RCI Hospitality Holdings Inc (RICK) 2009 Q1 法說會逐字稿

Welcome to the conference call and webcast for the first quarter of fiscal 2009 of Rick's Cabaret International. At this time, all participants are in a listen-only mode. A question-and-answer will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded. We will open the call with a brief message from Allan Priaulx, Investor Relations for Rick's Cabaret, who will be followed by Eric Langan, President and CEO of the company. Mr. Langan will take you through the company's PowerPoint presentation available through www.ricks.com or through the Precision IR website at www.investorcalendar.com. It is now my pleasure to introduce your host, Allan Priaulx, Investor Relations for Rick's Cabaret. Thank you. Mr. Priaulx, you may begin.

Thank you, Doug. Good afternoon, I'm Allan Priaulx, Investor Relations for Rick's Cabaret. Welcome to the first quarter '09 conference call and webcast for our company. In a moment I'll turn the call over to Eric Langan, our President and CEO. Before I do, however, I want to draw your attention to our Safe Harbor statement which is available in our PowerPoint presentation posted on our website and through Precision IR. Doug has just given you the URLs for those.

Also, I wanted to let you know that Phil Marshall, our CFO, is on the call today, but he is out of town because of a family emergency, so he will not be participating in our call. Also for those of you who are in New York City, we hope that you will join us tonight at our due diligence ball at Rick's Cabaret New York City, which is at 50 West 33rd Street between 5th Avenue and Broadway. And now I'll turn the call over it Eric Langan. Eric?

Thank you, Allan. Welcome, everyone. I'd like to start with the first quarter 2009 overview. We will be reviewing our first quarter performance. We are going to review what we are doing to improve the performance on a forward-going basis. How we are focused on our operations and our cash generations. How certain of our clubs are in the sweet spot and will have strong financial -- or strong impact on our future impact. And then get to our question-and-answer session.

Give a snapshot of 2009 our total revenues for the first quarter were $17.3 million versus $10.95 million in the first quarter of last year, a 58% increase. However, net income was $790,000 versus $1.78 million or $0.08 per fully diluted share versus $0.24 in the first quarter of last year. Part of that is because our same store sales were essentially flat. However, our cash flows do continue to be strong. What we have done so far at the end of the first quarter and through this quarter, the beginning of January and February of this year, to improve what's going on is we anticipated a downturn and we have taken steps to lesson the impact. However, in December it really started to deteriorate a little more so than in September as consumer spending continued to decline.

Our first quarter demonstrates that we are recession resistant and not recession proof and that we are still earning money and still have positive cash flow. However, not on target where we would like to be. Our New York City and Miami clubs remain very strong. Sales there are continuing to increase on a year over year basis in January as well. We are adjusting to the spending changes market by market. Major changes on Las Vegas where we just entered have been very challenging for us.

We also initiated major changes in Philadelphia, Dallas and Austin, which we will talk about in a few seconds, and we are hoping to lower our legal costs going forward due to some of these class action lawsuits and some of the lawsuits that we had in Texas as well. Where we are in Vegas right now is the club lost $678,000 in the first quarter of 2009. We are cutting costs by eliminating our day time operations. Our new operating hours are 4:00 PM to [8:00 AM] seven days a week. We are also trimming staff and cutting other costs including some tourist marketing stuff that we were doing and focusing more on locals. We are also forming new marketing partnerships such as this last Friday's event at the Hard Rock Hotel and Casino, where we had the Rick's Cabaret poker tournament which was a big success for Hard Rock bringing lots of new faces to their hotel and to their poker room as well as bringing people into the club afterwards.

We are launching a very aggressive program to bring local customers in, including no cover charge and discounted drinks on our main floor areas for locals, while we await the return of the tourist market. I have been in Vegas this last week and it has been very slow out there. Even the conventions that are out there are having much, much lower turnouts even than the reduced estimates that people have done and with the financial community of course pulling a lot of their conventions and meetings out there. It's going to be a tough market for some time.

However, I do believe by focusing on the locals, which basically we have no costs to get that customer into the building versus the tourist market where with the cab payouts are very expensive for us in paying for customers to come, that -- and the tourists aren't spending as much money as they were in the past. So it's a very challenging amount of money to overcome on each customer as they come in. So by switching to the local markets we don't have those upfront costs and so we are making profit off every drink that they buy from the beginning.

Philadelphia turning around in that we have converted it into a Club Onyx concept. On Thanksgiving we did the first Club Onyx concept on a Thursday night. It was very successful for us We continued it into September and both of the Thursdays into September that we -- in December that we did it were very good. So basically about mid-December we just made the decision to convert it into a Club Onyx. We ordered the signs and part of the marketing which all began in January. We turned a profit at that club in January which is the first time since we have had it that we have actually turned a profit. Business is still growing there as we start seeing more athletes and more trendsetters, rap artists visiting the club and bringing more and more guests.

Our two Dallas locations which were purchased in April and June. Our Club Onyx in Dallas had a liquor license problem that has now been resolved. The problem involved in the transfer because we actually formed a new corporation, did an asset purchase, rather than a takeover of the existing business, we had to get a new license. The existing license had a certain time we were able to operate on it. Unfortunately it took us six weeks longer to get our new license in place. So we were without a liquor license for most of this last quarter. That club has returned to profitability in January and we anticipate to see continued growth at that location.

We also converted the Rick's Cabaret in Dallas to an XTC format cabaret format which allowed us to turn the liquor license in, stop all the legal battles that we have been having with the [TAVC] and state comptroller's office and the city of Dallas on liquor there and revenues have surged at that location. Excuse me. If you combine those locations, if you look in the Q, we put a sheet in the Q that tells you exactly what we lost at each of those locations, and on an ongoing basis I estimate that out of the $1.9 million in losses from losing clubs in the last quarter, that between the Dallas properties and the Philadelphia location will eliminate over $900,000 of those losses on a going forward basis. So that should strengthen our earnings in the next quarter considerably.

If you look at the Rick's Cabaret New York City we have had continued strength there. We have had consistently exceeding fiscal 2008 revenues. Our clientele is diverse there, it's not just the Wall Street clientele. A lot of people thought when the mortgage crisis hit that all the mortgage bankers would stop coming and our business would go down, and then when the Wall Street collapse happened, that our business would go down. We have continued to grow year over year. We became the number one upscale club in New York City as we planned. Took us a little longer than we thought, but we do believe that we reached that position and because of that like I said we have very diverse clientele. We don't really cater to any one particular industry. We've also started billboard campaigns which are helping our weekend business, building our Friday and Saturday nights with billboard campaigns on the Long Island Expressway and the one in Times Square. They are having a great impact.

Tootsie's Cabaret in Miami continues to be a strong performer for us. It is easily the leading club in Miami with strong sales and margins continuing, and we have had aggressive marketing campaigns there along with fight nights with the UFC and boxing matches, and we have done a Hawaiian luau parties and similar VIP parties to draw more clientele in and bring our big spenders in. Even if they don't spend as much money as they used to it is nice to have a visit and come to the club. On a going forward basis we are going to focus on growth through our core competency, operating the top clubs and seizing the quality advantage that we have in some of our markets. We're going to continue to really focus on those top clubs, because are income producers and those are doing very well for us. We want to keep that going and then by reconcepting Philadelphia and the Dallas club and looking at some of our other locations that we can make the number one clubs in their market and we believe that people are having a strong fight to quality. They are not going out three or four or five times a week, they are going out once or twice a week, excuse me. And they are going to the top clubs because they want to know they are going to go out and have a great time. They don't have -- since they are not going out as much they don't have that off night. They don't want that off night.

So we are focusing on making sure that every night is a great night whenever they come to one of our properties. We are going to continue to cut costs and looking for ways to cut costs and increasing our operating efficiencies so that we can raise our gross margins. We maintain rigid cash control systems and monitoring of all of our bar staff and cash handlers. We are also looking to control our legal costs which have gotten a little high in this last quarter due to some class actions lawsuits we have and increased demand. But I think that in this quarter January/March we will see continuance of that for a little while as we have some depositions and basically a mini trial in the Minnesota case and we have some depositions coming up in March in the New York case. All of which we believe in the end will be vindicated and have very little exposure to any problems in those lawsuits. We are also looking at corporate overhead costs in ways to reduce our corporate overhead on a going forward basis.

We have made some small changes in the past quarter and in the first month or so of this quarter and we are going to continue to do that on a going forward basis. We are using our marketing skills and our brand awareness to build on that equity and to build that brand quality. We are trying to bring more people into the club since people are spending less and really focusing. The way we are doing that is basically to go directly after certain competitors and try to pull business from their's into ours as the overall pie is not really building that much. So therefore we have to focus on the customers that are out and how to get those customers in our clubs, especially on the weekends and on nights when they are spending money. Right now our focus is on our operations not on our stock price. While we are aware of the stock price and being one of the largest shareholders of the company I personally am very aware of it, I just don't believe in this environment that it is where our focus should be. I believe our focus should be on running our clubs, on lowering losses at clubs that are losing money and maximizing profits on the clubs that are making money.

Our acquisition growth going forward is not really our main focus we will resume -- until we resume our growth. We are still continuing to look at opportunities as warranted and we do not -- oops, we missed the not there. We do not plan to acquire any clubs that we buy will be immediately accretive with no rampup. We are not looking for start-up locations at this time. In summary, I would like to say that in the first quarter we remain profitable and we are generating cash. We will continue to cut costs, improve our operating efficiencies and continue to pay down debt. We are going to continue aggressive marketing tactics, targeted advertising and PR and valuable partnerships, such as the deal we're doing with the Hard Rock in Las Vegas. We will continue to look for more deals in that market and other markets. When the recession ends, I believe that we will be in a strong and well positioned to resume our rollup program and in much better shape than most of our competitors from a cash standpoint and from the ability to use debt and equity on a going forward basis.

That will end the formal presentation of the call. I invite everybody if you have any questions to please queue in and ask the questions. And I know I will see some of you tonight at the club in New York for the due diligence ball. Thank you.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator instructions). Our first question comes from the line of Eric Wold with Merriman Curhan and Ford. Please proceed with your question.

I'm sorry. Good afternoon, Eric and Allan.

How are you doing?

Good. A couple questions. First, so I understand an accounting question. Some of the promotions and discounts that you're running at some of the clubs. Where does that cost appear? Is it in the advertising and marketing line? Is it just lower revenues?

Some of it is in the decline, especially some of the newer clubs, as you'll see our cost of goods sold and our payroll in our stores same-store sales that are open a year or longer actually declined. While yet our overall, if you look at the nice little chart we did that gives you all the percentages in the Q, you'll see. And then our advertising of course went from 3.3% of gross to 6.8% of gross or increased basically from $360,000 to almost $1.2 million. So, yes, the majority is going into advertising and marketing.

Question. If you normally charged someone let's say $15 entry fee and now you do a promotion and charge them $5, do you actually charge $10 to advertising and marketing, or to revenue decreases?

No, just revenue decreases.

Okay.

And you'll see overall we have kind of still kept it pretty steady. If you look at our service revenues at 45.9% of revenues and this year we are 47.3% of revenues. Actually service revenues increased a little because while we may be charging less we are actually getting more people in. But they are spending a little less money too. So it is basically kept the majority of the percentages in line year over year.

That gets to my next question. Is the toughest part getting people in the door or once they are in there getting money out of them? In a way, what I'm asking if someone is coming in there --

It's a little bit of both. Yes. I see where you're going with it. Half the battle is getting them in the door and the other half battle is getting them to spend money once we get them there. They have nights where there are 50 people sitting around sipping on their one drink or one their beer. And you go around, the waitresses push on them, dancers push on them, but you can tell they are just there to basically escape, kick back a little bit and just not in the mood to spend a lot of money. And then of course what's crazy is the next weekend they come in and the same guys are blowing it out and going crazy, simply because they just had all that pent-up demand to them and want to get out.

It's a very difficult market in that you never know what mood the customer is in. So you have to make sure that either mood he is in he is getting treated great and that's the real problem especially with the wait staff and entertainers and management, and just because a guy is not spending money tonight doesn't mean he is not going to come back this weekend and spend money, and keeping that customer service going and making sure that the girls don't get discouraged and keeping them coming back. That's the challenge in an environment like we are in right now.

Okay. And then last question. On the third -- sorry, on the fourth quarter conference call there were three clubs that were losing money. Now it looks like in the last quarter there were five clubs losing money and I guess some obviously have turned profitable since then. Are there any clubs besides those that are on a downward trajectory that they're looking for that could flip over?

Yes, we have a lot of clubs that are very close. While we only -- we have a couple other clubs that may have lost small amounts of money in the quarter other than the five that we named. These were the five that were the majority of the $1.9 million, and if you look we specifically give the exact amount of income before taxes that we lost at each of those locations. And we feel those are the ones we are focusing on right now. Overall, I think the other clubs look pretty much -- they kind of bottomed out where they are at and it is just a matter of getting the costs in line and putting the right marketing plan in there to draw in the business that is out there.

Final question, then. If you do start looking towards the acquisition market obviously you want to buy clubs that are immediately accretive, which would exclude probably a club that is out there that is losing money -- thinking that the clubs are losing money are probably guys coming down in price quicker. So are you still priced out of the market if the clubs that you want to buy are still --

I think a lot of people in our industry, reality hasn't sunk in 100% just yet. Everybody thinks it's going to get better tomorrow still. Not everybody but a lot of them. I have talked with several owners. Immediately accretive. If we find a location that we think is a number one or number two location, it may not be profitable to the current owner, but if we could reconcept it into a XTC or a Club Onyx format or Tootsie's type format or a Rick's format that we believe would be immediately accretive to us, that wouldn't rule out us from buying that location.

Perfect. Thanks, guys.

Our next question comes from the line of Scott Coleman with Credence Capital Management. Please proceed your question.

Hi. If you guys could just go over the cash flow, you said cash flows are still doing well. If you could put some numbers on it and what they were and what you're expecting them to be.

If you look at our EBITDA, EBITDA would be the operating income of about $2.1 million. Add back in the appreciation amortization of about $900,000. So we had $2.9 million in EBITDA. The biggest change in our cash position was due to change in operating assets and liabilities and that we paid off several million dollars in debt, both accrued current liabilities and long-term debt.

So how much less interest will you be paying quarterly because of the debt you paid off?

I don't have the exact number in front of me, but I know we paid off about $1.4 million in higher interest debt, around 12%, some of it was 10%. I know that will be a considerable savings for us on an annualized basis. I just don't have all of it directly in front of me on the amount of interest reduction, but it will start showing. We paid $833,000 interest expense in this quarter. So you'll start seeing that number decline.

Okay. So if we assume that the two revamped clubs can do break even going forward --

We believe that the Philadelphia club will actually post a profit in the quarter. We posted a profit in January, and February numbers, we have almost ran as much in the first 16 days of February as we ran in the entire month of January. So we are very -- Philadelphia is very, very promising for us. In fact, I think that that club will do probably over $300,000 plus a month now versus when it was a Rick's, it was doing about $120,000. So very drastic change.

We know that the Dallas Onyx location as well with no liquor license lost money in the last quarter. I believe $180,000. I'm trying to find it right here in front of me right now. The Philadelphia location lost $276,000 last quarter. I believe it will post a profit, probably in excess of $100,000 for the quarter. So that turn around right there is probably about a $400,000 turn around. The Dallas club which lost $323,000 in the last quarter I think worst case is break even. It may even make a little money. We had some significant advertising costs on the conversion because basically we closed on a Monday and reopened on a Thursday. I mean closed on Sunday and reopened on Thursday, so we spent a bunch of money during that four-day period and then of course going through the first two weeks of the opening. So we recouped most much that money back in January. Probably will make the rest of it back through February.

We have continued some advertising in February, but about half of what we did in January. And we will probably half that number again in March on a going forward basis because we just won't need it. Word of mouth is spreading around. Our weekends are building. We have got Friday and Saturdays other than Valentine's Day where we can't put any more people in the building from about 11:00/11:30 PM at night until about 3:00 AM in the morning. So it just gets to the point where it doesn't do us any good to really promote those days. So that club, that's another $300,000 some turn around. I'm trying to find the Austin location, I'm hoping that we take those losses under $150,000 in this quarter, and then hopefully even less on a going forward basis as we focus on just that night shift and continue to build on that format versus the old format. And then the Dallas Onyx was a $200,000 loss and it made money in January and will make money going forward, so that would be another $300,000 turn around.

Okay. So if I'm roughing this out correctly, barring any more cash out for debt for retiring debt or the put options that are coming up, just operating free cash flow basis if there is such a term, we should be back up to about $1 million a month, I think.

Yes. I think we're going to be really close.

And then have you gotten any indication --

Vegas is the key. Vegas is the tough one right now. I mean, to give you an idea of the change in the Vegas market, we basically ran more in the first week we owned Vegas than we did in the month of December. It is a tough, tough market out there right now. It did bounce back in January and we're hoping -- the first week of February was fairly strong with Super Bowl, and that this past week was a little off but now we have some conventions coming up this week that look very promising. We have got some parties booked. We can basically go by our reservations calendar and kind of know pretty much how our week's going to be.

Okay. So then have you gotten any indications so far on the puts that will be exercisable starting in March?

They start at the end of March, basically, or in April. We have been in negotiations with several of the holders to reduce -- basically to extend out the puts. So I don't know exactly -- those are ongoing negotiations. We haven't reached terms with them yet, but hopefully we will hear now that we are getting closer. There are still several weeks before they had to make any decisions. We wanted to get our financials out so that -- a lot of them wanted to see our current financials, see what our cash positions were, see how business was going before they made any decisions. I'm expecting that we will definitely get some concessions, and what the concession will be at this point just don't know.

I'm sorry, when you say extend out the puts what do you mean by that?

Well, for example, right now they have the right to put 5,000 shares a month to us for a set period of time for 36 months or whatever. So what we would do is say instead of putting 5,000 lower the amount to 3,000, but instead of 36 months it will extend it out to 42 or 48 months or however long the new -- the deal was. Or what we may do is lower the front load and increase the back load. So they put 3,000 to us this year and in the third year they put 7,000 to us. Those are some of the ideas that we are looking into right now.

Okay.

That way when they put them to us maybe the stock price is higher so the cash outlay from the company is much less.

Right. Okay. All right. Thank you. Appreciate it. Thanks, guys.

Thank you.

(Operator instructions). Our next question comes from the line of Jamie Clement from Sidoti & Company. Please proceed with your question.

Hi, Eric, Allan, good afternoon. Eric, I just want to apologize. I did not have a chance to look through the 10Q yet, but getting back to some of your prepared remarks and I think some of the answers to the questions that were just asked, I think you said that if the $1.9 million associated with the five money losing clubs --

That's all clubs. The $1.9 million is all losing clubs combined.

Right, all the mine losing companies involved. I think with the rebranding in Philly and Dallas and with the planned sale of San Antonio, did those three things equal the $900,000 that you thought you might be able to narrow that quarterly loss to?

In San Antonio the write-off is not included in the $1.9 million. We have a $220,000 impairment that we took in addition to that $1.9 million.

Right, but leaving that out a bit. I thought that you were alluding to Dallas. Was it just you were alluding to Dallas and Philly and getting those things squared away and the rebranding behind you, you thought that would narrow the loss by that $900,000 a quarter?

Yes. Exactly.

Okay. What is, in your estimation at that point is, that in the next couple months to be on that run rate, or about how long will that take?

No. I think this quarter.

Okay.

I think we have already done it in January. Philadelphia made a profit in January. The Dallas Onyx made a profit in January. There is no reason to believe that either of those clubs won't continue to be profitable for February and March. The XTC Dallas didn't post a profit because it was only an XTC for half the month, was still just a little under break even, even with all the additional advertising costs. With the advertising costs reduced, the first two weeks we are seeing the revenues continue along the lines of when we first opened, so that we are seeing no decrease in the revenues. In fact, we are seeing increase in business on the weekend still. So we are still seeing growth in the revenues.

We are still not charging the tip out to the girls. We basically gave -- all the girls started in January with a tipout credit that will allow them free tipout through most of February. So in March we will actually start making money from the girls as well in tipout. So as this continues, I think there is good reason to believe that worst-case scenario for the Dallas club is it breaks even. It will probably will make a little bit of money.

Okay. Just -- Eric, if I may, just moving on to Las Vegas. I don't know how much granularity of detail you have on the amount of money you saved by changing the -- your hours of operations in Vegas, but can you give us a rough sense do you think you saved by narrowing?

Probably about $40,000 a month.

Okay.

In costs from the day shift. In addition, to that we have cut back considerable amount of the marketing. We have some taxicabs top up that were very tourist orientated that we ditched that was probably -- I think we were paying about $22,000 a month for those. We have got some billboards coming up. We're probably going to get rid of our basically tourist billboard. We may convert that into rotating billboards that basically pop up all over the local areas that the locals travel to try to cater to those locals. We may just let the billboards go. We haven't really decided.

Really the Vegas market -- I was out there all of that week. I'm flying back out on Friday again. I'll be there for about three weeks and then I'll have a much better handle on how we are going to real reign in the costs. And January wasn't as bad as October, November, December, because we had already made a lot of cuts and lowered a lot of costs. According to the January -- end of January was actually -- not a great month but old terms, but by October, November, December terms, it wasn't a bad month.

Okay. And Eric, let me ask you a question. The payout to the cabs out there, I mean in this economic environment, how sustainable for your competitors is $50 a head?

I don't think they can do it forever. That's for sure. It is very -- that's why we looked at the local business. If we bring the local business, nobody else wants it. We will take it. We will cater to those locals. It will save us a lot of money. It's a different than the -- in the tourist business, but you can still build a solid location out of it which is what we want to do.

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

There are no other questions in the queue at this time. I would like to hand it back over to management for closing comments.

Alright. Well, thank you, everybody, for calling in. Hopefully I'll see a bunch of you guys at the club tonight. I know I've seen a couple of you on the call that are planning on coming in. I'll see you there. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.