well, it's a little bit of both. We have certain clubs that are a little higher in some months and a little lower in other months. A lot of it is our New York location. And our -- and the Club Onyx location in South Houston has been doing very well for us. And I think as we move forward we're going to start seeing the Austin and San Antonio locations contribute. So it really has a lot to do with our past acquisition strategy, in that in 2006 we bought four clubs that were all startup or fix-'em-up clubs. Well, as those clubs mature to 18-month to 36-month maturity levels, they start seeing steady growth from the 18-month to the 36-month. And so we have clubs that are entering those cycles that are contributing. The New York club has been a phenomenal -- because it's well over two years and we're still seeing very steady growth, as much as 40% year-over-year growth at that location still.

That's great. And what do you see driving it? Is it more traffic or people spending more at the bar, people getting more dances, charging more at the door? What's driving that?

A lot of it's just more people. As we're becoming more well known, especially in the New York market, we're seeing more and more people come through the door. Certain nights we're seeing them spend a lot more money, and other nights we're seeing just a lot more people in the building.

Okay, great. Thanks.

Your next question is from Peter Siris, with Guerrilla Capital Management. Please state your question.

Hi, Eric. How are you doing?

Good. How are you?

Good. If I -- just to take a big picture question, if you look at how many clubs are there at the level that you could see acquiring? I don't mean you. I don't mean Rick's by itself. But how many potential acquisitions could there be in the country between, say, what you and Troy and whoever else might come along could make, if you were like talking about A and B clubs? How many of them are out there now?

I think a lot of it is like -- it's the 20/80 rule. 20% of the clubs are doing 80% of the revenue.

Right.

And I think those 20% are the ones we're going after. So if there's 3,800 clubs, there's 760 potential clubs that are in that top 20%.

Okay.

Reality, some of those either wouldn't be for sale, we wouldn't -- maybe not in the best strategic location, whatnot. I would say the number is somewhere in the 500 range. That's what we've thought for about two years now. We're still -- we're pretty much still sticking with that number, around 500 potential acquisitions.

So does that say at some point, I'm not saying -- obviously not this year -- but does that say at some point years, several years down the road, that someone in the industry, if I combine you and Troy and whoever else might show up to play in this world, that you would find two or three chains that between them that would have 100 clubs each? Is that a long-term goal or something?

I mean, our goal has always been to be between 30 and 50 locations in the next three to five years.

Okay.

Starting --

But you see the --

-- starting in 2007. So I think that -- I think that's very realistic. They're not making a whole bunch of new locations with the zoning requirements and the different laws out there. So I do believe that it is very feasible to see five years, 10 years down the road, a company that has 100 locations, absolutely, doing -- if you figure the top 20% run 80% of the revenue, you're talking about $1.6 billion in revenue that those -- that that 20% of clubs run.

Right.

So, I mean, I think you could see -- easily see clubs or companies doing $200 million, $300 million in revenues.

Okay, now, if you saw a company doing -- obviously these are not projections -- but if you started to have, whatever, 30 to 50 clubs, what branding opportunities does that give you beyond the idea of economies of scale, having -- well, you've got a couple of different brand names that you use.

Let's look at the most famous adult brand name out there, Playboy. They started with clubs across the company, then put their magazine out. I mean, I think it's unlimited. Once you get that type of brand name recognition, at that point I think we would bring in experts to tell us how do we leverage this brand? How do we create and make the most money we can from leveraging the brand at that point?

And when do you start to -- when are -- I mean, obviously you're running around making deals and stuff, but when do you personally start thinking about leveraging the brand?

Well, right now we're making so much money buying and adding additional clubs and building the brand that I just don't think we're to that level yet. Probably in the next three to five years, as we get to that size that we would need to have the national brand. You know, we need to be in about at least 30 major markets, so that you're reaching a huge amount of people at one time every time we would launch something out through the clubs.

And the last question I want to ask you is, is anything happening with Las Vegas?

You know, we've always looked and been interested in that market. We've -- there's times when we think it's not a good market, there's times we think it is a good market. We're just weighing all the options that are available out there to us. We'd really like to be in a casino and operate out of a casino. But we're not ruling out standalone properties out there, either.

But do you believe that it's a matter of when, not if?

Absolutely, yes. Definitely a matter of when, not if.

The casinos?

It's definitely a market. In order to have a national brand, we're going to have to be in that market. Everybody travels at one point or another to Las Vegas, especially our customer base.

Thanks a lot.

Thank you.

At this time I'm showing no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Just want to remind you that our transcript of this call will be posted on Seeking Alpha, most likely tomorrow, so if you want to review anything that we've gone over here you can go to Seeking Alpha to get it. It'll also -- there'll be a link on our website, as well. And if you have any further questions, please send your emails to IR@Ricks.com. We'll try to get right back to you.

All right. Thank you very much for [your call], and I look forward to seeing some of you tonight down at the club.

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