RCI Hospitality Holdings Inc (RICK) 2014 Q3 法說會逐字稿

Greetings and welcome to the RCI Hospitality Holdings, Inc., formerly Rick's Cabaret International Inc., third quarter 2014 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 being recorded.

It is now my pleasure to introduce Gary Fishman, who handles Investor Relations for RCI. Thank you Sir, you may begin.

Thank you. Please turn to slide two.

Thank you, everybody, I just wanted to remind you that our Safe Harbor statement is posted at the beginning of our conference call presentation. I will remind you that you may hear or see forward-looking statements that involve a number of risks and uncertainties. I urge you to read it. Actual results may differ materially from those currently anticipated. We disclaim any obligation to undertake or to update any information disclosed on this call as a result of developments which occur afterward.

Please turn to slide three. I also urge you to read the explanation of non-GAAP and adjusted EBITDA measurements that we use and that we are including in our presentation and news release.

Finally I'd like to invite everyone in the New York City area to join us at Rick's Cabaret New York tonight at six o'clock to get a firsthand look at one of our flagship clubs. Rick's Cabaret New York is located at 50 W. 33rd Street between Fifth and Broadway. If you haven't RSVPed, ask for me at the door.

Now here is Eric Langan, President and CEO of RCI Hospitality.

Thank you, Gary. Thank you for joining us today. We've got a lot to discuss, so if you will please turn to slide four.

Number one, welcome to our first earnings conference call for RCI Hospitality Holdings Incorporated, our new corporate name. RCI Hospitality reflects how far we have come since we first began as a publicly traded company in 1995. Back then we had just one adult club and modest revenues. Today we have 39 adult clubs and are well on our way towards owning and operating 10 sports bar restaurants. We have, in all, 15 major brands of formats with operations across the country.

Changing our name represents a significant step. It marks our Company's transformation into a profitable and growth-oriented player in the hospitality field and one focused on solid niche markets with what we believe is a highly promising future.

As for the quarter we are pleased to report that our core performance increased nicely year-over-year. Revenues reached a new record. Core operating margin was up and we continued to generate a healthy amount of cash.

Let me provide a little perspective on these results. Our second quarter this year was a turnaround quarter. We significantly increased our level of revenues, core operating margin and cash flow.

The recent third quarter on the other hand was a cleanup quarter. We took advantage of our higher level of performance to resolve a number of outstanding issues, particularly on the legal front. Based on our results year-to-date we are comfortable reaffirming our fiscal 2014 guidance for revenues, GAAP and non-GAAP EPS.

In addition, we have spent some time reviewing and updating our capital allocation strategy to achieve maximum benefits for our shareholders of our strong cash -- our strong and growing cash flow. We are focused on using excess cash to produce the best possible returns on investment for shareholders versus the top line, which has been our major concentration in recent years.

One result was that, starting in the fourth quarter, we have begun open market share buybacks utilizing our Board-authorized $10 million repurchase program, the bulk of which remains to be used.

Please turn to slide five. Here's how we look at our performance for this quarter.

On a GAAP basis we earned $0.07 per share. That includes $0.21 it cost us to settle five legal cases as we previously disclosed. GAAP EPS also includes $0.02 from the loss on the sale of property. Adding those items back to our GAAP EPS totals $0.30 per share. That represents a 31% year-over-year increase.

Our operating margin was 8.7%. When you do the same calculation you will see our core operating margin was 19.4%, about 10 basis points increase over the year-ago quarter.

Our non-GAAP EPS and adjusted EBITDA calculation formulas already exclude the $0.21 from the legal settlement but not the other costs. If you exclude that, non-GAAP EPS was $0.37 or 11% increase year-over-year and adjusted core EBITDA was $8.1 million or 16% year-over-year increase.

For the rest of the presentation we will use numbers for the quarter we will be referring to our core performance numbers. Please turn to slide six.

As noted, we incurred legal settlements costing $3.2 million. This covered two injury claims, two tax issues and one copyright case. We believe these settlements represent good use of funds. They have significantly reduced legal distractions and represent sound business decisions. We continue to work on other legal and tax cases to resolve them as expeditiously as possible. Please turn to slide seven.

Total revenues reached a record $33.3 million. This continues the market improvement we have been seeing over the $28 million average revenue range we experienced since Q1 2013, through the first quarter of this fiscal year. The first quarter of fiscal 2013 was when we began benefiting from the multi-club Jaguars acquisition. We are especially pleased that the third quarter revenues increased 1.4% subsequently -- sequentially, I mean, historically we have a decline in this quarter from the seasonally large second quarter.

During the third quarter, new adult clubs and sports bar restaurants added $3.7 million year-over-year. This largely reflects the full quarter of revenues from Vivid Cabaret New York in Manhattan and the new Bombshell sports bar and restaurant in Webster Texas. This also includes a small amount of initial revenue from the late June opening of the Bombshells in Austin.

Same-store sales of $28.9 million increased 5.1% year-over-year with nearly all major brands showing improvement. In particular, sales at adult clubs open for more than one year continue to reflect the success of our post-recession strategy of increasing patronage from bigger ticket high-margin customers.

Turning to slide eight, looking at operating margins compared to a year ago period we saw increased leverage in some areas. Salary and wages combined with stock-based compensation fell to 21.7% of revenues from 23.7% in the year ago quarter. Cost of goods sold declined to 12.9% from 13%. And other costs were 7.8% down from 8.2%.

However, we did see some increase in cost and other areas. Legal and professional fees increased to 3.6% from 2.8% due to the higher level of activity related to certain lawsuits and a large number of legal settlements in the quarter as we previously discussed.

Insurance costs increased to 3% from 2% due to the Company's growth and industry factors. These costs should decline, based on early quotes we are receiving for the new year as new markets are opening, as more companies are writing for the industry now that indemnity is out.

Looking at some other areas that are of interest, we also saw increase in preopening costs. They totaled $306,000 compared to only $185,000 a year ago. These costs are spread among a variety of expense categories.

They are also -- they are up year-over-year due to increased activity in opening new restaurants in the third quarter. We also saw a slight increase in rent and interest combined, which is how we measure cost of occupancy. That was 10.1% of revenues versus 9.6%. The third quarter reflects the addition of Vivid Cabaret New York and the Webster and Austin Bombshells. It also reflects the previously discussed increase in the New York Cabaret, Rick's Cabaret rents. Turning to slide nine.

As a result the core generating -- the core cash-generating power of the Company as reflected by adjusted EBITDA was $8.1 million for the third quarter. This compares to 6.1 -- $6.9 million in the year ago quarter. Over the last two quarters, adjusted EBITDA has averaged close to $9 million. That's a 21% increase from the average over the prior five quarters. Please turn to slide 10.

To review some balance sheet highlights for the quarter, we reduced debt by $2.3 million, of which $1.6 million was paid off in cash and $750,000 was conversion into stock. Our debt paydown also included $900,000 on the Tootsies-related notes, which at 14% rate is our most expensive interest item. We now have only $2.8 million remaining on the Tootsies debt.

Shareholder equity at the quarter end hit a record $109.3 million, up from $105.3 million at March 31. This primarily reflects the exercise of options, total assets were approximately level.

Turning to slide 11, as you can see we have three more units that should come online in the fourth quarter. We have one gentleman's club in active development, Rick's Cabaret in Odessa, which we are very excited about. It has received all necessary permits and approvals and is planned to open this month.

As I mentioned in the last call Odessa is the capital of fracking in Texas and has been ranked as the country's second-fastest growing metropolitan area in personal income for the past three years. Once it is up and running, we anticipate Rick's Odessa will be one of our top clubs.

As for acquisitions we've decided not to proceed with the previously announced acquisition of Club O, just south of Chicago. And as for the restaurants we are looking at opening two more Bombshells in the fourth quarter, one in South Houston and one in Spring Texas suburb, just north of Houston. Please turn to slide 12.

Looking at our sports bar and restaurant business we have four units open. Bombshells Austin opened in late June and has been doing very well. It is a great location off a popular highway, surrounded by shopping malls and high tech company campuses. On the slide in this photo of the new location and the day that some servicemen paid us a visit.

You will also have -- we also have two Bombshells, two other Bombshells once we opened in late January, one we opened in late January in Webster and the one in Southwest Houston, a suburb of Southwest Houston and the original one in Dallas. And then we have the Pole Position in Fort Worth, the new brand we developed to replace the Ricky Bobby's brand name near the Texas Motor Speedway.

As I mentioned we plan to open two more Bombshells in the fourth quarter that will give us a total of six sports bars and restaurants. After that we will be directing our efforts on siting and planning the next four Bombshells locations.

Turning to slide 13. Based on our performance year to date, the expectations of the fourth quarter, we are maintaining our most recent guidance. Revenues of about $130 million which will be up 16% year-over-year, GAAP EPS of $1.10 which would be up 15%, and non-GAAP EPS of $1.60 which will be up more than 14%.

Turning to slide 14. As many of you would like a detailed discussion of the status of the REIT and its funding, what piece of real estate we would sell and for how much and when, but because this is a legal process it would be inappropriate for me to comment in detail on these subjects.

We can tell you that the Company is moving forward exponentially. As I have mentioned on previous calls, whenever possible, we like to own the real estate for our adult clubs. Because that's because local ordinance often require the license to be physically tied to the location.

Owning as much real estate, however, makes our income statement and balance sheet look very different from other restaurant and bar chains. To solve this problem, we've worked at the development of this independent private REIT, the benefits will include a favorable liquidity event for Rick's. RCI is becoming more of an operating company with a significantly higher return on equity, and a much more comparable profile compared to other publicly traded restaurant and bar chains.

Turning to slide 15. As I mentioned earlier, we have spent some time reviewing and updating our capital allocation strategy. To give you some perspective, over the last three years we've focused on growing the topline. With the recession we had to lower prices so we used cash to finance acquisitions and development of new adult clubs and restaurants.

Both helped offset lower recessionary pricing strategy, but now, with the stronger economy, we have been able to increase our prices for food and beverages and other categories while costs are up with their inevitability impact on performance. We are also generating substantial cash.

Going forward, we need to make sure that we redeploying this cash to ensure maximum returns. This means we are focused on its best use without necessarily being wed to any one approach.

We are also focused on the bottom line, not necessarily the top line. Specifically, while our target has been 20% revenue growth, organically and through acquisitions a more reasonable target going forward will be 15% to 20%. As a first step in implementing this strategy we have been buying back stock which, at our current levels, we believe provides one of the best and most risk-free uses of our cash.

Also, we have begun to review underperforming assets looking for anything that is not generating sufficient cash. At present, there are no assets that we plan to buy. And once we finish opening the two pending Bombshells and Rick's Odessa, we anticipate a period of lower preopening costs.

We used cash in the third quarter to resolve certain lawsuits to eliminate the uncertainty and potential future use of cash in connection with these matters. We also have used cash to expedite debt paydowns. But based on our analysis that isn't necessarily the best use of our cash.

On the last quarter's call we asked for opinions about a dividend. Institutional investors were very clear in their opinion that dividends were not tax-efficient and not the best use of our cash. I will look forward to talking to you more about all of this during the question-and-answer session.

Turning to slide 16. I want to use this slide to pull RCI Hospitality's story together. We have been and are making solid progress to further strengthen our Company. We have come through the recession as a larger more diverse enterprise. As I mentioned earlier today we have 39 adult clubs now. In addition, we are well on our way to the 10 sports bars restaurants capable of generating significant added revenue and strong franchise potential.

All together, we have 15 major brands and formats that we operate across the country. The Company has a new name that reflects our broader scope, but also remembers our roots. We are well along to establishing a REIT to unlock the real estate value. It will also help us -- make our financial profile similar to other hospitality companies. Down the road it could open a new business opportunity for managing real estate of other adult club owners. We also see using cash to maximize return to shareholders.

Finally we have begun reviewing all operations to ensure maximum cash generation. I look forward to reporting to you on the new ways we are reducing costs and bringing more down to the bottom line.

With that we will open the line for questions. Operator?

(Operator Instructions). Steven Martin, Slater.

Hi guys.

Hey Steve, how are you doing?

Good. Your legal expenses -- what amount of the current quarter would you guess is more nonrecurring in nature and related to all the settlements?

Gosh. Good question. Probably the extra 0.8% or so that would get us back down to that. I want to keep it under 3%. I know it went a little over this quarter but we did have several attorneys working on multiple things to clear all this stuff up. But (multiple speakers) one more quarter of high legal as we work on a couple of issues that we still have out there.

On I assume that REIT -- the legal expenses on the REIT are in there as well?

Some, yes.

Okay. Can you update us on the Texas poll tax?

Right now, the attorneys are filing the appeal and basically we are just in hurry up and wait mode. And that's basically all we know at this time. I think there's another meeting next week where I will be meeting with some of the attorneys and other club owners to see if we can try to figure out something to move this thing forward.

Okay. And can you comment on how -- now that some of the Bombshells have been open for a while, can you comment on how they have been doing?

Yes. The first two locations, the Dallas location is still about the same as it's been for the last couple of quarters, so it's holding. Webster peaked, it's kind of slight decline and now we are starting to build back up there a little bit. And the Austin location, which I consider an A location, I think the first two locations are more of a B restaurant area where they are not surrounded by lots of other restaurants and shopping, where the Austin location is definitely an A location, surrounded by restaurants, shopping and whatnot. And it's doing way better than we anticipated or either of the other two locations have done.

The Spring location and the South Houston location are both, I think, A type locations as well where we have other major restaurant brands basically in the same parking lot or directly across the street from them. So I think that's going to help draw a lot more diners to those locations.

All right. Thank you very much.

(Operator Instructions). Mike Mork, Mork Capital Management.

Yes. My question regards you just have the one line there decided not to proceed with the acquisition of Club O. That was a pretty big acquisition for you guys. What caused you to not go ahead with that?

As we got farther into the due diligence process and some of the licensing issues with the city, the grandfathered license not necessarily as safe as we anticipated in the beginning, we just decided that we couldn't pay $11 million for it.

Okay. And then we are in your fourth quarter right now, so investors are going to start looking at your following year. And you more or less indicated this revenue growth looks like about 15%. You would be buying back stock, you won't have some of the problems with insurance, etc.

If you have a 20% increase in your EPS that would indicate about $2 for the new year. Does that sound reasonable?

It sounds reasonable. We haven't really gone into a whole lot at this time. I wanted to try to get -- we've got a couple of issues that I want to try to get through. I would guess that hopefully with the Annual Report, we will able to issue guidance for 2015 if not sooner.

Sounds good, thank you.

(Operator Instructions). Bob Brannan, private investor.

Hi. A few just sort of questions. First of all, can you comment at this point in terms of how much stock has already been purchased in this quarter?

No, we only can report that in the Quarterly Reports or Annual Reports.

Okay. And as far as the REIT is concerned, has an investment banker been retained to help start raising funds, or how is that -- ?

We are talking with several right now. We are still waiting on the final offer memorandum documents to be done, and once we get those put together then we will -- we have hired a consultant on it, but we haven't actually decided whether we going to use an investment bank or we're going to raise some of the money ourselves at this point.

Got it. And you have a sense in terms of timing when you would like this done?

Right now we are waiting on our attorneys and appraisers and just little things that are really out of our control. I am hoping that by year-end we will have a much better update and some progress on this. (multiple speakers) working on it for a long time, I know, but until we actually got the plan and now that we've structured the entity, did all the tax work and now we are working on the offering memorandum so --.

Sorry, was that fiscal year-end or calendar year-end?

Calendar year-end.

And finally, can you give us a sense of how we are tracking so far in terms of this quarter in terms of same-store sales?

July was in line with the quarter. The previous quarter that we are in or that we just reported. I believe we are going to be able -- we've had some price increases, we are having decent customer counts, we are very happy with the way business is going right now.

So I don't see any reason -- as we move into the prime season I am hoping to get into mid-September. As we get mid-September through March or May, it usually runs pretty good. So I'm very excited about the numbers going forward based on where we are at in this month.

Right, so you're saying so far we're good. Have you continued to see a little turnaround in Club Onyx?

Philly -- Philadelphia is doing very well, Charlotte is doing very well. Houston is doing okay, the Dallas location we are still working on but we've made some more changes there in the last few weeks. I think it's even going to get better there as well. It's better but we think it will get a lot better with some of the concepts that we are working on right now.

And last, have you seen -- I know last quarter you talked about how you were working on LA, and I was wondering how you've -- what you are seeing there.

LA is doing okay. It's not the home run that we thought it would be, so we are a little disappointed with that. But like I said we are working on the new concept. As we move into this quarter we are going to be looking at underperforming assets. We may sell some of them, we may disclose some of the locations if we are not happy with the results that we are getting out of them.

We are really -- we've been focused too much on the topline and not enough on the bottom line. So we've been what I call carrying a little bit of deadweight. We're going to work on eliminating some of that deadweight as we move forward.

Great, thank you.

Steven Martin, Slater.

Housekeeping detail. Phil, can you comment on what the actual shares outstanding were at the end of the quarter, and then obviously on the 10-Q it says that there were $10.138 million at the end of July. So something increased the share count?

We had a conversion of some debt.

Okay. And were there options exercised as well?

Not in July. All those finished -- we issued some shares, no, those didn't actually go in, never mind. Yes, we had no more options there.

All the options expired July 2. I think they were all exercised or exchanged out way before then.

So the difference between the end of the quarter and the $10.138 million was conversion of debt less whatever shares you bought back?

Correct.

Thank you.

(Operator Instructions). [Al Hartman], private investor.

Hello, I'm just wondering if you could discuss anything about the structure of like how management is going to receive a management fee back, or is it just going to be LP limited liability distributions that you'll get back from managing the assets of the real estate?

We will actually -- we will have a subsidiary that will be the management company for the REIT. And we will be paid a management fee.

Is that a percentage or too early to tell?

The structure is all being worked out with the lawyers right now. We have to be very, very careful on control issues. No one can control 50 -- you can't have a voting group that controls 50%, and there's all types of rules for REITs for the tax status. So, all that is being worked out right now.

Okay. And then, New York City had a lawsuit. Is that something you're looking to settle or is that something you're going to pretty much fight on until you (multiple speakers)

You know, I never say never on settling something. But settling on a reasonable -- something we consider reasonable versus the fight, at this point, we just don't know. We have some motions for summary judgment that are out there right now that just come back with any day, can be against us, could be for us. We just don't know.

I think right now there's too many moving parts to really consider selling the case at this point. This may be something that we go all the way to the US Supreme Court on. We just don't know at this point.

And on that one, is most of the legal expenses already (inaudible) like things like that, the appeals actually cost a lot to look forward or is it just most of the cost?

It's New York. It's never cheap. But I mean yes, relatively speaking, compared to what we spend on discovery and depositions and that, I think we are through the major cost of it. Obviously, there's lots of motions that have to be filed. And oral arguments, those type of things which do cost money. But nothing compared to doing 20 depositions in a month.

Okay. Appreciate it, thank you.

(Operator Instructions). [Nate Risposin, B Prince].

Hey Eric, just a few questions about the kind of change in -- change of pace in terms of you guys focusing more on the bottom line. I'm curious, what kind of conversations you've had, what you're seeing out in the market that have kind of turned the direction a little bit there?

I think a lot of it has to do with we're just not being rewarded. The stock is not being rewarded for the growth, the topline growth. We've met with a group that showed us, this is your cash on cash, your free cash flow return based on your current stock price with the growth levels that you're discussing and talking about. It's cheaper, it's more cash efficient for you to buy back your stock than it is to pay 14% debt down because your free cash flow returns exceeds 14% below a certain stock price.

So we started looking at it and we started doing the math on it and we had always calculated similarly. But we didn't take into the tax consequences fully, and when you fully take the tax consequences into it, it's pretty eye-opening how cheap our stock is, relative to our debt right now.

Any type of target amounts in terms of returning cash to shareholders?

It's a free cash flow-generated per share is how we are doing the math on it. We take our free cash flow-generated per share and do it on an annualized percentage basis, against the stock price is how you do the calculation. Basically it's over 14%. At under, I think it's $11.38 or something. So basically up to about $11.80 we can buy back our stock and earn more.

But specifically, I think we are going to continue to buy back our stock probably up to $15 a share at this point based on the math we are looking at.

Okay. Thank you.

(Operator Instructions). We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

This is Gary. Thank you, Eric. I want to remind everybody again that we do have due diligence event at Rick's Cabaret New York from 6 to 8 o'clock tonight that's it 50 W. 33rd Street between Fifth and Broadway. If you haven't RSVPed already, ask for me at the door.

Later this month the Company will be at the Gentlemen's Club Expo and tradeshow at the Mandalay Bay Resort and Casino in Las Vegas. And we look forward to reporting our fiscal fourth-quarter sales in October and then our year-end results in December. Thank you, everybody, and good night and have a good summer.

Thank you. That does conclude this evening's conference call. Thank you for your participation today. You may disconnect your lines at this time, and have a wonderful day.