RCI Hospitality Holdings Inc (RICK) 2019 Q1 法說會逐字稿

Greetings, and welcome to RCI Hospitality Holdings Fiscal 2019 First Quarter Results 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. You may begin.

Thank you, Sherri. For those of you listening to this call on the phone, you can find our presentation on the RCI website, click Company Investor Information just under the RCI logo. That will take you to the Company Investor Info page, scroll down a little and you'll find all the necessary links for this call.

Please turn to Slide 2. I want to remind everybody of our safe harbor statement. It is 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 our GAAP measurements that we use and are included in our presentation and newscast. Finally, I'd like to invite everyone listening in the New York City area to join us tonight at 6:00 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 West 33rd Street between Fifth Avenue and Broadway, right around the corner from the Empire State Building. If you haven't RSVP'd, ask for me at the door.

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

Thank you, Gary. Thank you, everyone, for joining us this afternoon. If you'll please turn to Slide 4, to review today's news.

We generated strong first quarter results. Total revenues increased 6.8% to $44 million and GAAP EPS was $0.65 compared to $1.47 a year ago. This year's first quarter included $1.2 million in pretax gain from the sale of nonincome-producing assets. It also included $447,000 in pretax nonoperating loss. This reflected implementation of a new accounting standard for changes in market value of equity securities.

On the other hand, the year-ago quarter included $9.7 million in deferred tax credit as a result of federal tax reform. The year-ago quarter also included $900,000 in debt issuance cost write-offs and prepayment penalties related to our large Centennial bank refinancing. On a non-GAAP basis, which eliminates all of these items and some others, EPS was $0.61, up 15% year-over-year; and free cash flow was $11.1 million , up 47%.

In line with our capital allocation strategy and given where the stock was trading, we began buying back shares in the first quarter. We have been active here in the second quarter as well. Altogether from October through January, we bought 28,211 shares in the open market. We continue to maintain our positive outlook for the year and our $26 million free cash flow target. I'll talk more about our free cash flow dynamics on Slide 8.

I'd like to note that in our 10-Q filed today, we identified mechanical errors in our goodwill impairment analysis in our fiscal 2018 10-K. It involves tax rate and debt service assumptions for 2 clubs in Texas and resulted in additional impairment of $834,000. This was a noncash item. It was also considered to be an immaterial revision and has no effect on our first quarter results. If you please turn to Slide 5.

Sales were preliminary driven by 7.1% year-over-year increase in Nightclubs and, to a lesser degree, 3.2% increase in Bombshells. As previously reported, Nightclub same-store sales were up 4.3%, while Bombshells were down. The latter was more than made up for by our Pearland location and a week or so of the new I-10 location, both in the greater Houston area.

GAAP operating income increased 21.8% or $2 million. That was driven by $2 million improvement in Nightclubs. The segment benefited from higher revenues, in particular higher service revenues, and that $1.2 million gain on sale. But Nightclubs also saw higher legal expenses in part due to Chicago and Pittsburgh acquisitions. Bombshells' profitability reflected reduced operating leverage while corporate expenses improved due to lower professional fees compared to a year ago. On a non-GAAP basis, which excludes the first quarter gain, operating income increased 9.9% or about $1 million. Margins expanded 64 basis points to 23.1% of revenue.

Please turn to Slide 6 to review sales of non-income-producing assets. We sold 3 assets in the first quarter for $1.9 million, resulting in that $1.2 million gain. Including were the former Club Onyx Philadelphia business, our former corporate offices and related real estate and a small parcel in San Antonio. Collectively, we received $1.2 million in cash and $625,000 promissory note. The cash was used in part to pay down close to $1 million in related real estate debt.

Subsequent to the quarter, we sold an access parking lot near the former Club Onyx in Dallas. The sales price was $1.4 million with $250,000 paid upfront in cash and the remaining $1.15 million payable in the form of a 3-year seller note at 8%. We expect to record a pretax gain of approximately $383,000 in the second quarter results. At the end of January, the only asset we hope to sell were 2 access parcels near Bombshells I-10 and U.S. 249. We anticipate closing both sales soon.

We have several other tracks near our Bombshells locations that we hope to have under contract in this fiscal year. I'd like to note that the sale of non-income-producing former club-related assets stems from our capital allocation strategy. In fiscal 2016, we took a good hard look at our assets. We wanted to dispose of assets that were not providing us with adequate return, and we wanted to turn money-losing assets into moneymaking assets or free up as much capital as possible for more productive purposes. This is what these bigger asset sales in the first quarter and in January were about. Please turn to Slide 7 for a review of sales and margin.

At $44 million, the first quarter of 2019 was a record quarter, and it marked the 11th quarter in a row of total same-store sales increases. This is the longest streak we've ever had. While operating margin can fluctuate between quarters due to the seasonality of our business, we can see -- you can see on this chart on this slide that we have been making progress expanding margins as we grow larger. We hope to keep that up.

Please turn to Slide 8 for a review of our cash generation. Total cash totaled -- our cash totaled $9.4 million at December 31. We have $17.7 million at September 30. The September balance included proceeds from debt used to finance the cash portion of the 2 November club acquisitions and the related real estate. Adjusted EBITDA performed well, increasing 8.4% year-over-year to $12 million. Free cash flow for the first quarter had an impressive performance with $11.1 million versus $7.5 million in the year-ago period. I'd like to caution you not to get ahead of us with this. Sometimes, the first quarter has a bit of a tailwind due to changes in working capital when we pay a lot of bills at the end of the fourth quarter and pay fewer in the first quarter. This benefits free cash flow. We will let you know when we feel comfortable whether we are likely to exceed our initial $26 million target. Please turn to Slide 9.

Our strategy for capital allocation remains the same. We've adjusted our graph on this slide to take into account our slightly lower share count due to share buybacks. But the general parameter is that $27 continues to be the breakpoint for buying shares at our current free cash flow run rate. As I mentioned at the start of the call, we relaunched our buyback program when the stock began to soften in the first quarter. And after the 10-K was filed, we began purchasing again in January. We'll continue to do so in our standard and judicious manner. Please turn to Slide 10.

Long-term debt increased a net $12.5 million through September 30. This was primarily due to the addition of $12 million in seller financing for the Chicago and Pittsburgh club acquisitions in November, which is secured by those club's assets. Our weighted average interest rate increased only 10 basis points and in total, 85% of our long-term debt is secured. Please turn to Slide 11.

While slightly higher debt continues to be manageable, we are paying down our $5 million bank line of credit installment loan with Centennial. That was used to finance the Chicago and Pittsburgh acquisitions. As of September 31, the balance was $3.1 million, and that should be paid off by the end of April. We continue to be on track for our large Centennial real estate loan to be 55% or less loan to value by the end of fiscal '19. At that point, amortizations will drop $250,000 a month, freeing up $3 million on annualized basis.

Looking forward ahead -- or looking farther ahead, the $3.1 million Realty balloon in fiscal '20 relates to excess Bombshells parcels, and we plan to sell those before that becomes due. As you know, we also look at occupancy cost and debt to adjusted EBITDA for debt manageability. Occupancy costs are rent plus interest as a percent of revenues. Both of these metrics increased in the first quarter. That was a function of the debt we raised in advance of the Chicago and Pittsburgh acquisitions as well as debt related to the construction of new Bombshells locations. Occupancy cost and the debt ratio should decline with a full quarter of Chicago and Pittsburgh's clubs and the Bombshells I-10 in the second period, and then at the other 3 Bombshells up in Houston.

Please turn to Slide 12 and 13 to recap our fiscal 2019 plans. In Nightclubs, we will continue to complete the integration of Chicago and Pittsburgh. Most recently, they were renamed Rick's Cabaret, expanding the higher-end gentlemen's club change in 9 locations. We must also keep open -- our eyes open for the right club acquisitions at the right price. With Bombshells, we will complete and open the 3 remaining units under construction and then review our progress. We will also focus on improving same-store sales. I'm pleased to report that the January Bombshells same-store sales were down only a single-digit percentage. As for our balance sheet, we anticipate closing sales on the excess Bombshells parcels at prices that should enable us to reduce our debt on the actual Bombshells investment, and we will pay down the Centennial loan in order to drop our monthly amortization and free up cash. With regards to margins, we continue to look for ways to reduce costs. And with capital allocation, we will continue the strategy that worked so well for us.

Thank you to all of our investors for supporting us and all of our staff for doing a great job. It's truly appreciated. Operator, let's begin the question-and-answer session.

(Operator Instructions) Our first question is from Frank Camma with Sidoti & Company.

The beat to my number once I adjusted the numbers, was pretty nice considering [probably] the revenue. And it sounds like it kind of -- when I go through my model where I go down, below down to the service revenue and the margins that -- which you actually called out. But why would that be so strong in the quarter? It seemed pretty outstanding, so just wondering or was there something particular there that I'm missing is it the mix or something like that or just it continues to be strong because of consumer confidence?

Yes. We just had a very, very strong December especially for service revenues in 3 of our markets, in Florida, New York and Minnesota, which carried a bunch of it. And I think part of it is also the sale of assets.

You mean as far as getting rid of some weaker revenue producers so you still look -- it is kind of the mix issue when you look at it from that perspective, right?

Yes.

Okay. So just -- I know you focus a lot on capital allocation. You have a pretty clear strategy. One question on that just is obviously you keep [from] better and better free cash flow and one of your priorities is to buy back shares, which I totally appreciate. But do you worry it gets a little self-defeating given just sort of your market cap as far as taking out some liquidity? I'm just wondering if you have any thoughts there.

Well, when the stock was $6, that was a problem because we were buying large number of shares with very small amounts of money. But with the stock in the $22, $23 range, as you can see, we spent well over $600,000-and-some between basically November and to January and we bought 28,000 shares. So I don't see it being a problem. Taking up 3% to 5% of our float in the calendar year at this point, I don't see that being a huge issue. I still think there are plenty of shares out there in the float that will trade.

Sure. Okay. And just one quick question on Bombshells. I think you made a comment about the -- did you say the first -- the January numbers were down to single digit comp declines? Is that what you said?

Yes, we were down less than 10% in January for Bombshells. We've got some pretty good programs in right now, training management, new stores are opening. The construction is moving along on the other 3 locations it is exciting our management team and that's what we've been marketing and hiring new management, to help build and train for the new stores, and I think that's really helping remotivate our existing stores.

Okay. And it looks like the schedule is unchanged, I think, compared to [last time] but it looks like the opening schedule is exactly the same as for right now.

Yes. Right now, we're on schedule. The only thing is the 249 floor could run into early March, first week of March or something. If inspections run over, if we have any inspection issues because there's always -- those are out of our control. Everything that is within our control, it will be on time and we don't suspect we'll have any issues but they're always possible. So -- but I don't think we would be any later than the 10th of March opening, and I think we can be early as right around the end of February. That's what we're planning on right now, to get open right on that first weekend March.

Our next question is from Marco Rodriguez with Stonegate Capital Partners.

I was wondering if we can talk a little bit about Bombshells and the operating margins, non-GAAP. Obviously, down here in the single-digit area. Just trying to understand that this is just a function of the same-store sales aspects or were there other sort of promotional activity that are kind of driving that down versus historical numbers?

I'll tell you what really drove it down was legal. We paid some pretty heavy legal bills in that quarter that we left as normal. We also had some depreciation and changes with the way some of it just -- and deferred rents were booked in this quarter. So I think some of those changes hit in this quarter as well. Because of the way we did the write-offs in the last -- in the year-end or something. They were trying to explain to me exactly all these deals. This is crazy. I know how -- I can look at the cash and see we generated all this cash from Bombshells and well, you tell me I didn't make any money. It doesn't make any sense. And so some of the noncash stuff kind went through there. But because of the way it look it's GAAP and we -- it can be affected into the non-GAAP number as well. So we didn't -- none of it was subtracted for non-GAAP purposes.

Understood. So is that going to reverse itself come the second half of this fiscal year for you on Bombshells? Would you expect it to come back up to that 15% to 20% operating margin? Or is that going to be a lingering effect?

I think it should, yes. I think, we're going to see a much different quarter this quarter. I know we'll get an idea where it's kind of headed from January, February, March. We won't have the legal bills. We -- the county dismissed the case with prejudice, so that's all in the past for us. We don't have to -- we're not going to be facing those legal fees anymore. The deferred rent issue is booked and worked out now so it's going to be normalized rent going forward on those locations and the stuff on -- whatever the deal with the Austin location was is all in the past now, too. So I think we're going to see a normalized quarter this quarter. I'm hoping so anyway. I mean, I know you guys are looking at what is the -- I'm having a hard time myself really figuring out all these adjustments that they did. So I just went back to the cash flow and said, okay, forget all that. Show me all the stuff that's noncash, take it out, show me what we're doing to cash. Okay, we're doing good numbers in cash. Great.

Good. That's helpful. Then kind of shifting gears, sort of the Nightclubs. I was wondering if maybe you can just kind of update us a little bit here on Chicago and Pittsburgh. Kind of I know it's still early days but how is that kind of progressing versus your expectations?

Pittsburgh is doing great, a little ahead. Chicago had some extreme weather. All 3 of our Illinois clubs, St. Louis, Kappa and Chicago, were all affected by the big snowstorms and stuff as well as Minnesota a little bit in January. So -- and of course, this year, we didn't have a Super Bowl in Minnesota. So there are certain markets that are down a little bit. But overall, I think we're -- I would say we're flat to down a little bit through the first 5 weeks on the Nightclubs, but we have the NBA All-Star game coming up in Charlotte, which will give us a big boost that week. And then the -- we have some really good lineups for the March Madness. I'm sorry, I can't get my brain to work right now. And then, of course, in April, we will have the Final Four in Minnesota. So even if this quarter is down a little bit, we'll make it all back up in the April quarter. But I'm hoping -- we're all pushing. We've got our team. We know we've had 11 consecutive quarters of same-store sales growth and we have all the teams pushing to in these next 8 weeks to really beat last year's number so that we have a boost in same-store sales for the 12th consecutive quarter, but this is a tough comp quarter for us for sure.

Understood. Got you. And then in terms of the acquisition landscape for Nightclub, if you can kind of update us there. If you have some possibilities that are moving along the line, further down the line, if you will, to a potential close.

I'm sorry, can you ask that again? I missed the first part of it.

The acquisition landscape on the Nightclubs, just kind of wanted to get an update.

We're looking at several still. I would say I don't think we do anything in this quarter unless something extreme popped up that we just couldn't say no to. But we are getting serious on a couple that we would move forward on probably to April to June quarter.

(Operator Instructions) Our next question is from Donald McKiernan with Cash Flow Kingdom.

Most of my questions have already been asked so I just really have 2. First, on the margin improvement that we saw this quarter. Is that something you expect to continue? Or is it just a onetime kind of thing?

If you see in the past, it fluctuates from quarter-to-quarter and it's really going to depend on how service revenue continues through the rest of this quarter and how it does for March Madness. March will be the real tale of how the quarter is going to go, as it always is for the January, February, March quarter.

What is the specific service revenue that did better this quarter?

Of all of our VIP...

Is it (inaudible)?

There's more people through the door in December, bigger parties in December. Just a little bit of everywhere.

Okay. And then on the $11.1 million in free cash flow, I know a nice chunk of that must be changes in working capital. Can you tell us -- give us an idea how much?

I don't know off the top of my head. I can get with Phil and the team and get you that number, though.

Okay. Well, I'll be able to see it once the...

In the Q, yes. It will definitely show up in the Q.

(Operator Instructions) There are no more questions at this time. I'd like to turn the conference back over to management for closing remarks.

Thank you, operator. Thank you, Eric. We've included a few supplemental slides in our appendix. Slide 18 is our calendar. For those who joined us late, you can meet management tonight at Rick's Cabaret in New York from 6:00 to 8:00 o'clock at 50 West 33rd Street between Fifth and Broadway. If you haven't RSVP'd, ask for me at the door. The next event on our calendar is our appearance March 28 at the Sidoti & Company Investor Conference in New York City. Our registration is free for professional investors. We encourage our tristate area investors to attend our presentation or sign up for a one-on-one. For those based out of town, use it as a reason to come to New York City and see us. And on April 9, we're firmly scheduled to report second quarter Nightclubs and Bombshells sales.

On behalf of Eric, the company and our subsidiaries, thank you. Good night. And as always, please visit one of our clubs or restaurants. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.