RCI Hospitality Holdings Inc (RICK) 2010 Q4 法說會逐字稿

Greetings, and welcome to the Rick's Cabaret International, Inc., 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 for Rick's Cabaret International. Thank you. You may begin.

Thank you, Jen. Welcome to our fiscal 2010 year-end conference call and webcast. In a moment, I'll turn the call over to Eric Langan and Phil Marshall, who will present our results and then answer any questions you might have.

Before we begin, I'd like to call your attention to our Safe Harbor statement, which is included on slide two of our PowerPoint presentation, which is available on our website and at PrecisionIR.com. Please take a good look at the statement, as this conference call may contain forward-looking information within the meaning of Section 21-E of the Securities and Exchange Act of 1934.

I'd also like to remind you that Rick's Cabaret files reports and other documents with the SEC, and all of them are available on our website at www.RicksInvestor.com, which is the new discrete Investor Relations web address for our investors.

I'd also like to invite anyone in New York City -- in our New York City area tonight to come down to Rick's Cabaret in Manhattan. Gary Dell'Abate of The Howard Stern Show will be there starting at 7 PM, and we'll be happy to give you a guided tour of the club to see how we conduct our business at the club level.

And now, I'll turn the call over to Eric Langan. Eric?

Thank you, Allan, and thanks, everyone, for spending time with us this afternoon.

Begin with a conference call overview, where we will review our fourth-quarter results. We will then talk about our fiscal 2010 performance and the impact of non-cash events. We'll talk about how our EBITDA has increased, and our cash flow is very strong heading into our outlook for 2011, and end the call with a question-and-answer session, so we can answer any questions you may have that we didn't get to.

Maybe a quick snapshot of the fourth quarter. Our revenue was $20.6 million versus $19.2 million in 2009. Net income of a loss of $12.5 million versus $1.8 million in the fourth quarter of 2009, mainly due to a $20.5 million write-off relating to Las Vegas and other -- some of our other properties.

Fourth-quarter 2010 fully diluted earnings per share, a loss of $1.24 versus $0.19 in 2009. Without the impairment charges and whatnot, I believe we were probably around $0.15 for the quarter. We did have some other one-time stuff in there, including some stock options issued to employees and some other stuff that we put in -- cleaned up in that fourth of September -- ending September 30.

Chief causes, of course, of the loss were the impairment charges and Las Vegas performance.

Going to the 2010 overview, total revenue of $83 million versus $75.8 million. Our adjusted EBITDA rose to $17.6 million versus $16 million in 2009. You can look in the 10-K and as well in the press release to see how we came up with the numbers for the adjusted EBITDA, what the add backs were.

Cash flow from operating activities is the real story of $17.4 million versus $18.9 million.

$8.9 million.

Or, I'm sorry, $8.9 million in 2009. Some of that was due to the patron tax being expensed, of course, but not paid. We did change that deal. But also operations were much better, and we were able to hold onto more of our cash than we were in the previous year.

Fiscal year 2010 net income, of course, loss of $8 million versus a gain of $5.2 million in 2009. Fiscal year fully diluted earnings per share of minus $0.82 versus a $0.59 gain in 2009. The loss was basically caused by the non-balance sheet impairment of $20.5 million.

Fiscal 2010 highlights. The Las Vegas marketing costs have been reduced as anticipated. We now have an agreement. That agreement has held. It's the lowest amount that's been paid since 2000 in Las Vegas, and is, I think, now the longest standing truce that the clubs have had probably since about that time as well.

We continue to cut our operating expenses. We are increasing purchasing power and regional efficiencies, and keeping our corporate structure as lean as possible. We've been able to make some pretty good deals on purchasing with some of the liquor companies and [true] volume.

With our new inventory control programs that we've put into place, we're also able to track all of our purchases on a nationwide basis, so we know exactly how much of each product we are purchasing in a given year, and using that information to go to the sellers and say, look, this is how much of your product we're buying. This is how much vodka as overall we're buying. You're x percentage. If you give us special deals, we can run your particular brand of specials and increase your percentage of our total sales. And we're getting some pretty good deals from that.

We were able to convert the $7.2 million in the convertible debenture in March of 2010. We were then able, after converting that note, to raise an additional $9.2 million, bringing our war chest to $19 million as of the end of September 30.

And as we move forward, we'll continue our goal of topline revenue growth and increasing our cash flow and working through some of the GAAP issues so that we can actually move that profit into our bottom line.

New York City, Miami, and Minnesota did very well this year. We have also rebuilt recently the San Antonio club, remodeled, and Las Vegas has continued to improve. We purchased three clubs in the new year. We have two more that we intend to close on by December 31, including the Indianapolis location that we announced, as well as the closing on the DFW airport location that I know everyone has been very concerned about, and I'll touch on that some more here in a little bit.

We've continued to bring patrons into our clubs in this tough economic environment, and we think that is the most critical thing right now. Keeping our headcounts up, keeping our staff and our entertainers and the wait staff making money in this environment, so that as the economy improves, we are already set up and ready to rock 'n roll forward with that.

We've implemented some creative new ideas to increase revenues in certain clubs like the Knockers Sports Bar at Tootsie's. We are continuing to look at additional revenue sources and different ideas outside of our standard to increase our revenues and increase market share in some of our clubs.

We have used marketing and pricing initiatives to help build our brand loyalty, including our, now pretty famous in some of our markets, our $2 Tuesdays, where we do $2 drinks on Tuesdays from open to close. That has been very popular, as you can imagine, and it really brings customers in that normally wouldn't come in on a weeknight and then hopefully they return on the weekends, and that is what we have seen happen.

As the recovery continues, I believe that we are very ready to take advantage of those increases.

Talking about Las Vegas, Las Vegas EBITDA loss was cut to $37,000 from $1.4 million in 2009. As I said, the taxi marketing costs are under control. We hope that they will stay that way. Of course, there is no -- there can be no guarantees. But there has been some turnover in club owners in that market and some consolidation. So I believe that as long as things stay the way they are, that -- with the ownership, that the marketing agreements will stay in place.

We will see true comps this summer, in 2011, when we actually lowered the prices to begin with. And -- excuse me for one second. And at that point, we will determine the future of this location as the trends develop.

A balance sheet overview. As you can see now, we have $19.1 million in cash as of September 30. We have continued to free cash flow into October and November. We will use this free cash flow to continue buying back the put options and making sure that stock doesn't hit the market. Meanwhile, still enjoying our interest-free debt, because we look at that as a debt instrument that we issued with equity that we're able to take out that has no interest, and we just pay the put amounts.

We have also made some open market stock purchases, buying back some of our stock between about five -- I think $5.78 and $6.31 per share in the previous year.

We are also preparing to make strategic acquisitions, but we're only going to do so when the price is right and the potential is right. We get a lot of pressure, a lot of calls on you're not spending the money fast enough, you're not doing things fast enough. If you're looking -- if investors are looking for that quick kill in our stock and those type of investments by us, I don't think you're going to see them.

We are going to take our time. We've got a long-term growth strategy in place here. We plan to continue to make acquisitions at about one per quarter, as we can absorb them and at the right prices and in markets that make the most sense for us, which goes to our growth strategy moving forward.

We are going to continue to stress organic growth, and work on organic growth. It's very tough in this economic environment, especially with the price discounting and things we are doing, but what we will see as the market gets better, as the economy comes, we will be able to change some of those marketing strategies that we do to bring all these people in and increase our prices gradually, which will equate straight to bottom-line growth.

Our focus is going to be to continue to generate free cash flow. We are prepared to leverage Super Bowl in Dallas. We have seven clubs in the market now with the new acquisition at the DFW airport club, which we intend to open by January 15. And I believe that we'll see a lot of business that week and had a very healthy February. I think January is going to be very good leading into that, and then, of course, as we move into March, with the March Madness and whatnot, I do believe that we'll see a very strong quarter, as we did last year.

We're going to continue to try to close those acquisitions each quarter and seek properties that will be immediately accretive.

As I said, we have about $19 million in cash. The marketplace knows we're a serious buyer, and because of that we're able to be picky in the properties that we're considering. We are considering several properties in addition to the two that were announced today. And I believe as we can come to the right terms on those properties, we will be moving forward on them. There is not a lot of competition in the marketplace right now bidding against us, and I do believe that as the sellers become more motivated to sell, that we will pick those places up.

We're still watching the overall economy closely. If we continue to see the strength returning and we can get a prolonged three, four quarters in a row of positive growth and positive shrink where we see our customers spending -- customers spend up and visits increasing, then we will become more aggressive in our acquisition strategy and we may consider paying more than the three times EBITDA -- or less than three times EBITDA that we're currently bidding and offering on some of these clubs.

Our goal is to identify those high quality targets and buy them for the right price.

We were very happy with the October/November numbers. We have stayed strong, especially November this year. We were very concerned with November. As you know, November of last year, our sales dropped off from October about $800,000 from $7 million some-odd down to the low $6 million, and so we were very concerned with that happening again this year. And while there was a little off, because October did have five weekends, overall the average daily sales numbers were very similar in November as they were in October, which we're very pleased with.

As I said, we expect a very strong January and a very big February due to the Super Bowl.

Other positive factors that we have to look forward to is the contribution of the new clubs. We anticipate a little lower legal bills, due to the fact that some of our old litigation is aging now, and it's not as demanding as far as discovery.

We anticipate the Texas poll tax ruling sometime in 2011. We have heard, of course, rumors from everywhere. Obviously, it is the Texas Supreme Court, and they can decide something whatever they decide to decide it, and whenever that is. But we're hoping to see something hopefully early in the year, and we believe that could have a positive impact on our 2011.

If not, as you know, we have been expensing that poll tax the entire time. The only thing that would really change if that ruling was upheld, it would be -- we would appeal to the Supreme Court, the United States Supreme Court, and whether they heard that case or not is unknown. But we would -- we have been expensing that, so it wouldn't be an added expense to our bottom line. It just wouldn't have the -- it would affect our cash flow, and, of course, the earnings in our future, but we believe that tax is unconstitutional.

We are not prepared to issue any formal guidance at this time, just because the economy is too hit and miss right now. But we will consider it in the future as we see things stabilize.

The other thing I want to address that we've been getting a lot of phone calls on, I'm getting a lot of e-mails on, and a lot of inquiries, is Rick's planning on going private? I want to, for the record, say that Rick's is absolutely not planning on going private. I'm not looking to take the Company private.

I'm looking to continue the growth and to continue to build shareholder value for our shareholders. And I believe that the best way for us to grow the Company is in the public market. It gives us access to capital. It gives us credibility, and I don't think we can do that as a private company.

So on that note, I will be happy to take any questions and answers -- take any questions you may have, and we can move into that section.

And be sure to invite you all out to come see Gary tonight at the New York location. I'm sorry, I will not be able to make it there. I did have some stuff in Dallas today to work on with the new airport location, some meetings here that could not be postponed or changed. So I had to be in Dallas-Fort Worth today.

(Operator Instructions). Eric Beder, Brean Murray, Carret & Co..

Talk a little bit about the acquisition in Indianapolis. That is a new market for you. What is the thought process there and how is that market in terms of regulatory and other pieces?

Well, you know, it's a new market for us. But the price was right. And we were able to pick up the real estate as well as a club location. The previous owner had passed away. We are buying the location from his estate. So we're very happy with the arrangements that we were able to make.

We will have to do some remodeling on the club, so there will be some minor CapEx expense when we first take over to bring the club up to a Rick's Cabaret standard, but it is a great location. It is very close to the -- to a private airport there that has a lot of private jet and private airplane traffic. It is close to the Indianapolis Speedway. It is on a very busy avenue here. There is a lot of fast food restaurants and other chain type restaurant on that street. So we're very happy with the actual location.

It just remains to see once we get up there, we do the conversion, turn it into a Rick's, I believe we'll pick up some of the business travel and whatnot. It's not too far from the actual Indianapolis airport as well. So it should be a very good location for us.

How are some of the clubs like in Philly and Charleston doing?

Philly is turning around. We did put new management in up there. We changed the format a little bit. We have added -- we took the sports bar in the back, turned it into more of a nightclub concept that we're doing special promotions on Tuesdays, Fridays, and Saturdays on that are doing pretty well for us. It is a challenging market, but in time I think that it will do very well for us.

The economy seems to be getting a little better up here. Our customer base seems to have a little more money, and they seem to be spending a little more money up there. That area was hit really, really hard by the economy and the manufacturing job losses.

Great. I guess the final question is, you have talked before about trying to wean away from some of these $2 pieces. And you also said before how the economy has made it so pretty much everyone is driven by discounting. Are you seeing less of this just discount-only customer coming in now?

You know, what we're doing with the discounting is, and what we've been able to capitalize on, is the clubs are getting so busy now that the VIP has become prime real estate. And so, what we're able to do is take some of our higher-end customers and because the main floor is so packed on that night, move them up into VIP areas and upsell bottle service, VIP seating, and those types of things. And that's really how we're starting to generate some pretty decent revenue on those evenings.

So the discounting is actually helping us in two ways. A, it's bringing all the people into the club, and because of that, now that people are starting to have a little more spending money, or at least it seems like they are, we're able to do -- to better up sales.

Great. Thank you.

Mike Rindos, Rodman & Renshaw.

Hey, guys, I just want to follow up a little bit on some things pointed to earlier. In the Vegas market, are you seeing any exit of clubs?

We haven't seen really an exit of club. What we have seen is some of the clubs trying some new things -- switching to more after-hours type stuff, doing different nonadult related -- nonadult stuff, concerts, different things in some of the clubs.

And really, you've seen one of the main operators there take over two of the other locations. We were offered a couple -- a chance at some of those, and we just really decided that in that market right now we're not really ready to make the investment. One of the other operators was, and it's been good for us because what it's done, it's ended some of the feuds. One of the clubs, there was a feud between two club owners, and now that one club owner is out, so that feud is gone. And it's been able to stabilize some of the marketing expense in that market.

That's good. On the last call, you characterized spending patterns as wildly unpredictable. The tone from what I'm hearing so far, it doesn't sound like that anymore. It sounds like you've got good traffic in the clubs. You'd like to see the price points move higher, but it doesn't seem quite as unpredictable as it was over the summer months. Is that fair to say? Or do you have any other thoughts to share?

Yes, exactly. What you're seeing is January, February, and March last year was crazy. The spending was really high, and everybody got -- changed back to that format of the big spender coming in. Then as we moved into mid-April all the way through July, that person just disappeared out of the clubs. And we had already switched our MO, as you would say, to a different philosophy.

We have gone back to the philosophy pre- that time. We've stayed in that, and what we plan to do this year is even as the big spenders come in, continue to pack the floor, and just move those big spenders up into VIP. So we're going to cater to both customers at the same time, so to speak, versus trying to control which customer we're catering and spending to.

We're just going to cater to all of them, and like I said, just keep the place as completely packed on the main floor. Maybe it's guys just drinking bottled beer and doing cheap shots, and move those bottle guys into VIP areas. In fact, we've even -- like I said, we've redone a couple of the clubs, remodeled clubs to fit that format of masses in one area and VIPs in another.

Great. That answers my questions for now. Thanks.

(Operator Instructions). [Robert Strougo], [RAS Investments].

Okay, earlier in the year, you indicated you were interested in VCG Holdings. Since then, you've withdrawn that, and the head of the company is now trying to take it private at $2.25 a share, which comes out to $30 million some-odd, $37 million.

They're the only publicly-traded competitor that you have. And they seem like an attractive acquisition at these prices. Do you have any comment about why you withdrew your offer to take them over, or whether you have any interest? It seems like they would be a real good fit with you guys, and (multiple speakers)

You know, we'd be very interested (multiple speakers) properties.

(Multiple speakers) as far as I'm concerned, being a stockholder of their company and your company as well. Many stockholders are unhappy with that takeover at $2.25 a share.

You know, I understand, and the problem is is they have some leases in place that require approval from the landlords. They're unable to get that approval, which equates to about 27% of the EBITDA. And it just made the deal unattractive to us. There was just no way for us to close the transaction with them at this time. (Multiple speakers) unless something changes -- I don't see how anything would change.

(Multiple speakers). I thought you were also interested in taking part of the company, not the entire company.

We would definitely be interested in that at the right prices. At this time, we've talked off and on about different clubs, different pieces, different things, and I think right now they've got -- he's got his offer out there.

Whether he would -- after he goes private, he's going to be interested in selling us any locations or not, I don't know. Whether we could work out something ahead of time, I don't know. But at this time, buying the company as a whole is just not an option.

But we did buy one of the clubs from them.

Right.

Okay, thank you. Keep up the good work.

Thank you. We're trying.

(Operator Instructions). Gentlemen, it appears there are no further questions at this time.

All right. Thank you, everyone, for calling in, and we will be available if you need us through Allan or through our website. Appreciate it.

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