RCI Hospitality Holdings Inc (RICK) 2012 Q1 法說會逐字稿

Greetings and welcome to the Rick's Cabaret International first quarter 2012 earnings conference call and webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Allan Priaulx, Investor Relations Counsel. Thank you, Mr. Priaulx, you may begin.

Thanks, Bob, and welcome, everybody, to our first quarter 2012 conference call and webcast. In a moment, I'll turn the call over to Eric Langan and Phil Marshall, who will present the results from the quarter ended December 31, 2011, and then Eric and Phil will answer any questions you might have.

Before we begin, I need to call your attention to our Safe Harbor statement, which is included on Slide 2 of our PowerPoint presentation. That is available on our Website. That's Ricksinvestor.com, 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.

In addition, I call your attention to the term adjusted EBITDA. It's a term you will hear during this call, and for your convenience, we've included the definition of adjusted EBITDA in our PowerPoint.

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 IR website, Ricksinvestor.com. A transcript of this call will be available later this week at Ricksinvestor.com. And for those of you in the New York area, you are invited to our popular Due Diligence Ball at Rick's Cabaret tonight from 6 p.m. until 8 p.m. We hope you will come to the club and perform your own due diligence on our Company at that place. You'll have a great time doing so.

And now, I'm turning the call over to Eric Langan and Phil Marshall.

All right, thank you, Allan. To begin the conference call, a quick summary of the overview of the call. We're going to go over the Q1 numbers, talk about the chief drivers of our revenue increase, summary of our EBITDA, our cash flow and our earnings, review some cost control measure stuff that we've been working on, and give you an outlook for the remainder of 2012 and discuss our acquisition program. And then, of course, always at the end of the call will be a chance for you to ask direct questions of us.

First quarter revenue was $22 million, a 12% increase over last year. The higher revenue is primarily due to newly acquired clubs, as well as broad growth at our existing clubs. Same-store sales of 6.7%, and we had several of our brands -- our Club Onyx brand performed very well, a couple of our XTC Clubs did very well, and then several of the Rick's Cabaret locations have seen some nice improvements in this quarter.

We had very strong cash flow from our operating activities, $5.2 million this year versus $2.9 million last year, and our adjusted EBITDA for the quarter was $5.5 million versus $5.3 million. Total operating expenses increased to $17.7 million versus $15.2 million. The biggest increases were in our cost of goods sold -- liquor, food, et cetera. A lot of it is we're seeing a lot more VIPs and bottle sales. And some of the high-end bottle sales, while we have considerable markup, it's not as much markup as some of the lower-end products that we sell. And also, we're seeing a few price increases from the liquor companies and the food companies, the beer companies, and we've held our prices at most of the locations pretty steady.

I do believe that we're going to do some across-the-board price increases. Some clubs, we did some as test markets to see how it would affect the numbers. We didn't see any effect at all as far as customer complaints or losing customers from it, so we'll see a much broader price increase that we've put in, probably last week and as we move through February.

Salary and wages increased, primarily due to new clubs. As a percentage of income, it stayed pretty steady. Depreciation and amortization expenses, as we purchased more real estate and made some more capital improvements to our clubs, our depreciation and amortization increased. And, of course, legal fees were high in this quarter due to some depositions and some other legal maneuvers that we've made in a couple of the cases that increased our costs in that quarter. Where possible, we're going to be reducing expenses. We're going to keep a close eye on expenses and guarantee that we continue to increase our cash flow and improve our earnings.

Rick's Cabaret in Indianapolis had a great Super Bowl weekend, as did New York, and Miami did a very strong Super Bowl weekend this year. All the clubs overall did very, very well for the whole weekend. As you know, more than likely, the TABC has granted our liquor license at the DFW Airport location. We'll be doing an opening party this weekend, starting on Thursday, February 9, and I hope to see that club contributing to our revenues as well as our earnings here in the short term, as well as considerable profits in the long term from that location.

The late start in the NBA season impacted some of our clubs in NBA cities, but basketball's back, the crowds are back, and we're seeing some nice visits to the clubs after the games in markets that were affected by that. As I said, we'll be doing our minor price increases over the coming weeks, and we'll see how that affects our top line and bottom line numbers.

We closed on the Silver City transaction a few weeks back. It has nine clubs in the Dallas-Fort Worth metroplex. It was amazing how quick the turnaround was in this location. The market was so strong that we were able to bring in top-notch management, a lot of girls and employees from our other clubs as well as higher-end clubs in that Dallas market, and we immediately saw an increase in the revenue of that club.

The club was doing about $22,000 a week when we closed on the transaction and in previous weeks before the closing. We did $44,000 the first week. We did over $60,000 the second week. And we're in our third week right now, and I think we're on course to be close to $70,000 a week. Our goal with that location is to get that location over $100,000 a week, which will make it about a $5 million a year club, and so a very nice return.

We paid about $1.5 million for the operation of that club, so we should see a return on that within 12 months of our investment. So we had a very nice deal on that. We bought the real estate there; in fact, it's a considerable amount of real estate at that location that we'll be doing some other projects and some other loose stuff on that real estate. And that real estate was all owner-financed at 5.5% on a long-term note, so it won't affect our cash flow much.

Our current debt is $34.2 million, with an additional $8 million from the Silver City acquisition, like I said, financed at 5.5%. We reduced our debt by $1.4 million ending 12/31 and expect to pay down an additional $5.5 million over the next 12 months.

Our growth guidance going forward, we're going to have a renewed focus on growth through acquisition. We believe that our cash flow is very strong. We've had three quarters of steady numbers now. The numbers have been great. We've seen consistency in our club operations, and with that consistency, when we get that consistency, it really builds our confidence up that we can survive whatever the economy throws at us going forward.

And so we're going to be looking and searching for some multi-club operators to acquire or merge with or do some joint ventures to accelerate the growth. And we'll also continue our current growth in cash generation. I think, as I've said over the last few quarters, our real focus is on generating free cash flow, and our aim remains to do accretive acquisitions. And we look, especially in areas where we currently operate, to give us that strength and to build on the strength of our existing management.

And our outlook going forward, we'll see some very solid, consistent numbers. We've got a lot of growth opportunity and a lot of acquisitions out there that we're looking at, and I think you're going to see contributions from both our new and existing clubs continuing to drive our current growth. January was a fantastic month for us with overall increases in line and better than this quarter, and same-store sales growth a little better than this quarter.

We believe, going forward, we will achieve results in line with or exceeding our current analyst estimates, and we're very confident in our management and our business model working, regardless of economic conditions going forward.

And that concludes the formal part of the presentation, and I'd be happy to take any questions or answer any questions you may have about this quarter or going forward.

(Operator Instructions.) Danielle McCoy, Brean Murray.

I have a couple of questions. I know that DFW got the liquor license. What kind of impact, can you give any more color on the kind of impact you guys expect to see from that?

We believe that club will start out in the $50,000 a week range, and we're hoping to see it move into the low six figures, $100,000-plus a week. So somewhere between $3 million and $5 million of revenues. So this quarter, being the beginning, our price here will be at the lower end of that, around $50,000 a week, so we'll get about seven weeks, so about $350,000 or so in revenues for this quarter. But then on a going-forward basis, that will continue to grow as we go from quarter to quarter through the end of the year.

Okay, great. And I'm sorry. I missed what you said before about the Silver City location.

Sure. Silver City, and this can be described at DFW as well. When we went into Silver City, there was only about $22,000 a week on their previous month sales, so sales had gone down considerably. They had just given up, I think, were ready to sell and close, and the closing got extended a little bit, but I think they just went through that process of just hanging in there.

We were able to do $44,000 the first week. We did $60,000 the second week. And our third week, it looks like this week we could be close to $70,000 a week. We had originally said, stated something that sales about $35,000 a week and then slowly growing the sales up to about $80,000 a week. We figured it's about a $4 million a year club. Based on what we're seeing right off the bat down there, we've now readjusted and believe that we'll grow this thing to about $100,000-plus a week or about $5 million a year in revenue, and should put about $2 million and plus of that to the bottom line. So it should be a very good club for us.

And we could see the same thing happen with DFW. The thing is, we're so strong in that market. We have nine locations, we have a great pool to pull from for talent, for wait staff, bartenders, DJs, management, as well as all the entertainers that we have in that market have definitely helped to make it much easier to grow the clubs faster than we would in a market we were new in.

Great, great. And getting to the economic pressures that you guys have seen and are doing great with, have you see more return of the big spenders?

We are. The big spender's not inconsistent, but what's been really nice is that we've been, overall, we've been very consistent. When our higher-end clubs are a little slower, it seems like our blue-collar and what I call our party clubs are much, much busier. And then we'll see the big numbers at the high-end clubs, and the other clubs may have an off weekend. But overall, it's been very, very consistent now for going on about nine months, and we're able to -- and we implemented some new reporting systems so that our upper management, we get the numbers and we know our sales and we know our numbers very quickly, and we can track the trends really quick.

So in the old days, where we used to get our numbers at the end of the month and we'd see what was going on, now we're getting our numbers basically on a daily basis. We know exactly, and we can do week-to-week, week-over-week comparisons. They're all in our email every morning from every club as soon as we wake up, and so we can watch those trends. And so when we see a club's numbers that are slipping a little bit, we're able to immediately go in, send upper management in there or regional management in there and say, "What's going on? What's missing? What are we missing? Why are these numbers slipping a little bit?" So we've been able to really stay strong and consistent.

Okay, great. Where is your acquisition focus? Are all the deals still improving?

We're getting a lot of calls. We've done the last couple of deals on owner financing. We've started to get some calls on some cash deals. We're still, got considerable amount of cash, fortunately, I think, in cash on hand, so we're still in pretty good condition there. And we're looking at some cash deals, and we're starting to look in some markets, some new markets that are outside of the markets that we're in right now, but not a far stretch from those markets. So it's a lot easy access to get into those markets.

Okay. And I know you mentioned you have seen New York doing well because of basketball. Can you provide any more color on that?

Yes. New York helps, it helps in Dallas, of course, and we have a couple of clubs. And of course, the Silver City location is right by the American Airlines Center where the Mavericks are. Miami, we have the Heat. In Minneapolis, we have the Timberwolves, the Spurs in San Antonio, the Rockets. So we've got a lot of, we've built and really grew our clubs around sporting events and sports teams and the stadiums and stuff. So it's helped in a lot of markets. And that's why I think we've seen a really broad increase, especially in December. December was very strong, a very, very strong month for us, and I think a lot of that would be with people are out again.

All right, great. Well, good luck, guys.

Brian Burns, Private Investor.

You mentioned in terms that you're comfortable, very comfortable with the outlook in terms of analysts. I'd just, to make sure I'm hearing that correctly, the one I saw was around $1.20 in terms of earnings for this fiscal year. Is that what you're referring to?

Yes.

Okay. And the second question is, in terms of a couple of years ago when you were looking at the issue with the other company in terms of merger, one of the comments you had made was at some point, you hoped to get a certain level of scale that you felt like, from a negotiating standpoint vis a vis the liquor companies, you'd be in a better position to negotiate better pricing. And I know you've mentioned it in terms that there have been some price increases there. I was wondering if you could maybe speak to what you think in terms of where we are right now vis a vis that, or do you think it's feasible where we could get to in terms of that?

Sure. What we've been in, we've been in negotiations on some national pricing. We have a very nice contract with Red Bull, our national pricing, and we do a lot of promotion. What we've been focused on recently is working with the liquor companies and getting support, what we call product support, where they come in and help on specials and help build our sales with our clubs, for us to do cross-radio promotion stuff, print stuff, that type of stuff, where they're helping to basically market their product and our product at the same time and getting us huge discounts and getting us in the marketing places that we have a hard time getting into on our own because of the nature of our business. So those are the things we're working on at this time, as well as, of course, discounted pricing for products, carrying their products in all of our locations, or using their products on our bottle names, those types of things. So we've been very successful with that.

And part of that, when we sell bottles, obviously, if we sell a bottle by the drink, we're getting $8.00-something a drink for it, but if we sell the whole bottle at one time, the price per drink may go down to $5.50. So it increases our cost of goods a little bit, but it also increases our overall revenue significantly. A 1% increase in cost of goods is not a huge number compared to a 12% increase in total gross sales.

Right, absolutely.

David Mau, Montgomery Street Research.

Hey, congratulations, Eric, on a good quarter. I have a couple of questions. On the Silver City, you guys are doing very well, it looks like.

Yes, we've been very pleasantly surprised that that location took off so quickly. The location, we left it Silver City because, of course, we have the Rick's at DFW that we're going to branch with that's about 12 miles away. We didn't want the confusion in the marketplace of two Rick's Cabarets at one time.

And we did the market research on Silver City, and they had a great, great reputation. In 2010, the club did $4.5 million in revenue. So we knew what we were getting, and we knew we had a winner there. We just didn't realize that the strength of the market and the reputation that the club had before, that we just put the right management and the right people in there, that the people would come back so fast, and it's been fantastic.

I know it's in a big building, and you're only using part of the space at this point. Can you tell me what maybe the future plans are for it?

Sure. We currently have about 14,000 square feet that we're using there. We're currently building out an additional 3,000 square feet for the club itself, to put in what we're going to call the Main Floor Overflow Room, because what happens is we start getting busy, the main floor fills up, there's tons of VIP space there. They cater to VIP customers very well, but their main floor is a little small.

So we've added another 3,000 square feet with a wall and doors that we can keep it small when we're slow, but when we're busy, we can open up those doors and overflow into this other 3,000-square-foot room, which will about double the capacity on the main floor. In fact, we've already had a few nights where we could have used that room, and hopefully, it will be done here in the next week or so.

But in addition to that, we have about 40,000 square feet that we're going to probably put an after-hours club in, do some after-hours, just regular like a dance club type deal. And when our clubs close, we'll push our customers and all of our entertainers who don't want to go home yet, want to go out and play because it's their happy hour time, will have a place to go, as well as we're looking at a sports bar type deal like we have in Miami with the Knockers, or maybe one of the newer concepts that we're working on that's very similar to that with the Ricky Bobby's Sports Saloon that we're working on. So one of those type of concepts we'll put in the end of the building. And then we'll probably take part of the middle of that space and do some retail that will both cater to or draw to all of our existing businesses there.

So when all is said and done, this facility could be maybe two-thirds the size of Tootsie's?

The total usable square footage there is about 54,000 square feet.

Okay.

To give you an idea, Tootsie's is about 74,000 usable.

Okay, good. And then I had a question on your renewed focus on acquisitions. You had mentioned that you were looking at the multi-club operators. And I'm curious if you can add some color to that and maybe talk about the revenue that you're looking to purchase?

We've always said we wanted to be at a $100 million run rate by the end of the fiscal year. So we're looking for something that we can add -- we're about $84 million to $86 million or so without the new clubs coming alive, we move forward. So I'm thinking in the $15 million range is really what we're looking for. We want to do a single acquisition that has about $15 million in revenue, something similar to the size of Tootsie's, but there's not really a single club out there that we could purchase like we did in 2007. So we're having to look at a multi-club operator, someone that's got enough clubs that's hitting that $15 million revenue range and try to close something in that category.

Oh, very good. Thank you very much, and congratulations again on a great quarter.

RJ Towner, Private Investor.

A quick question on the other income line. Could you elaborate on that a little bit, or the other expense line, sorry?

Other income line?

Sorry. I meant the other expense line.

Oh, the other expense line.

Yes, it increased pretty considerably year over year.

Yes. Phil, have you got that one? I can't remember what's all in there. I know there's so much, there's so much stuff in there.

Everything else, and it's -- we've talked about that. We realize that there are some expenses in there, and we're addressing them.

And we'll probably end up having to break out. The last time we broke out, I think utilities and insurance were two of the things that we broke out separate from other, and we're probably going to have to go in there and break some other stuff out as it becomes more significant so that you can really get an idea of what those are. It's just so many things, it's hard to pinpoint it all down.

And it's not one single category of expenses. It's just a little bit of several.

Okay, so just a little bit of everything contributing to that? Okay. And one other question. Is there any news on the McElroy lawsuit?

We have settled with two of the three plaintiffs, and we have a mediation with the third at some point in the future. So where it's going to go, I don't know, but the Company, we have the insurance that we settled the first two with, not admitting any fault or whatever, just trying to get rid of the expenses and the future liability. Obviously, we disagree with their claims, but at the same time, we are aware that we're going to have to deal with it.

All right. Thanks a lot, guys.

(Operator Instructions.) Eric Martin, MA Capital.

Good evening, and again, solid quarter, guys. I just wanted to get a little bit of color on gross margins as we roll forward. Should we -- I know you've provided some incremental color on the beverage side and some other components, but as we look at all the components, as we continue to drive the top line, should we continue to model out some gross margin erosion, or do we feel now, with the pricing adjustments that you've done, can we, at least on a percent basis, return to flatter incrementally, starting to improve gross margin?

Well, we're probably going to see incremental improvement, because typically what happens as we increase -- and the legal was a lot higher. We were at about $260,000 legal addition this quarter. That was big. Advertising and marketing, we had some new locations come up and we spent a little more, so you've seen $200,000-some incremental increase there. I think we'll start to -- now that we're -- I think we were so excited about the top line growth that we didn't really watch every little thing as much as we should. I think we're very on top of it now. Once we get the numbers, we look at them real hard and go, "Oh, wait, we've got to watch this; we've got to watch that." And so we're back to watching, so I think you're going to see it increase this quarter. The January to February to March quarter, I think, will be a little bit better than the December 31 quarter, simply because we're very aware of it now.

And when we look at the components on the cost of goods side -- let me put it another way. When you look at the impact for this quarter and in hindsight you could have done things differently, what was the biggest --

I really don't think we can do, the only thing we can really do much about cost of goods sold is some minor price increases, because, like I said, the majority of it, when we went through it and we looked at it real hard, our bottle sales have increased. Bottle sales customers are great customers. They spend lots of money. There's not much you're going to do about the cost of goods sold on the liquor side of it, because you're not going to raise the bottle prices. The bottles prices are pretty decent, but they're much cheaper than if you sell by the drink.

But what you get with that bottle customer is also a very nice increase in service revenues. If you really look, you go from $19 million to $22 million and over 6% same-store sales growth, a lot of that is that bottle customer. Goes back in there, that bottle customer is the higher average spend. But like I said, it squeezes the cost of goods a point or so. Really, when you look at our total cost of goods, $2.4 million versus $2.9 million, so a 1% increase is not that much when you compare it to a 12% overall growth in revenues.

Okay. Listen, guys, again, good quarter, and I'll follow up with you later on. Thank you.

William Steppacher, Private Investor.

Previous callers have already taken care of most of my questions. Thank you.

Joseph Auff, Private Investor.

Congratulations, Eric, on your performance this year. I've been a long-time investor in your organization, and I was just wondering, do you have any plans of having a club in the Chicago-Milwaukee area?

We looked in Chicago, we are continuing to look in Chicago, and that is a market we most certainly want to be in. As far as Milwaukee, we've had a couple of acquisitions we've looked at. We've got a guy up there we've been talking to for a while now, thinking about retiring soon, and at that point, we'll probably, we'll definitely be in that market through his club. And we're also looking at some other properties in that area.

As you know, we've got the Indianapolis club now and we've got Minneapolis, Indianapolis. We'd like to make a nice little triangle there for us if we could get a club in either of those markets. So it's definitely on our radar of places we're looking. And we really appreciate you being an investor and sticking with us, and we've been through the ups and the downs in the last few years, but overall, we've continued to increase our cash flow and build the Company, and that's what we're out here to do, sir.

Well, thank you very much, sir, and keep up the good work. It's been a pleasure talking to you.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

We want to remind everybody that we have a Due Diligence event at Rick's Cabaret in New York City tonight. That's 50 West 33rd Street between Broadway and Fifth Avenue. And if you are in the New York area, it's a really great opportunity to meet Eric, to get a look at the club. We take you on a private tour of the club. You see how our cash management system works, how our financial controls and management controls work, and it's a great opportunity. So we hope to see you down there. Just check in with Kim at the door and tell them you're there for the Investor Relations Due Diligence event, and she'll make sure you're taken right upstairs.

All right. And thank you for your time this afternoon, and look forward to talking to you all again next quarter. Thank you.

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