RCI Hospitality Holdings Inc (RICK) 2012 Q4 法說會逐字稿

Greetings, and welcome to the Rick's Cabaret International fourth-quarter and full-year 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. Thank you, Mr. Priaulx, you may now begin.

Thank you, Shea. And thank you, everyone, for joining us this afternoon. I just want to remind everybody that our Safe Harbor Statement is posted at the beginning of our PowerPoint presentation, which is available at www.ricksinvestor.com. It reminds you that you may hear or see forward-looking statements that involve a number of risks and uncertainties. I won't go into the entire statement on this call, but I do urge you to read it, as well as the explanations of other measurements we use that are included at the bottom of our PowerPoint. I would also like to remind you that our press release and the 10-K are posted at www.ricksinvestor.com as well as the PowerPoint presentation itself.

And now, it's my pleasure to present to you our President and CEO, Eric Langan. Eric?

Thanks, Allan. And thanks, everyone, for joining us today on a Friday. We were hoping to try to get this out earlier than late Friday afternoon, which is our last day we were able to file today. But with our audit going on and with the audit of the Jaguars acquisition, our staff was just entirely too busy to get this done any earlier than today. So, thanks for joining us today.

The conference call overview -- we're going to do a summary of our Q4 and our fiscal-year 2012. We're going to discuss the important factors that affected fiscal-year 2012. Give you an update on all of our current projects. Discuss the debt and cash flow of the Company. And discuss some strategies we have for unlocking shareholder value on a go-forward basis. And then our outlook for 2013. And we'll end it with a question-and-answer session, as always, where you can ask direct questions.

Starting with our snapshot of our fiscal-2012 fourth quarter. Total revenue was up 11.3%, to a total of $23.9 million. Net income, $1.5 million versus $2 million in the fourth quarter last year. Mainly due to the acquisition cost of the Jaguars acquisition and several legal settlements that we entered into in the fiscal year, at the end of the fiscal year, to lower our legal costs going forward. Our fully diluted earnings per share, $0.15 versus $0.20 in Q4 2011. The earnings per share without the one-time costs would have been $0.20 against analyst estimates of $0.22. The analyst noted that he did not include legal or acquisition costs in his estimates either.

Moving to the fiscal-year snapshot. Revenue up for the entire year, up 14% to $95.2 million. And net income of $7.6 million. Fully diluted earnings per share, $0.78.

Using a non-GAAP net income number, we would have made $10.5 million, or earnings per share of $1.08. And our adjusted EBITDA of $24.4 million. But I think, most importantly, net cash flow provided by operating activities of $18.4 million, showing that the Company is continuing to generate strong cash flow.

Important factors for fiscal 2012. This is our third year of consecutive double-digit growth, averaging 12%, 13%, 14% in revenue growth during what was considered a recessionary period. Our same-store sales growth for the year, up 4.1%, a little lower than we would like. We would like to see it closer to 6% to 8%. But given all the economic factors we faced in 2012, we're happy with 4.1% growth this year.

The Jaguars acquisition was done using only $4 million of our cash, which allows us to leverage our name and our reputation, and build up an increased cash flow in the Company, and build the Company without using a ton of cash. We did this by taking on debt. And all that debt is at a subsidiary level, which I'll explain later in the cash flow and debt section. We've also refocused our high growth going forward. And our expectations are to grow between 20% and 30% annually over the next three years.

I'll give you an update on our current projects. We have six projects in the works right now that should all open by the end of 2013. Two of these projects are slated to open in January 2012. The first one we'll open will be the Vee Lounge, which is a nightclub tapas-type restaurant that's going to be in downtown Fort Worth. We're going to be able to use our synergy from all of our clubs to give VIP cards to our girls. And bring girls and bring business down to the downtown Fort Worth area. As well as bring in DJs from Miami, New York, LA. It's a new concept for us, but we're very excited about it. We've got a lot of backing from the local Fort Worth area that we think will do very well. That will open probably around the 17th of January, with a grand opening weekend of February 1 and 2.

The next to open will be our Bombshells location. It's going to be basically a restaurant-type nightclub where we have food and restaurant services in the daytime until around 10 PM, when we'll bring in live music four to six nights a week. Also, our LA joint venture, which we expect to open sometime in the March quarter. The Ricky Bobby Sports Saloon that we're working on, and the Ricks Cabaret Odessa. We expect both of those properties to open in the June quarter. And we expect to close on and start construction in January of our second New York location, and open that location by year end. We also expect to announce further acquisitions throughout the year, as we're working on several other acquisitions and have a pipeline of acquisitions going forward.

I think most importantly for shareholders is to look at our cash flow and our debt situation. Our cash flow remains strong, and we expect it to continue to increase as our new projects come online. We paid $7.1 million in debt reduction payments in 2012. We added approximately $30 million debt in connection with acquisitions in 2012. One of the other exciting things is we made our final put option payment in November. In the last two years, we paid about $6.5 million out, buying back our stock on those put options from 2008 and 2009. Our last payment has now been made on those. Our last payment on our 2010 debentures will be made in June of 2013. So, we have the December payment this month, and then only two more payments on that debenture, and that eliminates some more debt.

The Jaguars debt that we took on will be easily serviced with the cash flow from the acquired clubs. So, while we've eliminated cash going out with the put options, cash going out with, as this debenture ends in June, and we've continued to pay down our other long-term debt, including accelerating our 14% debt on the Tootsie's acquisition that we have, we've been paying approximately about an extra $170,000 a month on that. Which should get us around an additional $2 million -- a little over $2 million a year in reduction on that. And hopefully have that debt paid off by 2015.

But in addition to that, the Jaguars debt is subsidiary-level debt for Jaguars Acquisitions Corporation, which is the Corporation we formed to purchase those clubs. And that debt is separate from the parent company. So, we're eliminating debt, so our cash flow should increase from the existing operations. And all the debt that we took on, on the Jaguars, will be serviced from the clubs that we acquired.

Looking forward, and unlocking shareholder value, obviously the stock's been stuck in a rut here between $7 and $10 for the last two years. And we've continued to grow the Company. We've made major acquisitions. The market doesn't seem to be really paying any attention to the things we do. And so, we're going to look at other ways to unlock shareholder value. And what we're considering in that is increased stock buybacks, a possible dividend. The Board is reviewing some of the effects of paying a dividend and the tax consequence of that. But, really, we want to look at releasing the hidden real estate value.

Out of our debt, $25.7 million is real-estate-related debt, which we look at as basically lease payments. So, we could also do, we could do sell leasebacks on that real estate. We could form a private or public REIT, which would allow us some tax benefits there. We're reviewing that with certain investment banks to decide what the best strategy is there. Which may allow us to pay a dividend through the public REIT versus the current public company and lower our tax effect of the payouts. We're also going to continue accelerating paying down our high-interest debt. That's one of the things that -- anything that's not real-estate-backed debt or high-interest debt, we're going to be looking at eliminating as we move forward.

Our outlook going forward, like I said, we're going to plan to grow 20% to 30% annually. The difference between our current programs and the programs in the past of this growth rate are we're not going to rely strictly on acquisitions. In the past, we've had to rely strictly on acquisitions for growth. And with our new projects coming online, we believe it will be much easier than in the past to achieve these growth plans rather than through acquisitions only.

Also, we're going to use our real estate portfolio, and leverage that real estate going forward to raise capital while our stock's at these prices. So, we are not interested in issuing any equity at these prices. In fact, any time the stock is under $8, we're going to probably be active in the market through our stock buyback program.

We're also going to focus on consistency going forward. We want to try to have that consistent growth, and make that growth more consistent than we've been able to do in the past. By lining up acquisitions that, for some reason, haven't closed in the past, we've ended up missing for a quarter or what not. This way we have new projects we can bring online, like Odessa Ricks, the New York Ricks. And we're looking at some other possible places to build clubs from the ground up, rather than just buying existing clubs. So, we can continue that consistent growth on a go-forward basis.

And at this time, I'll take any questions that anyone may have about the Company or the quarter or the year or our future growth.

(Operator Instructions)

Eric Beder from Brean Capital.

Could you talk about the logic of the recent acquisition of the land in New York City?

Yes. We have a lease, obviously, with, I think, about 11 or 12 years left on it. I think what a lot of people don't realize, and we probably -- we had to put it on an 8-K, we didn't realize we had to do it at first. And we said -- Oh, wait. This is a significant transaction,. Based on our numbers we need to put out an 8-K. So, we put the 8-K out. We didn't really want to put a press release out because this is a six-month down the road closing, a June closing. We haven't lined out exactly how we're financing it. We've got several options open to us, some real estate financing. But we're getting the air rights.

This is a 15 FAR. And I know that doesn't mean much to most people. But basically it gives us the right to build an additional 52,000 square feet in New York City. And those air rights are very valuable between the residential air rights, probably between $200 and $250 a foot, and the commercial as much as $300, $350 a foot. And so we're in negotiations with a couple parties on possibly selling those air rights, or developing those air rights. It's a moving transition right now.

But the main thing is, that's a grandfathered location. Which means the adult license can never be moved from that physical address, ever. And if it ever discontinued operations for two years, it would go away and no one would be able to operate there again. So by locking down that property, by owning that property we control our destiny on that, as well. So the real philosophy of it is to lock down and make sure that we'll always have that property. I don't know how many people are familiar with the Scores East property on the upper east side, but their original rent was about $40,000, like ours. And when they finally ended up losing the location to the landlord, the rent was like $300,000 a month. That's one of the things we want to avoid in the future by owning our real estate, is not having a landlord that can basically become our 50% partner.

Okay. In terms of the legal expenses going forward, what should we be thinking about with legal expenses for fiscal 2013?

To give you an idea, for 2012, it was 5.9% of gross revenue. The highest level it's ever been. The previous year it was about 2.3%. I would like to see it drop down in that 2% range. Definitely don't want to see it over 3%. And that's the target. That was the reason of settling a couple of these class action text messaging cases, even though we didn't feel we had any real risk in it. But we were able to settle them relatively inexpensive to defending them. So we had to look at our cost of defense versus our cost of settle and make them go away, and weigh those factors out. And really just wanted to be undistracted by any lawsuits that we weren't really insured for.

The only real lawsuit that we have now are the labor lawsuits in New York. Which we are now finished with the discovery phases of, which are a very expensive part, including the depositions and all those types of things. And we've moved into summary judgments and motions. Basically all the lawyers are doing all their stuff. But it's freed up management to run the business. That was a real factor in getting rid of these lawsuits on a go-forward basis and then lowering these costs.

Okay. You've had the Jaguars acquisition for awhile now. What are your thoughts on the deal and what is the upside you see from it?

It's been great. Obviously, when we took 11 clubs at one time, we ran into some small unexpected things here and there with personnel, which is a very management-intense business. We've added some new management, we've lost a little bit of their management, and brought some new guys in. Moved some of our guys around. I think we're in pretty strong -- it's obviously still -- we're in the first quarter of the acquisition but we're seeing good results. The cash flow from the business has been fantastic. We're able to make all of the payments for the real estate and the clubs themselves from cash flow from operations of those businesses. And still have plenty of cash left over. So it's been a win-win for us. We only have to come out of pocket $4 million and all the rest of it's leverage. We're paying them with their own cash flow basically.

Great, that's a nice deal. When you are looking at acquisitions going forward, is this the model -- 10 to 12 clubs, bigger deals -- going forward?

I think we're going to continue to see the small deals that we've always done because they're easy. But I think our focus is definitely on multi-club operations going forward. We want to grow at a faster rate than we've grown in the last few years. We're very confident in our cash flow on a go-forward basis. Like I said, we're freeing up a bunch of cash with the put options being paid off. We've got a couple pieces of real estate that are going to be real estate loans that are going to be paid off. I think, on a property in Austin, Texas, the last payment is in April. That's about a $20,000 a month payment, and that property's going to be paid off.

The debentures, which are about $1 million a quarter, we've only got December and then two more quarters of that. Paid out $4 million this last fiscal year. We're only going to pay out $3 million in this fiscal year. So there's an extra $1 million in the year. And a calendar basis, that's $2 million more between now and December. So those types of things really start freeing up cash flow for us. And we're going to continue to maneuver that cash around and make acquisitions with it or pay off long-term debt. And then actually look at ways to pay a portion of our cash flow back to the shareholders. Because the stock's not really performing so we want to give the people that have been with us a long time, people that have held and stayed with us a long time, some type of yield or return on their investment while they continue to wait for us and wait for the market to catch up with the growth and the cash flow that the Company is creating.

Great, thank you.

Chris Brown, Aristides Capital.

I apologize if I missed this in the 10-K, but I was curious. There was a press Release, I believe it was in August of this year, of a wrongful death suit filed in Texas. Has that been settled or is that still outstanding?

That is outstanding lawsuit at this time. They non-suited us in Harris County and then turned around and refiled in another county. We have insurance. The insurance company is handling that claim at this time. And that's really all I can say about ongoing litigation. And, yes, the litigation is out there. We do have insurance that is handling it at this time. And the rest will have to wait and see how everything works out.

Can you comment at all on any risk of insurance potentially not covering the entire judgment or entire settlement in that case?

Not really. It's ongoing litigation. I really can't say too much on it. I can tell you we have insurance and that they're handling it at this time.

Okay, fantastic, thank you.

David Kaczorowski, who is a private investor.

Maybe you can straighten me out a little bit when it comes to the Odessa Club. You said there's a June opening target on that. Was that a Jaguars legacy club?

No. The Jaguars Odessa is open out there. This is another location that's about, I want to guess is about 1,500 or 1,800 feet down the road from the Jaguars location. The Jaguars location is a BYOB location. The new location will serve liquor and basically be a Ricks Cabaret.

Okay. And I think in a prior call you talked about the Odessa and Lubbock locations were both BYOB and you were looking at changing the license on that?

No. We added an additional club in Lubbock. It's already opened. We opened a Ricks Cabaret in Lubbock. It's open, it serves liquor. And we're going to do the same thing in Odessa, basically -- is open a second location that has liquor. The Jaguars locations will continue to operate the way they've operated all along.

Okay, thank you. And then as far as the whole chain for Jaguars, you said you're one quarter in. What is your view now of the branding?

I'm sorry, I couldn't hear you for a second.

For the Jaguars chain, are you rebranding that? Are you keeping the Jaguars?

We did rebrand. The chain, before we purchased, was actually called Jaguars Gold Clubs. And most people knew them as the Gold Clubs. We just dropped all the Gold Club stuff and we have just called them Jaguars. We're just keeping the Jaguars. We're not going to rebrand. We could rebrand to our XTC Cabaret brand, but when we sat and looked at it, we have five locations, I think, that are XTC Cabarets right now. So to turnaround and rebrand nine locations with those, and change signs and those types of things, it was much easier just to eliminate the Gold Club stuff out of their name. Just use the word Jaguars, and use that brand a go-forward basis. And we're basically build and create a brand called Jaguars.

All right. You also released a press release about, that Hurricane Sandy was not a problem for your New York club. In the final analysis, did everything work out there?

Yes, we didn't have any real damage. Some minor wind damage on the rooftop deck and that. Most of that was repaired within a day or so. We were closed for three days so we did have three days that we were closed. But we reopened with a big Halloween party because it was already planned. And the employees really -- we were thinking about closing for another day or so but the employees were really excited to get back to work. And get electricity. Someone who didn't have electricity, running water, that type of thing. So it really became a place for everybody to come hang out, as well. And charge their cell phones and do those types of things. It's definitely been tough on a lot of our staff, a lot of our employees, a lot of people in New York. But our particular property didn't have any real problems.

Okay. And was there a major change in the business cadence in the aftermath?

No, not really. We opened back up and business -- the Garden's going strong. We've been having a really good December.

And then last one. So, the Dallas -- I believe last time around you mentioned an October open, and now you're saying a January open. Any problems there that you think may continue to be an issue?

We were hoping to open in this quarter, in the October, November, December quarter, originally. Basically we've had a couple of inspections that have taken a little longer to get the city out to inspect, or approval of plans or something. All permits are in, all the liquor licenses are in. Basically, we've got some final construction stuff that's going in right now, then some final inspections. We don't foresee any problems. We've actually started advertising the Vee Lounge dates as opening the 17th of January, with the grand opening February 1 and 2. And we expect the Bombshells to open on the 24th of January. And unforeseen something happens between now and Christmas, we will start marketing. We were only going to market that location about two to three weeks ahead of time, so we'll probably pick the exact date for sure. Right now it's scheduled for January 24. It could change a week earlier, a week later, depending on stuff, but we'll start advertising and marketing that the first week of January.

All right, thank you. Good luck.

(Operator Instructions)

David Mau from Montgomery Street Research.

I noticed in this press release and in the 10-K that you are talking about non-GAAP earnings. And I was thinking or hoping that you could explain your thinking behind what you're trying to show there. And maybe in relationship to future consistency of earnings.

Yes. What we want to show is, like a lot of companies, a lot of major companies now are putting out non-GAAP numbers. We're a growth company, and as we grow there's going to be acquisition expenses. There's going to be some one-time expenses here and there, as we grow and as we develop. But what we want to be able to show with the non-GAAP number is the consistency in the earnings stream. We try to do that through cash flow by saying -- Look, see, our cash flow is strong, our cash flow is growing, our cash flow from operations. But it doesn't seem to be the standard that the Street uses. The standard the Street seems to be using is this non-GAAP number. And so we've decided to put this non-GAAP number in, as well. We're carrying along with our cash flow because we've got certain groups that's following that growth of the Company, and using that as their valuation deals. But we wanted to bring in the non-GAAP number because that seems to be more of a standard that many companies are using. So we want to bring that in, as well, so that we can be compared, like other companies are compared.

Very good. Are you expecting to be publishing non-GAAP financials to point out what the one-time expenses were in the quarterlies coming up?

Yes, more than likely this is something we're going to continue to go with on a go-forward basis.

Very good. I applaud your transparency.

(Operator Instructions)

We have no further questions at this time. I'd like to turn the call back over to our speakers for closing comments.

Eric, was there anything you wanted to talk about with respect to transportation?

Yes, I do. We've been getting a lot of questions. We get a lot of calls and a lot of e-mails regarding our corporate aircraft. And I want to address that. The biggest question is how much do we pay our pilots and that type of stuff. We don't pay pilots. I, myself, am a pilot. Travis Reese is also a pilot. So typically we fly the planes, we fly ourselves to places.

We have a small single-engine aircraft that is the majority of our flight time that I use to hop around in Texas. Because I can get to any of our Texas locations in about an hour or so, on about 16 gallons of avgas. So basically, around $80 or $100 for a flight. It's not only cheaper than trying to jump on Southwest Airlines or one of the other airlines. It's more convenient because I can travel at any time of the night. Unlike most operations, our operations run until 2.00 and 5.00 in the morning. There's not too many commercial flights I can catch at those times.

So I just wanted to explain that and hopefully it frees up some of the questions. Our corporate jet we use on longer-term flights when we're typically traveling with more people. The other thing is the tax benefits. Now, after this year those benefits may change, and we may have to reevaluate on a go-forward basis some of the strategies. But the tax benefits are phenomenal, as well, on the purchase of new corporate aircraft, like the one we purchased in February. We get accelerated and bonus depreciations and all types of other tax benefits. And being a 34% taxpayer, it creates a lot of benefit for the Company, as well. And that's really all I have to say on that.

If anyone has questions, they are always welcome to send an e-mail and we'll try to answer and get back with you as we can. And I'd like to invite everybody out, no matter what city you're in tonight. Obviously I'm not going to be in New York this evening. I will be back up there in February again so I hope to see a lot of you in February. But stop by and visit any of our locations for some due diligence. We would love to hear your feedback on it. Thank you.

Thanks, Eric. Thank you, everyone, for being on our call today. And, as always, feel free to ask me any questions you have regarding Investor Relations. I'm available at IR@ricks.com, or you can always visit our website, www.ricksinvestor.com. And Happy Holidays to everyone. Shea, it's over to you.

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