RCI Hospitality Holdings Inc (RICK) 2011 Q3 法說會逐字稿

Greetings and welcome to the Rick's Cabaret International third quarter 2011 Earnings Conference Call and webcast. (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. Thank you, Mr. Priaulx You may begin.

Thanks, Doug. Good afternoon. I am Alan Priaulx,the Investor Relations Officer for Rick's Cabaret. Welcome to our third quarter 2011 conference call and webcast. In a moment I'll turn the call over to Eric Langan and Phil Marshall who will present results from the quarter ended June 30th of this year and then answer any questions you might have. Before we begin I would like to call your attention to our Safe Harbor statement which is included on slide two of our Power Point presentation, available on our website and at PrecisionIR.com. Please take a good look at this statement as this conference call may contain forward-looking information within the meaning of Section 21E of the Securities Exchange Act of 1934.

In addition adjusted EBITDA is a term you will hear during this call and for your convenience we have included a definition of adjusted EBITDA in our Power Point presentation. I would also like to remind you that Rick's Cabaret files reports and other documents with the Securities and Exchange Commission and all of them are available on our IR website at www.ricksinvestor. comwhich is our discrete Investor Relations web address. A transcript of this call will be available most likely tomorrow at ricksinvestor.com.

For those of you in the New York area I'm sorry to advise you that we will not be having a formal Due Diligence Ball at Rick's Cabaret in New York tonight as Eric is out of town. However, you are welcome to come to the club tonight and perform your own due diligence. You will have a great time. And now I will turn the call over to Eric Langan. Eric.

Thank you, Allan. Appreciate it and welcome everyone. Thanks for joining us this afternoon. We begin the call with a quick overview. We're going to give a summary of our third quarter results talk about the chief drivers of our revenue increase, the impact of the NBA championships which is great for us because of course Dallas and Miami are both big cities for us. The details on the Vegas decision and why we did it, the outlook for the remainder of 2011 and going forward as well as a discussion of valuation of our stock, our current stock buyback program and then we'll end with a question-and-answer session.

The June quarter was a great quarter for us of $20.8 million in revenue, 15.4% increase over last year. A lot of that revenue was due to the NBA all-star games in Miami and Dallas with both our Dallas clubs and our Miami clubs performing very well in the quarter. But also the San Antonio location, the Minneapolis location, and the North Austin location also performed very, very well. The two Texas clubs up over 40% year-over-year. We put some new management in and made some (inaudible) and they're doing very, very well for us.

Our same-store sales were up 9% to $19.2 million and our adjusted EBITDA for the quarter was $6 million versus $3.9 million last year, 52% gain. Net income from continuing operations $2.5 million versus $1.1 million, or $0.25 versus $0.11 last year. The net income attributable to common stock was $888,000 versus $857,000 or $0.9 for both years mainly due to the Las Vegas write-off.

Net cash from operating activities for nine months was $13.7 million which means we're generating about $1.5 million a month in cash flow and I think that's the real story here is we have really been able to buckle down and start generating a lot more cash.

Going to Las Vegas as we told you in previous conference calls we were going to continue to monitor it and at some point if we didn't believe that we would reach profitability soon we would get out. We decided to stay through last season's conference season. We were unhappy with the results losing $800,000 in that six -month period versus $330,000 the year before and while Las Vegas may appear to be coming back , the problem with Las Vegas is it's only the strip, it's only the casinos that are keeping anybody and the people that they're bringing out to the casinos with all the discounting and all the stuff don't have the big spend and that's the Rick's customers. We need people who can come in and drop $200 or $300 in a visit, and the problem with Vegas right now is they've got everybody coming out there with $400 in their pocket for their three-day stay. Not exactly our customer base.

So after evaluating everything we finally decided that we'd had enough, we lost enough money, we through enough good money after the bad and after the hard and tough decision we decided to close the location. We went to the previous sellers, we had some litigation going on with them, we still owed them some money. We said this is what we're willing to do and we were able to negotiate a settlement that lowered the debt by $900,000 so instead of $2.5 million payment we only had to make $1.6 million payment, which was a lot of debt off our books. In addition to that the settlement relieved us from having to buy back any more of the stock they had at $20 a share which saved us about $1.4 million in put option obligation.

We also eliminated the loss which is close to about $2 million a year for the time period that we owned this location was pretty dramatic for the Company. The other thing we had to weigh in here was the future tax benefits which was around $4.9 million in tax benefits that we could actually write-off. We had already expensed the majority in the previous year, but that was a balance sheet transaction and didn't affect the income tax statement so this by actually closing the location, leaving the location we actually get the IRS benefit as well.

Moving forward to look at the upside here, in Philadelphia, in Pennsylvania they passed some new regulations on liquor clubs that now allow for extended operating hours that allows us to have entertainment and dining until 7 AM. That was the big problem when we -- the Onyx in Philadelphia was very profitable made about $1 million, then the rules changed on us, we were unable to stay open those late hours. Now we're able to go back to those late hours and we do believe that we will see profitability at that location. It's only been a few weeks and we're already seeing a very nice improvement.

The acquisition of Schieks Cabaret Royale in Minneapolis is now complete now that the Minnesota legislators went back to work. And let the state employees back to work. We got a license, we closed the transaction. It's only been a little over a week but we're starting to see some nice improvement at that location. Been making some nice changes there and expect that to be a very good (inaudible) in the quarters going for.

Rick's Cabaret Indianapolis was launched at our grand opening. We got through the Indy 500 and the Brick House 400, two great events for the club, bring in lot of new people a lot of new faces, and we did some nice cosmetic improvements on that location. It's doing very well for us.

The Omaha acquisition right now is on hold. We're not sure what's going to go on there. There's (inaudible) concerns as well as the river cresting and no flood insurance on the property. So we were unable to move forward on it at this time. We may or may not be reviewing that as we go forward. We'll just have to see how things develop there. We do have several other acquisitions that we're considering at this time so it's not a big deal if we're unable to do that one.

The TABC hearing for Rick's DFW was in June. Final arguments were sent out on July 8th. We expect a ruling back by September 8th so we'll have a better it idea of what's going on in that for you in the next quarter. In the meantime, we continue to operate as a BYOB location. And it's not doing great but it's not doing bad either. It's kind of just hanging in there.

We continue to look for acquisitions in that Midwest area and the northeast. We believe that's where the best acquisitions are right now, and we will touch on that in a few slides here.

Where I think this quarter really does for us in getting Vegas out and what I think the focus needs to be is to look at our balance sheet and we do that with our debt update. You see our current debt is down to $36.9 million. Which is about one-and-a-half times adjusted EBITDA, annualized adjusted EBITDA and about 20 times our monthly cash flow right now. We have reduced debt by $3.3 million in the nine months.

Over the next year we will reduce our debt by another $6.2 million if we continue without any acquisitions or taking on any other debt, but we do continue to explore refinancing some or all of our real estate debt on a go forward basis.

Also on the balance sheet you will see a patron tax liability of over $6 million. We also paid an additional $2 million in that we expect to get back at some point once this Texas Supreme Court makes a ruling if they ever do or if we have to go to the US Supreme Court but as you see we continue to expense that but we don't have to pay it. So at some point in the future if that were to happen tomorrow based our June 30th numbers, it would add about $0.80 to our top line EBITDA and about $0.53 to the bottom line net after-tax.

The other thing you will see on our balance sheet is our receivable. We have an other receivable now of about $3.3 million, which is the remaining income tax benefit from the Las Vegas transaction. We won't have to able pay-- while expensed income tax continues, we won't actually have to pay, which will help our cash flow on a go forward basis.

Looking at our gross (inaudible) going forwards we're going to continue to work on organic growth try to keep our same-store sales growth up as much as possible and really focus on cash generation. We're going to continue to look at accretive acquisitions, especially where we're currently locating and like I said in the Midwest and East Coast. We're watching the economy closely, but we anticipate to continue our growth even if it gets pretty rough. I think we've learned some things this recession to allow us to focus on keeping the number of people up in our clubs which helps keep our revenue growth. Sometimes we -- it's not as profitable growth -- profitable revenue, but it keeps our people working, it keeps our clubs filled and then when times get better our income increases exponentially.

We expect a lot of new prospects from the expo. The Gentlemen's Club Owner's Expo is this month the 22nd to the 25th in Las Vegas at the Mirage. We'll be out there for that. We expect to meet a lot of club owners and talk to a lot of people out there and get a lot of feedback on what's really going on with the industry as far as what's for sale, what's out there, what's available. So we'll have a better idea. We expect to find some really solid acquisitions and while we're not actually out looking for the mega club right now because we're not sure what the economy is, we are we're going to do these nice solid acquisition-a-quarter type deals that continues to add our revenue app continues our growth along this baseline that we've established.

For outlook we had a great April and a great quarter. It's much better than 2010. Of course the NBA helped out on that and the new clubs helped out a lot. I believe the current trend continues and the economy doesn't just completely tank here the -- 2011 will be our best year ever.

I believe our stock is very undervalued right now and we'll be buying it back at these levels and we'll continue to buy back because it's the cheapest acquisition we can make. Based on our closing price we're trading at under three times adjusted EBITDA. If you look at the average restaurant chain out there right now, they're trading about nine to ten times EBITDA, which give our stock a value of about $24 a share. And even if you did a send discount on that, I believe we should be in the teens. And we really can't buy earnings as solid as our, and as known as our own earnings at these multiples. So we will continue to look at our own stock as an acquisition going forward if the stock doesn't rebound back up into double digits.

We're not issuing any formal guidance at this time. However, I'm hoping that by year-end going into 2012 that we might be able to do that again and get back in a more planned stage of growth and let you know how that's going to go. Vegas, we just got the financials done with Vegas out. We now see the deal out, we want to see another quarter, we want to see how the economy does here the next three or four months, and hopefully in 2012 we can give you some formal guidance.

That will end the formal presentation. And I will be happy to take any questions anyone might have at this time.

Thank you. (Operator Instructions). Our first question comes from the line of Eric Beder with Brean Murray. Please proceed with your question.

Good afternoon. Congratulations on a solid quarter.

Thanks. We've been working hard to stay on top of everything, to get done.

Cool. And welcome back, Eric.

Thank you.

How is the New York club doing? What are you seeing in terms of bringing back some of the high rollers and the big ticket money people?

New York is solid as ever. We're still seeing year-over-year growth at that location. Since that location opened in 2005 we've only had one month ever that we didn't have year-over-year same-store sales growth. Just continues to perform, continues to grow and I -- to be honest with you I thought it would it would top off a long time ago. We just have solid staff there, such a great location and we just continue to gain popularity there with the Howard Stern show and the Garden so close.

Who knows. It amazes me the fact that club has continued on a solid growth. It's starting to exceed the original numbers that we had in our business plan in 2004 when we were doing the deal. It's starting to exceed the cap of what we thought the maximum that location could ever do. So we're very pleased with the New York location.

And in terms of bringing back the big spenders, how is that working out?

Surprisingly we see a lot of stuff going on out there. The big spend others have been back in the clubs I think. I think you can see that through our solid numbers and then -- and the small guy has been out, too. You know, I've been watching the commodities market lately this oil back down you know $80 a barrel and so I think that weighs good for us on all of our B and C clubs and it doesn't hurt our A clubs either because it just puts more people in the business, which makes the VIP spaces higher priority and people want to be in them because the main floor starts to get crowded it's been a good thing for us. It's -- we're doing very well across-the-board on all levels.

I think we haven't been able to get out and reach and train our staffs and properly staff our locations to cater to both clientele which has always been a challenge in the past because when times are good everybody want too sit and sip champagne. But because there's just not as many champagne customers as there used to be, the girls have to learn to work both crowds and I think that's what we're seeing now and I think right now it's going very, very well for us.

A final question. You now have I believe with two clubs in Minneapolis how are you shifting them around to maximize the returns and do you -- how do you look at that market?

You know, I love the Minneapolis market. We have done well there. The big thing there like Fort Worth we're really focused on looking for other acquisitions in that market and looking for the dominance. Right now we have two of the three major clubs we own. And I think that gives us a lot of credibility.

What it allows us to do -- we turned Schiek's Palace Royale into Downtown Cabaret. We're going with the Cabaret North, Cabaret East type format that we did in Fort Worth, where we have the rich location and the Cabaret East, Cabaret North formats running against each other but they only compete for about 30% of the same clientele. They both specialize in their specialized area with the high-end clientele for the rich location and a younger partier that goes out and want to have a good time, get loud, a little louder music, more rock music and that's what we've been able to do in Fort Worth and I think we're going to copy that and do very well with it in Minneapolis well. It seems to be going well so far. It's just so early, it's only been a couple weeks so...

Great and again congratulations on a solid quarter.

Thank you.

Our next question comes from the line of Danish Kapoor a Private Investor. Please proceed with your question.

Hi, Eric.

Hi.

I have a question on the debt (inaudible)Some light on the average cost of debt and what do you think of paying off the debt rather than going for stock buyback?

Well, I think our average debt right now is about -- a little between 8% and 9% so I mean it's not a big push to pay off that debt. Most of it is long-term and most of it's real estate debt.

Yes.

We don't really have, so it's kind of like rent.

Okay.

It's such a small monthly bill that -- the biggest part of our debt of course the convertible debenture that we did last year that's as far as current portion of long-term debt, The easiest way to pay that off of course is to get the stock over $10.25 a share and it'll turn into equity instead of debt. So those are the issues we're looking at right now. We've got plenty of cash flow so the debt's really not a concern. One of the crazy things, a few years ago we thought we were going bankrupt because of these put options, and I think people misunderstood them.

You know, we have less than $4 million owed in total put options from the $20 million that was owed at one time. So the put options have all been paid off basically except this last $4 million which will be paid off over the next couple years and our debt is very, very manageable at this time so we're in the acquisition mode. I don't see buying our own stock is basically buying our own clubs and they're the cheapest clubs we can buy right now.

Yes. Okay.

(Operator Instructions). Our next question comes from the line of Bill Brown, a Private Investor. Please proceed with your question.

A couple quick questions. One is I know you don't do formal guidance but I just want to see how your take is of July so far in terms of how we're doing. Second is I know Vegas is closed. Is there a license -- a liquor license or anything that we can sell or not sell on that and then the final question is on the stock buyback is there already amounts that are authorized is there something new being authorized and if so how much, and what's been done if anything yet?

Okay. (Inaudible) July was fantastic. It stayed -- we're very consistent right now. And that's what I like to see. When I see consistency, I'm happy. We've been very consistent for several months now and we got consistency going, we can build on consistency. And it's very -- it becomes very stable and very easy to operate. We can focus our energies on other properties that aren't performing and focus our energy on new acquisitions. So we're very happy with the July numbers. The first week of August was right in consistent, right with everything else so we're happy with that.

As far as Las Vegas we moved all assets that we could move, that were our assets to move. So there's nothing -- there's nothing left to sell there. It is a write-off. The only thing we gained from that was the income tax benefit, but in hindsight we wish we would have known Lehman was going to go bankrupt two weeks after we bought the place. But unfortunately we didn't know that, I'm sorry, The third question? I'm sorry.

Oh, in terms of if you could explain a little bit about-- is the buy back, is that an old one, is that a new authorization or what's been happening with it.

Sure. We had $5 million approved. I believe we've used about $2 million of that. I think there's about $3 million left in the stock buyback program right now. I haven't really discussed it with the board a lot because we've got plenty of buying power left. As we get down stock if our stock stays in these price ranges I will ask the board to approve additional funds for stock buyback. Like I said we're generating about $1.5 million a month in cash flow so there's plenty -- we're generating plenty of cash. We can buy out of our own cash flow. We don't even actually have to touch our base of cash that we have in the bank right now to buy back stock.

Got it. Thank you.

Thank you.

Our next question comes from the line of David Mau from Montgomery Street Research. Please proceed with your question.

Hey good afternoon Eric and Phil. Congratulations.

Thank you. How you doing.

Good, good, good. Listen, so the business environment you mentioned is stable now. Can you compare that to the pre-recessionary times? I mean on a per club basis are you doing as well as you've ever done in most of the clubs or is it still behind?

I think -- I think what we're doing -- revenue wise I think we're doing what we were doing in the past. We're just having to have more people through the door to do it. We don't have the big blow-out spenders as often, but they are coming around more than they were -- last year they were pretty much non-existent. So we are seeing some of it.

Okay. But the environment is stable now so you're not giving guidance but you're on a run rate of let's say close to a buck for a [VPS] on continuing operations?

I think we're going to stay in that $0.25 range. That seems to be where we're at right now. You know, it's pretty steady. Like I said the numbers week-to-week have been very steady. We see the first week is off a little, down a little bit, the next week is, the next week is up, the fourth week slides back down a little bit. The first week is off and then your second and third week of the month is strong again. You know, people have extra money.

I think when gas prices come down we are going to see some really strong numbers. Because we're getting the volume. That's what's important right now. We have said that -- I think we've been saying that for two years now that to us right now volume is important. We're looking for that quality customer, we're shopping the floor, finding him, making sure we get him upgraded into VIP when he wants to spend money we're there to take care of him. And he's having a great time and he's coming be back. So when a customer does come out to spend the big money, they're in our clubs.

That's what's important right now. And when he's coming in and only dropping $50, we're still treating him good and that's -- it takes a long time to train your staff and to get your staff into that mindset to take care of every customer. Every customer. Because you never know, the guy may come in and spend $50 bucks a weeks for five weeks and then come in and spend $1500 because he landed a big job or he's celebrating a bonus. Or maybe he is not working, maybe he's just been working too hard. Maybe he doesn't have -- he doesn't want to stay there for four hours. He gets some time off, he relaxed a little bit he comes in and parties. That's really what we're looking for. And I think our staff is doing a -- you know, overall -- not every single location is perfect yet, but I think overall it's gotten much, much better as people have gotten used to that -- this new economy, this new this new way of people spending money.

You know, it sounds like -- and this is my opinion, of course -- but trading at like $7 and change, you guys are incredibly cheap (inaudible).

I said that if you look -- if you look at your standard restaurant, you look at Brinker and Yum, and all the-- Buffalo Wild Wings and all these restaurants that are out there, they are trading at nine to ten times their EBITDA. We're trading at 2.9, basically is what our close today. So I think it's -- I think our stock is -- like I said i it's the best company we can buy. It's the best acquisition we can makes right now.

We're going to have to do something about that.

I mean from a value standpoint we're a great value buy right now.

Yes. Exactly. Well and that's the comment that I wanted to impress was that it seems that you guys are an incredible value right now.

Yes. We're going to be out after Labor Day waiting for Labor Day. After Labor Day when everybody gets back -- I think everybody is working in New York right now actually so we may get out a little earlier but we have the expo coming up and want to see what acquisitions we can line up.

But after Labor Day we're going to be out on road. We'll be hitting San Francisco and LA and the Midwest and New York and we're going to be on the road telling our story and getting the Company back out in front of people. I think the story is solid again. I think we've proven that we've made it through this hard time. We made the hard decision on Las Vegas and let it go and we're going to-- the Company is built from where we're at right now. But we're going to get out there and tell the story and see if we can get people to agree with us.

Well, excellent. Once again, congratulations on a fabulous quarter and I look forward to seeing equally or better results from you in the future.

Great. Thanks, David. Appreciate it.

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

All right. Thank you. I won't be in New York tonight. The staff will be there. I think Allan is going to stop by so if you want to come by for some due diligence come on by and of course all the lovely entertainers will be there to entertain and help you out with any due diligence you need. Thanks for your time and I'll see you next quarter.

And as always if you have any questions to follow up just email IR@Ricks.com and we'll get you answers.

Ladies and gentlemen, this does conclude today's teleconference and webcast. Thank you for yourparticipation. You may disconnect your lines at this time and have a wonderful day.