RCI Hospitality Holdings Inc (RICK) 2018 Q3 法說會逐字稿

Greetings, everyone, and welcome to RCI Hospitality Holdings Fiscal 2018 Third Quarter Conference Call and Webcast. (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. For those of you listening to this call on the phone, you can find our conference call presentation on the RCI website. Click Company and Investor Information just under the RCI logo. That will take you to the company and investor information page. Scroll down a little, and you'll find all the necessary links for the third quarter.

Please turn to Slide 2. I want to remind everybody of our safe harbor statement. It's posted at the beginning of our conference call presentation. It reminds 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, and we disclaim any obligation to update information disclosed on this call as a result of developments that occur afterwards.

Please turn to Slide 3. I also direct you to the explanation on non-GAAP measurements that we use and are included in our presentation and news release. Finally, I'd like to invite everyone in the New York City area to join us tonight, 6 o'clock to meet management at Rick's Cabaret, New York, Manhattan's #1 gentlemen's club. You can also tour its sister club, Hoops Cabaret and Sports Bar, next-door. Rick's is located at 50 W. 33rd St. between Fifth Avenue and Broadway, around the corner from the Empire State Building. If you haven't RSVP-ed, ask for me at the door.

Now I'm pleased to introduce Eric Langan, the President and CEO of RCI Hospitality.

Thank you, Gary.

Good afternoon, everyone. If you'd please turn to Slide 4, after the market closed, we issued our third quarter earnings news release and filed our 10-Q. We reported another great quarter of strong core results.

We are in active negotiations with club managers in multiple markets to purchase their clubs. Our newest Bombshells in Pearland, a Houston suburb, continues to do very well. And all 4 of our Bombshells units in development are moving ahead on schedule.

Turning to our results, we achieved record quarterly revenues of $42.6 million, up 14% year-over-year. GAAP EPS for the third quarter was $0.55, up 38% from a year ago. During the quarter, one of our subsidiaries had an approximately $500,000 lawsuit settlement. Excluding that and other smaller items, non-GAAP EPS came in at $0.58, up 24% from a year ago.

Free cash flow increased 17% year-over-year to almost $8 million. Favorable trends are continuing. We believe we'll exceed our fiscal 2018 free cash flow target of $23 million, and we'll announce our fiscal 2019 target in December when we report year-end results.

Please turn to Slide 5 for an analysis of third quarter operating performance. Compared to the year ago quarter, total revenues reflect increases of 12% from new units and 5% from same-store sales. New units included a full quarter of the Bombshells 290 in Houston, which opened in the fourth quarter of '17, nearly a full quarter of the new Bombshells in Pearland, which opened in early April, and a small contribution from the renamed Kappa Men's Club. Excuse me.

Last year's 2 major acquisitions, Scarlett's Cabaret in Miami and St. Louis, transitioned into same-store sales over the course of the third quarter. All of these translated into segment sales increases of 8% for Nightclubs and 54% for Bombshells. In addition, all core revenue lines continued to grow with beverage up 14%, food up 33% and high-margin service revenues up more than 6%.

GAAP operating profit increased 20.4% to $95 million. Key factors included big increases in segment operating margin for both Nightclubs and Bombshells. This more than offset a modest increase in corporate overhead. Non-GAAP operating margin, at 23.4%, was about level with last year, in part due to significantly larger contribution from the Bombshells in the mix.

Please turn to Slide 6. A variety of factors drove our performance. In general, we benefited from the improvement in our portfolio of nightclubs and restaurants along with increased operating leverage from higher revenues, particularly in the Bombshell segment. We have continued to see increased customer counts in nightclubs and restaurants and strong marketing around pro basketball playoffs and the start of the pro baseball season.

There were some specific factors -- Nightclubs benefited from the economy doing well, which has been reflected in higher oil prices which helped revitalize the Texas oil patch. Bombshells continue to benefit from the interest in the Houston Rockets and the Houston Astros as well as the new menu items we introduced last quarter.

As we discussed in our last conference call, corporate overhead increased. This was primary due to hiring vendors to develop controls governing our new financial IT systems and produce reports automating financial analysis. Having said that, I want you to know that as a larger company, we're exploring new ways to use our scale to reduce costs from vendors in areas such as insurance.

Lastly, similar to our second quarter, cost of occupancy continued to decline. And because of the new federal tax law, our effective tax rate was 20% lower than last year.

Please turn to Slide 7 for a look at our sales and margin trends over the last 2 years. Same-store sales are now up 9 quarters in a row. This was the longest continuous quarterly uptrend we've had since early fiscal 2013.

In the third quarter, we started to comp against year ago increases of 6%-plus in same-store sales and increases in total revenue from the Scarlett's acquisition in Miami and the acquisition in St. Louis. And in the fourth quarter, we began comping against Bombshells 290. This is where our new Bombshells Pearland has helped sales, and our Bombshells rollout plan will also help pending the acquisition of new clubs.

As I mentioned earlier, the third quarter generated record quarterly total revenues. If all goes well over the course of fiscal '19, we will benefit from both the new Bombshells as well as any acquisitions.

As for non-GAAP operating margin, as we mentioned in the last quarter's call, we expect it to moderate somewhat in the second half. In general, however, you can see we are on an upward trend.

Please turn to Slide 8. Our strong performance during the third quarter also led to strong cash generation. Adjusted EBITDA was up 14% year-over-year to almost $12 million. For the 9 months, adjusted EBITDA was up 28% to more than $35 million.

As for cash itself, we had more than $13 million on the balance sheet on June 30. This was up more than 5% from March 31 and close to 33% from the start of the fiscal year. As for free cash flow, it is now up 24% for the first 9 months at close to $21 million.

Please turn to Slide 9 to review our long-term debt. Debt continues to be very manageable. Compared to March 31, it is up approximately $4 million, mainly in debt secured by real estate. There were small reductions in other types of debt across the board. And our weighted average interest rate was up 5 basis points.

Please turn to Slide 10. Regarding debt maturities, in the third order, we extended $3 million in Scarlett's Miami seller-financed, non-realty balloon is now a balloon in fiscal '19. We added $4 million of realty balloon for property on U.S. 249, part of which is being used for a new Bombshells. This comes due in fiscal 2020, but this should be converted into a construction loan in the fourth quarter as we start building there. The only major balloon in the next 5 years is the $5.4 million in fiscal '20 related to the Scarlett's acquisition. If needed, we believe we can extend or refinance this before it balloons or pay it out of free cash flow.

Even though total debt has increased, our higher revenues and lower interest rate on debt -- cost of occupancy has continued to fall year-over-year. In the third quarter, it was 7.6% of total revenues, down from 8.2% a year ago. And for the 9 months, it was 7.6%.

We added a new section to this slide on our total debt to adjusted EBITDA ratio. We like to keep this below 3x. Currently at 2.95x, we are close to the 3x, but that's primarily due to the extra real estate we acquired around our new Bombshells. As this real estate was acquired with bank financing, and as we sell off the extra real estate over the coming months and pay down the bank dead, our debt-to-adjusted EBITDA ratio will come down.

Please turn to Slide 11 for an update on Bombshells' expansion plans. Our 4 Bombshells locations in the greater Houston area continue on schedule. We are building 4 locations that are the same as our prototype on Highway 290. This should assure us of consistent, high quality results. In our latest developments, construction is scheduled to start next week for our location on U.S. 249, and we have a location in Katy under contract and awaiting business permit -- or building permits to be approved.

When possible, we are using bank financing to purchase Bombshells real estate and finance construction, fixtures and furniture to enhance our cash-on-cash returns. The new units will bring the chain to 10 Bombshells in operation by the middle of next year. The average Bombshells has been running a little more than $4.5 million dollars in annual revenues with segment operating margins around 20%. Doing the simple math, we are looking at having the Bombshells segment, by the end of the next fiscal year, with an estimated run rate of $40 million to $50 million. And as revenues increase, so should operating leverage, which would help expand profitability.

Our next target markets continue to be San Antonio and Miami. In case you didn't see it, we put out a news release last week announcing how Restaurant Business Magazine named Bombshells to its 2018 list of fastest-growing new restaurant concepts. We greatly appreciate this third-party recognition, and it's especially rewarding since we've only opened the first location 5 years ago.

Please turn to Slide 12 to review our capital allocation strategy. We've simplified the slide down to its core tenets of our strategy. The key metric we look at is our free cash flow relative to our market cap. Based on free cash flow of $23 million and current market cap of more than $310 million, the after-tax cash flow yield on our equity is in the mid-7% range. This is what we consider to be our risk-free return by buying back our own assets in the open market. At that yield, however, we are more likely to use capital more productively for club acquisitions or to open Bombshells, as we are doing.

To compensate for this added risk, our hurdle rate has to be at least 25% to 33% cash-on-cash return unless there is a significant strategic rationale to do otherwise. Should free cash flow rise or our stock price ease to the point where the yield is nearing the double-digit percentage range, and it exceeds the yield of accelerating payments on our highest-interest debt, we would look at buying back shares again. Currently, $25 is the breakpoint for these criteria.

With the stock significantly above that price, we would continue to use capital to acquire or open new units. Should the stock fall below that point, we would use capital to buy back shares. We continue to apply this formula and lessons learned from the past to almost all of our decisions involving capital investments.

To wrap up, please turn to Slide 13 for a review of our 3 to 5 year financial goals. Our objective is to grow free cash flow by more than 50% from our fiscal '17 level to approximately $30 million a year. On a per share basis, we'd like to grow that on an average of 10% to 15% per year.

We have 3 strategies for achieving that. One, acquire more great clubs in the right markets. As I mentioned at the start of this call, we are currently in active negotiations with club owners in multiple markets to purchase their clubs. Two, continue to expand the number of company-owned Bombshells. Our target is 3 per year. And third is strict adherence to our capital allocation strategy. If we can't find the right acquisitions or Bombshells locations, we will sit, wait and let our capital build.

Now let's open the call for questions.

(Operator Instructions) Our first question today comes from Frank Camma from Sidoti.

I was obviously pretty surprised, pleasantly, with the margins here, so a couple questions on that. First of all, are you seeing any creep -- I thought you might -- in commodity costs on the food side? Let's talk about that first, and how you might be handling it.

Actually, anything that we've seen in cost increase, we've more than offset with the drop in chicken prices. I'll put it easy. I was actually just talking with David [Simmons] the other day about how much chicken has come down. I read an article. I get a lot of -- I'm signed up to a lot of restaurant newsletters these days, and I read an article about how chicken prices have come down, so I called to ask him how it was doing. And he said, "Man, it's been fantastic." He says the wing prices have dropped so much that the little bit it's gone up is being offset by that.

That makes sense because your menu is tilted towards things like -- convenient, the wings and stuff, so I guess that's a big component of your costs. Okay. That does make sense. Now how about the salaries though? I thought that would creep up given a higher component of Bombshells. Are you seeing anything there?

We've kept our costs in line. We've given some significant raises. I think the taxes are really helping offset some of that. The lower tax rates have made that much, much easier on us. But I think that you're seeing that the Nightclub segment has been fantastic for us. We're still seeing increases in service revenues. If we can continue those trends, I don't think salary and wages are an issue that we're going to have to look at. On the corporate side, we are having to -- we're still watching that very closely. As the labor market tightens, corporate staffing, we're having to watch corporate staffing, pricing and making sure that we're paying our corporate staff employees, especially in accounting and whatnot, competitive rates. But overall, I think we're keeping it in line with where we've always been.

Okay. Now obviously, (inaudible) for you, at least the revenue numbers earlier, you were thinking there'd be like the typical seasonal slip. So is it basically just the strong economy and your ability to bring in those people in the clubs? And can you talk about sort of the summer because that typically is also like a seasonal slowdown that could be --

Yes. Typically we slow down in this quarter and slow down a little more this quarter, but we didn't see it in the last quarter, I think partly because the Houston Rockets -- so the Bombshells did very, very well, especially Houston locations while the Rockets were in the playoffs. We're seeing definitely the oil patch areas, Odessa, Longview, having very nice bounce backs right now, but overall, I mean, sales have been strong everywhere. Minnesota, Florida, New York have been pretty steady and pretty good for us. You can see that in that service revenue. Any time service revenue is up, profits are up because there's really no real associated cost with those service revenues.

Our next question comes from Marco Rodriguez from Stonegate Capital Partners.

Just wondering to kind of piggyback on that last question on the same-store sales and kind of your expectations. And I know the last quarter, again, you were expecting kind of the seasonal slowdown. That didn't seem to happen, and so I'm kind of wondering what your thoughts are here for Q4 and same-store sales.

I mean, it's really hard to say on a quarter-to-quarter basis. I'm hoping that we can continue with the trend of at least 3% same-store sales. That's kind of our internal target. That's what we're watching the year-over-year units and talking with our regional and general managers and having them target beating their last year by at least 3%. Some of them are doing a little better. Some are skating along. But we're excited about the potential. As long as the economy stays strong, I think we follow the trends until the trend doesn't work anymore. We're waiting for a trigger. If something triggers in the economy or if something happens that slows people's spending down, we'll have to adjust the model, but I think right now, I think we shoot for that 3% same-store sales growth.

Marco Andres Rodriguez: Got you. That's helpful. Then in terms of the Nightclub segment and your comments on the kind of the M&A landscape, can you maybe talk a little bit more from a high level just as far as how full that pipeline might be as far as potential targets? And maybe, if you can, talk a little bit about as far as how close you might be with any potentials?

Sure. I mean, to put it in simple terms, the lawyers are working on a couple of deals. As far as the pipeline itself, there's several behind the ones that the lawyers are working on that we're still off a little bit negotiating certain terms or negotiating price or maybe we've come to terms on price, but not necessarily down payment and payout, things like that. We can probably be about as active as we want to be over the next 6 months. I'm really waiting. At the end of this month -- well, actually the 20th through the 22nd we'll be at the Gentlemen's Club Owners Expo where all the club owners come and meet every year in Vegas. We'll be out there for 3 days. I have lots of meetings set up. I'm talking with several people out there. I expect several people that I'm not scheduled to talk to approach me because that's typically how it works. And so we'll look at the pipeline we have in place right now and then look at anything new that's out there that's available that didn't really know about and kind of get a better strategy in the early part of September as to where we want to focus our time and where we want to move forward. The nice thing is we have 4 Bombshells lined up right now, so we are looking at properties in Miami, but we've got plenty of time left on that. So our main focus, I would say through the end of this calendar year, through December, is going to be very focused on club acquisitions. I think that's A) where our time is going to be best spent, and I think that's really -- we're to that point. We've got enough Bombshells, like I said, lined up and ready to go, and it's time to grow the club side again. We've absorbed Scarlett's and St. Louis. Both are doing very, very well for us. We've lined up management and been training some management to move into some new markets, so we're looking at new markets, not just markets we're already in. And I think that as we -- the lawyers work out the details on the ones that we've got active, the pipeline will remain robust going forward.

Got you. And then kind of moving on to the Bombshells and your comments on Miami, can you maybe just talk a little bit about as far as the landscape there that you've seen? What sort of opportunities might be available and maybe kind of where you are in terms of what inning as far as getting close to finding some targets down there or areas to expand?

Sure. In Miami, we're having a little more trouble finding properties to actually buy, so we're looking at some lease deals, which'll raise our cash costs up front, and our cash-on-cash returns will be tighter into that 25% to 33% range versus the range when we're only having to put up 25% cash on these things and owning the real estate. We do have a property or 2 that we're looking at -- we can buy. The real estate's much more expensive down there, if we look at the larger developments like we've done in Texas where we're buying multiple acres, building our property and then selling off the additional property after we've increased the value by bringing the traffic flows up. So it's a little different market for us, but we'll learn it in time. Like I said, the good news is we have plenty of time, and we have some great operations in Florida currently with Tootsie's and Scarlett's. So we'll find what we're looking for there. The nice thing is the competitors that we're looking at there and the things that we're seeing in that market, the numbers are much higher. The sales are much higher at most of the sports bar-themed type restaurants than they are in Texas. So that's a big plus for us.

Got you. And last quick question, just kind of a housekeeping item, just kind of noticed here on your balance sheet, if I'm not mistaken, assets held for sale increased a couple million dollars sequentially. Did something else get pushed over to be sold or was there a revaluation of some items that were already in there?

I believe those are the properties we now have under contract. When we have raw land, we don't put it into assets held for sale until we have a contract on it, I think, is our -- is what we're doing with our policy. So we did get a couple of contracts on some of the raw land next to the Bombshells properties, and so as those properties go under contract, they're being moved into assets held for sale.

(Operator Instructions) Our next question comes from Darren McCammon from Cash Flow Kingdom.

On operating margin, you guys did quite a beat on operating margin. Should I be expecting something in the 22% range going forward or is this a -- it's nice to see, but is it a onetimer or should I be budgeting for this going forward?

I was looking at the trend. Yes, it's on Slide -- what's that? Pull that slide up for me real quick.

17. It's on Slide 17.

Yes. So I mean, if you look -- out of the last 1, 2, 3, 4, 5, 6 quarters -- or actually, it's the last 7quarters, you've got 2 of them at 19%. The rest have been over 20%. I guess it just kind of depends on if the service revenues stay as strong as they are. The Bombshells will drag it down a little bit as more of the revenue comes from Bombshells, but the Bombshells are continuing to increase as well. So if they move up into the 19-plus percent, I mean, it's hard to say. We're just going to kind of have to watch it over the next few quarters and see how it develops. But as of right now, I mean, I think we're pretty much in line with where we've been for the last 3 quarters in a row now. I guess we had 25%, 23%, 22%, so I'm hoping we stay on (inaudible). That's definitely where we want to be.

Yes. I keep budgeting you for it to drop a little bit as you open Bombshells, but it's just not happening, so good to see.

Well, the nice thing about the Pearland Bombshells is it was a very big opening for us, the highest gross revenues that a Bombshells has ever done, so --

What is the run rate on Pearland now?

It's exciting. I don't know what we're currently at. July has been a very, very rough month for us. I don't know if you -- you're probably aware, but 100 days plus -- or, I mean 100-degrees-plus for 20-some days out of the 30-some days, so our patios are having a lot of slowdown. But we're looking very forward to football season starting. I think some of the first preseason games are tonight, so that's going to be a pick up for Bombshells. And one of the other things we're doing, since we have several new stores opening, we've just done some negotiations and landed some sponsorship spots on all the sports radio stations in Houston and a couple of the other larger rock stations and whatnot and one of the hip hop stations. But we're buying sponsorship for the Astros, the Texans, the Rockets and lining those up, and I think we're even doing some stuff with the soccer team. So we're going to start doing some marketing, especially in the Houston market where we haven't really done much marketing, so I think that will -- we'll see a nice increase in the sales trends in Bombshells from that. It's new. We'll see. Let's see how this next quarter comes out, and then as we open up the new store in September, that's going to help give us an idea of where those Bombshells are going. As we open up 8 stores in the same market, we're going to get to see what kind of market saturation and crossover we get with the branding. I think we're going to see some nice increases in margins because of that. So I'm hoping to push those Bombshells -- I know our top stores are running margins in the 26%, 28% range, so if we can continue to push that up, I think the Bombshells can average in the 20s. If the Bombshells average in the 20s and the clubs stay where they're at, especially as we close these underperforming clubs like Philadelphia, a small club in Houston. As those margins -- I call those margins the anchors pulling the margins down -- as those margin numbers go away, we're going to see a higher increase in the margins of the clubs as well. So maybe we'll stay in these operating margins in the mid-20s or lower 20s.

Okay. Well, just a bit of irony, calling 20% plus margins anchors, but okay.

Well, no, those were the ones -- I'm saying they're being anchors down to 20%. Right. We have a club that's (inaudible) margin or 4% margin that's pulling the other ones down.

I know a lot of restaurants that would love to be anywhere near that.

Yes.

So how are you going to measure the effect of the advertising, the sports radio and stuff? How are you going to know whether it works or not?

Well, we've got comps in Houston. Some of the stores have been open for 3 or 4 years in the Houston market now, and so we're going to be able to see where they're at and what their trends have been and kind of why -- I said the nice thing is when you -- it wasn't extremely expensive for us, and when you divide it by 4 stores, it's a little more expensive, but by June, we'll be dividing it over 8 stores, so it gets really, really inexpensive on a per store basis to do these things.

So you think you've got the by-store data by day to be able to tell whether or not radio spots help or not?

I don't think we'll be able to tell it by day, but I think we'll be able to tell by month, by quarter and especially on the year-over-year and just seeing new faces, right? Obviously, if we're seeing new faces, then the radio is working for us, so that's the idea is to help build the brand, to bring in new faces into the business. And I think we'll be able to see if that's working for us. Along with the radio, you're getting -- we're getting Internet spots with them. We're getting live remotes. It was actually a very nice buy package that we've been able to negotiate on this.

Okay. So you did almost $8 million in free cash flow, but your actual cash went up less than $1 million. Where'd the difference go?

Well, a lot of it's going to the Bombshells properties. We have to put 25% down. We have to put the first 25% of construction down. With actually 3 construction sites going right now, that's a considerable amount of cash that's gone out for that, so I think that's where the majority of it's going.

Did you have to pay back any Scarlett's or pay down any loans or anything this quarter?

I think we -- was that $2 million paid down in Scarlett's this quarter or last quarter? [Phil], do you know when that was paid down? But our overall debt went up.

It was last quarter.

That was the last quarter. That's what I thought.

Okay. I'll see it when the Q comes out. Some comments on your slides. The rollout slide that you added -- I think that's new this quarter -- that's really helpful. I like that. It might be the first time I've seen it. And then also I've always loved the capital allocation slide, but I just wanted to comment, you can't make it any plainer than below $25, we buy shares, and above that, we do this, so good job on that.

(inaudible) slide this time is just a simple slide up -- it was getting a little cluttered with all the little boxes and all the little target things on it, so I decided, let's -- I was talking with Gary, said let's simplify that up and just put it in plain English. If the stock's below this, we're going to buy stock. If the stock's above this, we're going to keep growing.

Well, when you make it that plain, I don't think you're ever going to be buying stock. So the 4 upcoming Bombshells -- well, in other words, people will buy in front of you, which is kind of interesting.

Yes. We're going to keep buying clubs. I mean, the nice thing is we're in that position today, and that's -- we've worked hard to get here, and the discipline, I think, is really paying off for us and for the shareholders.

Agreed. The 4 Bombshells that are coming up, I know for Miami you're looking to lease. Are the rest of them are going to be purchases?

These are all 4 purchases. We'll own the real estate and build the buildings on all 4 of these. In fact, what we're -- a couple of them are -- the I-10 site is a development site. We bought a little over 8 acres and put in the sewage and retention. We bought the land extremely cheap, and we've already sold off one of the build pads. We turned it into 3 pad sites. We build on the middle pad site. We've sold the East pad site, and the West pad site we have -- is listed with brokers, and we have several interested parties looking at that now. Hope to have that under contract before the end of the fourth quarter. So that'll end up that. The Pearland pad sites, the business is open now. I'm talking with a couple of different developers right now on what we want to do with those 2 pad sites or whether we just want to list them and just let anybody move on them. We're trying to control who's next to us and put in businesses that complement or add business to our Bombshells. The 249 site, we've already sold a 1.59 acre site there. That will be a Corky's BBQ out of Memphis. That'll be one of their first Houston locations to open as they move into Texas. We think that'll be a complementary restaurant that'll help our business. And we are currently looking -- we're talking with several other concepts on the remaining -- I think we have about 7.3 acres left there that we're going to sell off.

So that sounds like it's becoming another strategy of yours: buying larger chunks of land and almost having a real estate aspect more and more to the company, real estate development. Is that fair?

We only used it because it made so much sense for us. To do it in other markets, we're not really looking to -- the pad sites we're looking at in Miami, for example, are 2.2, 2.4 acre, already-built pad sites. The Katy pad site was a super lot, ready-to-build pad site where somebody else did all the development. We pay a little bit more for them though that way, but I think we've proven the concept enough now that you're -- this was really a way to limit risk for us. I think we're proving the concept out. We kind of know our demographics. We know what we're doing when we open these things, and so I'm not looking to do that as much. We just kind of got into these 3. The 59 location, we had to buy 4 acres. We're building a 20,000 square-foot shopping center on it. Once it's built and leased out, we'll probably sell the shopping center off with a parking easement.

Okay. Okay. So when I heard that, that's not really a long-term strategy. It's just how it worked out in Houston.

Yes.

Is that correct?

Correct.

Our next question comes from Steven Martin from Slater.

Eric, you did $20.6 million of free cash flow for 9 months. Your guidance was $23 million for the full year, and you said you were going to exceed it. But frankly, that would -- you had a great fourth quarter last year, and now to get to your guidance, you only have to do $2.4 million of free cash flow.

We don't necessarily call it guidance. It's our target.

Okay.

We targeted at the beginning of the year to do $23 million in free cash flow. And right. To think that we'd only do $2.4 million would be extremely low for us. So that's why we said we will exceed that target. We're not raising the target or doing anything with that target. We'll issue our new target for '19 and the December year-end.

Okay. And the Scarlett's that -- the acquisition you did last year in Florida, can you comment on how that has done since you bought it?

It's doing very well for us. We're in line with the projections that we thought we would be able to -- the increases that we thought we'd be able to increase it. It is moving into same-store sales on a go-forward basis. I think that'll definitely help with our same-store sales percentages, which is why I say we're targeting 3%, and we're very happy with it. If we can find 2 or 3 more of them, we're ready to buy them.

Okay. In the -- within the corporate expense, you've got a whole bunch of one-time items the last couple of quarters. When should we see those start to diminish, the lawsuit settlements and some of the other items?

We've moved through most of those. In fact, I was just looking at what we have left from uninsured. There's only 2 or 3 cases left, I think, of the uninsured cases. Unfortunately, we see new stuff from time to time, but overall it's gotten there. Part of that one-time stuff was the New York State sales tax audit that we were going through. That's all settled now, so we know those numbers. Those are expensed out. There's not a lot left out there, I hope. I mean, the problem is, it's unforeseen, so if I could predict it all, it'd be great because then we could just plan for it. But overall, I mean, I think we're -- it's lower and lower each year. I think that's the good news. It's getting lower and lower each year. There's still some of it popping up, but it's getting lower and lower.

Our next question comes from [Bob Brown], private investor.

Two questions. Great year so far. Now that you -- I think you made a comment maybe the last quarter in one of the releases saying how you feel like you've really gotten a good handle on all aspects of opening up the Bombshells in terms of picking the real estate, the legal, the business side. And given that we're going to be -- that we're looking at 10 in not too long a way -- not too far away, what do you think? Are we getting close to where we think franchising is going to be a more realistic target here?

Yes. We are getting people. We're getting calls again, which we hadn't in a long time. We're not even marketing for calls, so it is -- we're getting some calls. We're talking to some people. Like I said, same as always, we're looking for -- our first franchisee is going to have to be a larger operator, someone who knows what they're doing. We don't want to have locations open and close somewhere or anything like that. And it is a major investment. They're not -- it's not a $300,000 investment. It's a 3-plus million dollar investment to open one. I'm hoping so. I think when we get to that $50 million mark, I was looking up -- I've kind of looked up some of the past, smaller chain restaurants that opened up some company stores and then seeing when their franchising really blew up, and most of them, you started seeing at 10 to 15 locations and $50 million plus in revenue. So I think we reach that by the end of this year -- or I'm sorry, '19; I say the end of the year -- in fiscal '19, and I think at that point maybe we will look at hiring a franchise salesperson again and marketing and advertising franchises again. I just don't think, in the next 12 months, it's going to make a lot of sense for us. I think for the next 12 months, we -- first of all, we need management focused on the club acquisitions because the -- there's several of them out there. We're working hard on them. We've got the Bombshells openings lined up. I know the Bombshells team is going to be very busy opening these 4 locations. I mean, technically, we're opening 4 locations between September 30 of this year and June 30. So really why we keep saying a year, that's really only a 9-month period or actually about a seven-month period, and then we're going to be opening these next 4 stores. So they're going to be very busy with that. So if something -- if the right person comes along, we'll take the time and energy to make it happen, but it's not something we're actually actively out searching for franchisees right now.

Okay. And second question, I just happened to see this on a news item today. I assume you guys did as well with Buffalo Wild Wings. Anything in terms of possibilities of doing some sports betting now, now that it's illegal in terms -- or at least federally anyway, in terms of at some of the Bombshells locations?

I mean, I don't think sports betting's legal in any of our markets. If it became legal in our markets, we'd look at it. We are looking at some EA Sports stuff, and we are also looking at some of the fantasy team stuff, which again is kind of sports betting, but not necessarily direct sports betting. So we have been talking with a couple different groups to start, like, the Bombshells fantasy sports league or something along those lines where we do a revenue share with someone else's platforms. So that is something we could be looking at for additional revenue at some point in the future.

(Operator Instructions) Our next question comes from Ishfaque Faruk from WestPark Capital.

A couple of questions from the -- somebody already asked regarding your M&A targets. Do you have a sense for the size of the M&A targets? Is it going to be like Scarlett's Cabaret or is it going to be like some of the smaller ones like the $1 million or $2 million one you did recently and the geographical extent?

The active ones we're looking at now are in the $10 million to $20 million range.

And which geographies are you looking at primarily?

Not disclosing that at this time. Thank you though.

All right. Okay. (inaudible) In terms of your --

Because they're such small markets, if I talk about which markets, it's too easy to figure out which acquisitions we're looking in.

I understand that. Okay. Another one was your long-term debt. Are you comfortable with your debt creeping up? I know you've commented and also mentioned it on your slides that your debt grew to almost $133 million-or-so, and there's a lot of high interest rate debt in there too. Are you comfortable with that even though the company's margins are growing as well alongside this?

There's not a lot of high interest rates in there. I mean, most of that is associated with the acquisition of Scarlett's, and so we're not worried about that debt at all. Scarlett's is performing as expected. It was 100% financed acquisition -- excuse me -- if you'll remember, we basically used none of the company's money. We borrowed the down payment, and we financed the rest through the owners. We've slowly started taking out some of that with a $2 million payment to the owners, the $5.4 million balloons in 2020. We'll have to decide how we're going to move that debt. $90 million of our debt is associated with estate, which is financed at very, very low rates, average weighted rate of 5.62%, so we're not worried about the real estate debt. As we sell off some of the nonincome-producing properties and the land around the Bombshells, that's going to drop our debt significantly. So there's absolutely no worry. And of course, the biggest thing, in 14 months, our debt service level goes down by $3 million a year when we don't have to continue to make the extra $250,000 monthly principal payment on the Centennial Bank refinance of most of our properties. So no, there's no worries at all on the debt level. It's well below our 3x EBITDA, and as our EBITDA is expanding as well -- you've got to remember, when the 4 Bombshells open, that's going to grow our EBITDA considerably, and the debt associated with those Bombshells is mainly -- is included in here already.

Yes. Okay. And sticking to Bombshells, the margins of Bombshells went up a lot this quarter. Is it just scale, operating leverage? And is there anything more to read into that?

Well, you've got to figure your oversight management is being divided by more and more revenue, right? So as a percentage of revenue, the oversight management costs are going down. We're getting more buying power, so we're able to negotiate better pricing. That's helping. And the stores we're opening are doing larger volume, and the same-store sales at Bombshells is increasing as well, so that's all helping to expand the margins. So as we open up the next 4 stores, I'm hoping that we'll see those margins at running around 20%.

Wonderful.

There's not a lot more margin increase, but obviously a little. I think we're still at -- what -- 19%, I think, on Bombshells. So if we get another point or 2 out of it, we'll be very happy.

(Operator Instructions) And ladies and gentlemen, at this time it's showing no additional questions. I'd like to turn the floor back over to Gary Fishman for any closing remarks.

Thank you, Operator. We've included a couple supplemental slides in our Appendix. We have our calendar in there, a few things coming up. If you joined the call late, we're having a Meet Management at Rick's Cabaret in New York tonight from 6 to 8 o'clock. Rick's Cabaret is at 50 W. 33rd St. between Fifth and Broadway. If you haven't RSVP-ed, ask for me at the door. August is the 20th anniversary of the acquisition and the merger with Taurus Entertainment Companies. August 19 to 22, as Eric talked about earlier, is our Annual Gentlemen's Club Expo in Las Vegas. This is the adult nightclub industry's national convention, tradeshow and awards. The following week on August 29, we're holding our Annual Meeting at Corporate Headquarters in Houston. And on October 9, we'll be reporting fourth quarter Nightclubs and Bombshells sales. On behalf of Eric, the company and our subsidiaries, thank you and good night. And as always, please visit one of our clubs or restaurants. Thank you.

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.