RCI Hospitality Holdings Inc (RICK) 2012 Q3 法說會逐字稿

Greetings and welcome to the Rick's Cabaret International third-quarter 2012 earnings conference call and webcast. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is be recorded. It is now my pleasure to introduce your host, Allan Priaulx, thank you Mr. Priaulx, you may begin.

Thanks Doug. Good afternoon, everyone. I am Allan Priaulx, the Investor Relations Officer for Rick's Cabaret, and I want to welcome you to our third-quarter 2012 conference call and webcast. In a moment, I'll turn the call over to Eric Langan and to Phil Marshall, our CFO, who will present results the from the quarter that ended June 30, 2012. And then we 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's available also on a website at www.ricksinvestor.com and at presicionIR.com. Please take a good look at the 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, I'd like you to note adjusted EBITDA is a term you will hear during this call and for your convenience we've included the definition of adjusted EBITDA in our PowerPoint presentation. Finally, I'd 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, again that's ricksinvestor.com -- ricksinvestor.com. A transcript of this call will be available later this week at ricksinvestor.com. For those of you in the New York area, please come to our popular Due Diligence Ball at Rick's Cabaret tonight at 50 West 33rd Street from 6pm until 8pm. And we hope you'll come to the club, meet Eric and myself, perform your own due diligence on Rick's Cabaret. You'll have a great time. And now, I'll turn the call over to Eric Langan and Phil Marshall.

Thank you, Allan. We will begin the conference call with an overview, will be doing a summary of our third quarter, talking about the chief drivers for the quarter, discussing the new acquisition announcements and joint venture that we are entering into, talk about the outlook for the remainder of 2012, and then end the call with a question-and-answer session to answer any questions that you may have.

Quick snapshot of the third quarter. Total revenue rose 15% to $23.9 million, versus $20.8 million in the third quarter last year. Same store sales rose 5% to a total of $21.3 million for the quarter. Third-quarter 2012 income from King operations without our legal settlement and loss on the sale of assets would've been $2.2 million versus the $2.5 million in the third quarter and will discuss later in the call what those one-time charges were. Adjusted EBITDA for the quarter, $5.7 million without the legal settlement and the loss on the sale of assets versus $6 million last year. Third quarter '12 expenses include one-time costs of a $200,000 settlement on the lawsuit and the sale of assets of $332,000, and we also had some very high legal expenses for the quarter that we will discuss later on as well. Exclusive of the legal settlement and the asset sale, operating margins were 19.1% versus 21.1% in the previous quarter. The majority of that decrease is from the increased legal fees and then other minor costs.

Nine-month snapshot. Revenue rose 15% for the first nine months in line with this quarter to $71.4 million versus $62 million in 2011. Cash flow from operations for the first nine months were $14.1 million versus $13.8 million. So while our earnings have not been as consistent, our cash flows definitely have. A lot of it has to do with the GAAP accounting. EPS for the first nine months, $0.63 versus $0.59 year-over-year. We had strong growth at our biggest club in Miami, Tootsie's, had an actually fantastic quarter. We hope to see that strength carry on through the remainder of the year. The Rick's Cabaret at DFW Airport is discontinuing to build. We got the liquor license there in February, as most of you know, and we are seeing consistent builds every single month since February. Club Onyx in Philly and Charlotte are both resuming growth and the Onyx concept in those markets is starting to do very well again.

Our debt update, give you a current update we have $43.5 million in debt of which $27.5 million is real-estate related. We reduced debt by $3.6 million in the quarter ended June 30, 2012. The Jaguars transaction will add $32 million in total debt, $10 million of which will be for real estate, and we believe to be more than covered by the added cash flow, which we base the payments on about a 60% of the EBITDA number versus the $7 million that we're going to take in.

Impact to the Jaguars deal. The Jaguar transaction will add 11 clubs to our existing 24. It should add immediately, $15 million in revenue and $7 million in adjusted EBITDA. They have two additional locations that will be opened. One will be opened at closing -- the liquor license and all permits are already approved for the club. They were in the process of opening it. We asked them to go ahead and hold off til we close on the transaction so we can open it originally as a Rick's Cabaret. These should be quickly integrated as most of them are in Texas -- 10 of the locations are in Texas and one is in Phoenix, Arizona. We have strong management strength and experiences in Texas and these locations will be very easy to manage from our DFW base.

Exploring new concepts. Another thing that we're looking at right now is because we have such great cash flow and our cash has been building up on our balance sheet, we've had a lot of a calls from investors to put that cash to work, so we started looking at what I consider the restaurant category, which are you basically a Hooters-type, Twin Peaks, Tilted Kilt, there are several concepts going around right now. We are going to look at opening two concept restaurants in the Dallas-Fort Worth market, as well as some other nightclub concepts that aren't necessarily adult-entertainment-related and don't require adult entertainment licenses. We plan to invest the $4 million of our cash in the next two years into these locations, including building from the ground up for one of these locations on some property the Company already owns. We also started to look for acquisition candidates in this restaurant niche, as we increase our expertise and ability to operate these locations. We're bringing on some new Management talent that has experience with this concept and we'll look forward to introducing you to those -- that Management team as time progresses.

Our forward growth strategy. We are going to focus on the integration of the Jaguars. We are going to continue our emphasis on organic growth and cash generation. We believe free cash flow is the most important measure of how successful we are operating in our businesses. We're going to continue to explore acquisitions that are accretive to profit and shareholder value. The Los Angeles joint venture will be operated by our joint venture partner. They have 19 other locations around the country, and one existing location in LA at this time. The new location will have full liquor and topless entertainment and it will be one of the only locations that serves liquor in LA County that's not located in the downtown LA area. We're going to continue to look for joint venture partners with the right groups to enter markets that we don't currently serve or that we believe that a joint venture will give us strength in that market.

Our outlook for the rest of the year and going forward is going to be focused on generating positive cash flow. Our goal for the next three years will be to achieve a 30% growth rate, and while we've had trouble in the past doing this -- achieving this growth rate due to the fact that acquisitions are sometimes unable to be closed when we think -- and we've invested our time in those acquisitions, we believe that with the restaurant concept and the nightclub concepts that we are looking at that, that we'll be able to easily achieve that goal by branching into those markets and opening up new locations in those markets when we are unable to find the proper acquisitions.

We are also going to be reviewing the best use of our $60 million-plus in real estate that we currently own to maximize income potential on that, including billboard leases with billboard companies, developing any of the property that's undeveloped as we are with one of our restaurant concepts where we own four acres of raw land that's actually overflow parking lot for one of our nightclubs. By building a restaurant in there, we will still be able to use the parking for overflow parking for our nightclub and generate additional revenue from that property.

We remain highly confident in our Management and our business model on a go-forward basis and we will really be focused on growth over the next three years. We believe that things are turning around, the economy is steady enough for us to take these risks and move forward, and our cash flow is strong enough that we are not concerned with any of that. Our debt is very manageable, so on a go-forward basis we are ready to resume our growth patterns. At this time, that'll end the formal presentation of the call and now we will take any questions that anyone may have at this time.

Thank you.

(Operator Instructions)

Eric Beder, Brean Murray.

Good afternoon, congratulations on a deal and a solid quarter. (Technical difficulty)

We had a lot of extra legal expense in this quarter with the acquisition -- we've been working on this acquisition for several months and we also -- I really wanted to try to wrap up all of what I call non-insured losses, basically any losses the Company is paying for in this quarter, since we are wrapping up, the discovery on the New York case is now complete. And so we think the [clint] in that New York case will go down a little bit on a go-forward basis, we've got some summary judgment motions, and some other stuff, and then we will just be awaiting trial. So those fees should go down.

We are really trying to get any not insured losses under [deal]. We settled one of the text messaging cases in this quarter and the other text messaging case is a class action so it's being submitted to the judge by the end of this month for approval and it will be settled on similar terms to the one we settled which is pretty negligible from a cash point or expense point for the Company.

Okay. So this acquisition, when is it supposed to close?

We plan to close sometime between August 31 and the end of September. We're going to do everything in our power to close on August 31. We want to open the new Lubbock location on that day, on August 31. And I believe that most of the clubs we should have all the license and everything back on the majority of the transactions.

We may have to close on a huge portion of the transaction and actually close certain parts of it into an escrow, so to speak, to get it all done, if we don't have our permit back, and then we may get the permit back two or three days later and then we'll close that part of it until the entire acquisition is closed.

So we should expect a $15 million and the $7 million to be basically next year's fiscal?

I believe so. We may get a month of it or basically September, we make get -- or part of it in September, but yes, the majority of it will definitely be closed, the entire transaction should definitely be closed by September 30.

Okay. If I look at this, where are the opportunity, as we look at these clubs, because obviously you already have many clubs in these areas, to get further synergies in terms of liquor and other things, to drive these numbers even higher?

We planned that, and what we also planned as well is the two new locations were basically -- the big bonus in the transaction is that in the two markets, Lubbock and Odessa, the Jaguars clubs are the only clubs operating and they're BYOB clubs. By putting liquor licenses in the other two buildings that they have and opening those up as liquor clubs, we believe it will be two different customer bases.

We will share a small percentage maybe 20% or 30% of the customer base will be shared but basically creating another market in additional income and EBITDA -- revenue and EBITDA from those two new clubs -- increase $15 million to what we hope, somewhere between $19 million and $20 million and the EBITDA from $7 million to as much as $9 million.

Okay. How is the New York club doing?

The New York club is doing fantastic. Nice numbers in New York. In fact, I was at the club last night. It was very busy last night. It has been very strong. Our major clubs are doing very well. Some of our smaller market clubs are having their July, August slowdown, so it's just typical. However, we are staying steady with our same-store sales growth of about 5%.

When you look at the comp, is it a function of the high rollers coming in? Is it a function of bread-and-butter? Or is everything working out really well?

Actually it is more volumes these days. In the summertime, we've noticed that some of the bigger spenders are slowing down or I think our same-store sales growth would be even higher. We will see if we move into Daylight Savings, we get into September, October. We are seeing a more return to more typical summer environment last year and, of course, this year.

Which the two previous years we didn't really see the slowdown in the summer because the economy was crazy. People were not really following patterns but it appears to me, especially this year, that we are seeing that typical summer pattern of business. And I think in the long run, that's going to be a really good thing because what happens, you slow down a little bit in the summer in and then around mid-September, business really starts to pick up and then we shoot right through May.

I think this is your first Phoenix club. Is that a market you want to expand in or is that just part of the deal? How do you think about that market? And let's do L.A., too, because you're doing the joint venture?

We've always wanted to get to the West Coast. We've got East Coast location. We've always wanted to get to the West Coast. We want to become a more nationwide, so as business travelers travel, they know our brands, they know our locations. And I think both these locations are a step in that direction.

And you probably cannot talk about this, but the wrongful death lawsuit, how should we think about that?

Yes. We have no comment on that at this time other than to say that we do carry insurance and the insurance company is currently waiting for us to be served. We have not been served yet. We are waiting for service and then we will turn it over to the insurance company and their lawyers and they will do what they do.

Okay, great. Congratulations.

David Mau, Montgomery Street Research.

Hello, David and Phil. Congratulations on the acquisition. I have a couple of qualitative questions about the new concepts. I'm curious as to, is there anything out there today that you are looking to directly compete against or -- is this going to be maybe like a Hooters style of operation?

Well, we try to consider it more of an upscale Hooters type locations. Our menu will be a little different, of course, than Hooters. We are not just going to be chicken wings and beer. We're going to have full- service bars in unique locations. We are going to use the eating times where most restaurants have downtime from 10 PM to 2 AM, since your liquor license allows you to serve liquor til 2 AM. So to try to serve food to people at one or two o'clock in the morning doesn't make a lot of sense so we are doing outdoor patio-type concepts.

We are going to bring in live bands from 10 PM to 2 AM, and basically be more of a nightclub/bar type deal, in the evening times, as well as a restaurant from lunchtime on, so we will get our full service liquor license service hours from basically 11 o'clock the morning, 10.30, 11 o'clock in morning, all the way through 2 AM at these locations.

Okay. As I understand you're planning to open four of these types of operations, too, in the Dallas-Fort Worth area?

Well, we're going to open two immediately -- hope to have the first location in Dallas, we are hoping to have opened sometime in October. We are waiting for building permits to come back. Once the building permits come back in, then we will have a more definite timeframe when this location will open. Our total investment in that location is going to be about $0.5 million because we already own the building through the Silver City acquisition.

The other location we hope to open in January. Could be as late as March, but some time between January and March. It is a ground-up construction. We're building the building, we're developing and designing the entire concept for that particular location. And that's something that we hope -- as we create the success there and put together the plan for it, that we will be able to maybe franchise those types of locations in the future.

Okay. And the other two that you are talking about, is that a different concept?

Well the one will be -- the one concept we are probably not going really even try til next time, where we want to get the Bombshells location open and going and then the stuff that is right next to that, we will start working on that concept, which is basically just a nightclub concept.

And then we have another concept that we are doing in Downtown Fort Worth that is going to be basically a restaurant/nightclub concept, not the outdoor patio type concept, but an actually indoor nightclub concept. We will bring live DJs in and more of a tapas restaurant. There will be a lot of appetizers, tap, and stuff like that, that we will do basically for happy hour and then running into the nightclub end of the evening.

Okay. Very good. And then I have some questions about the new Los Angeles joint venture. I'm wondering what are your expectations out there? If you can talk about that?

Yes, I've talked with Jerry a lot on the deal. We believe the location probably will do around $50,000. We put about $3 million a year, our investment in the location currently is about $600,000. If it does the $3 million from $50,000 a week, we should probably, with a 50% ownership in the property -- in the building -- in the business -- we will probably make our money back cash on cash return of 100% in about 12 months to 18 months.

It just depends on the ramp-up period. If the ramp-up period is immediate, we are going to be doing some grand opening stuff, obviously we're going to bring some girls from some of our clubs out. He's going to bring girls from some of his clubs out.

So we have a pool now with the Jaguars acquisition of about 54 locations around the country to pull girls from when we open a new location and let girls know that a new location is opening, so the grand opening should be bigger, and they should be easier to (inaudible) -- the ramp-up period should be lower and so I think we will get our return much quicker.

And you haven't talked about the location yet, have you?

The actual out location in L.A.? No. All we have announced so far is it is in L.A. County. And we want to wait til we have basically every permit and everything, all construction completed, all inspections done before we announce the location so that we don't run into any political problems or anything like that. We want to be ready to go, day one, then we will let everybody know where it's at and what's going on, but it is a fantastic, very high-traffic location.

Yes, L.A. is a very crowded area, of course.

Yes, it is.

And so I'm curious as to what are the big things that may draw people, is it near the airport, for instance, or is it near where the ballpark -- the new -- the Staples Center?

I'm sorry, David. Based on our agreements with our partner, we are not allowed to really discuss that location as far as the location of the location.

Okay, well very good. I appreciate the -- what you've given me so far.

No problem.

That should do it for me.

All right. Thank you very much.

Thank you.

(Operator Instructions)

David Kaczorowski, private investor.

Good job in the quarter. As far as the new concepts that you are talking about, do you think there's opportunity for cross-branding along with your Rick's core product?

With the Bombshells, obviously we're building the Silver City building. It is hard to explain Silver City's property, but it is an L-shaped building and the L runs down -- the long part of the L runs down the freeway, so in the front corner of the top of the L, basically, is where we are going to put the Bombshells location. Silver City is actually in the L in the back of the building, not actually facing the freeway but facing towards Carpenter Freeway because we are on a little V right there between the two freeways, and we have about six acres there that we own.

What we are hoping is the Bombshells will draw lots of people in, and basically in the men's restroom, we will be able to advertise the Silver City location, of course, and in any of our other Rick's locations that we want to advertise, as well as, on the bottom of all the receipts, we will print out a little D on the bottom of the receipts, that lets everyone knows with the receipt, that if they present their receipt at the door, they can get free cover charge at Silver City.

So we think we'll be able to do a lot of cross-promotion in that sense. As well as marketing in the parking lot with free passes and different things. It really depends on -- a lot of these restaurants have become very family-oriented and family-friendly. And we intend to follow that same model. So while we want to cross-promote our other clubs, we at the same time don't want to offend any potential customers so we will have to watch the -- it will be delicate balance that we will have to figure out as we progress.

And of course, the live band, once we get the ladies, then of course, the live bands will -- we can have promotions in between the band sets and whatnot of the clubs and maybe run some ads -- some high-end, classy ads on the televisions that basically promote our other locations. So we definitely believe there will be some cross-promotion.

And then we can advertise -- the thing is a lot of gentlemen's clubs, we cannot advertise on certain radio stations, in certain markets, and certain billboards, however the restaurant concepts, we will be able to advertise in all of those venues. And so we can draw people to the property through those other marketing venues that we cannot actually reach and then turn around and teach that customer that our other locations is there as well. So there will be definitely some positives from that.

Okay. That sounds good. And as far as looking into the new concepts and also you mentioned earlier in the call about expansion nationwide. Would you say that those are two different agendas that you're looking or do you think you would be doing them together or what's your overall strategy in terms of that?

I think our overall strategy is 30% growth and we are going to be focusing and concentrating on 30% growth. We want to grow this Company at a growth rate of at least 30% on a go-forward basis for the next three years so that basically takes from just under $100 million we're at today to close to $250 million by the end of 2015. And so we are going to be very focused on that.

And in that sense we can find adult clubs that we can operate because we love the margins and what we do, we're going to do those locations first, and when we cannot find locations or when the opportunity arise and we have -- and the cash is there, we are going to continue to look for what I call very high-traffic in select restaurant-type locations. Because everybody knows the restaurant -- it's location, location, location. 90% of your success is from the traffic you have and then of course your food and service has to be great as well.

But we just consider that a given with the Rick's format that we're going to carry over into those restaurants. So really it is -- it's really about the location and so as we find the proper locations, the right locations, high-traffic locations, that's what we are going to be looking for.

Okay. Can you going into a little bit more detail about the financing on the Jaguars deal?

Sure. It is seller financing. So basically what we did is we looked at the cash flow from the businesses and we worked out a deal where we put up some cash down so we had some skin in the game and the seller is basically keeping about 60% of the cash flow for the next 12 years. About how it works out right now. And then our kiss or bonus the deal, as I like to call it, I call it the kiss on the deal, is that we have two new locations that aren't generating any EBITDA at this point, that are our bonus on the deal.

So we open those location occasions up, they do very successful and we -- that's our added bonus on the transaction but basically we're going to operate his clubs for -- and keep 40% of the EBITDA for the next 12 years and let him keep 60% of it and after we do that for 12 years, we get to keep 100%.

All right.

And that includes, of course, buying all the real estate, because the real estate is included in that total payment number.

Right okay, great, thank you.

Heshy [Dubrowski], private investor.

With all the uncertainties going forward in the economy whether it's the fiscal cliff, taxes, election -- your Company, high-end clubs, which is a novelty, not a necessity, and you sound very confident on this call. How are you so confident that consumer confidence will be strong over the next quarter at least -- for me, for example, to say, and I have an investment today in this Company, you've had a great quarter this past quarter.

But there's so many more uncertainties coming forward in the next quarter, so where does this confidence come from because people don't go out and pay, especially at the high-end nightclubs when their cash flow is hurting?

Well, if you look at our quarter you will see that our percentage of alcoholic beverage sales increase as a percentage total revenues, which means our higher-end clubs are still doing still doing very, very well. We've raised some prices over the last six months slowly in certain markets, and they stuck. We've been able to keep those price increases and not had any real decline or any problems or complaints from customers. So we can always discount again.

And what we've learned in 2008, 2009, mainly 2009 is that when the economy gets really bad, we only do that for a short period time because we have to switch modes from catering to the high-end customer to catering to the masses. I think we've learned that very well and we've learned at this point to cater not to only the masses but to cater to the high-end customer at the same time. And which is why we have seen very steady clash flow.

If you look at our cash flow year-over-year with $5.5 million year-over-year on both quarters, we are remaining very steady on cash flow. Our cash flow for this year has actually increased to $14.1 million, so we've had more cash flow this year than last year.

And you're confident that the growth, as you mentioned with the previous investor, 30%, will continue even with -- because I believe as an economist going forward, the next three months of this -- the next quarter will be even harder for consumer confidence because all the uncertainties are coming more now than it was before -- and you're still confident 30% growth?

And we tend to be. We tend to slow down in this next quarter. The June, July, August quarter -- the quarter ending June 30 is a little slower than the quarter before. This quarter is our slowest quarter of the year, typically, and then October, November, December is a good quarter as we start increasing again, have a big quarter, October. And then January, February, March is our blow-out quarter, and then we slow down a little bit, but we are still year-over-year in our same-store sales up 5% for the nine months.

Okay. So final question, do you see it possible that you might raise your view if things either continue to go strong or just stay the way it is now and low ball or maybe, possibly raise your view?

Oh, obviously the better the economy does, the better we will do. Our margins will increase more. As the economy does better. We can keep the masses in our club, which we are doing very well and we keep the big spenders in our clubs at the same time. That's of course always when we make the most amount of money.

All right, thank you very much.

There are no further questions in the queue. I'd like to hand the call back over to Management for closing comments.

All right. We'd like to thank everybody for being on the call tonight. And we invite you to come down to the club. We will be there from 6 PM to 8 PM this evening and talk to anyone, let you do some due diligence to the club. All right. I would turn the call to Allan, see if he has any other questions.

Thank you very much and everyone knows how to reach me if you need me for any further questions at ir@ricks.com. And thank you all for attending this conference call.

Ladies and gentlemen, this does conclude today's conference call and webcast. You may disconnect your lines at this time. And have a wonderful day.