RCI Hospitality Holdings, Inc. (RICK) Q3 2013 Earnings Report, Transcript and Summary

Thank you for taking your time today. I think there have been technical difficulties with my last phone. Let’s hope this one is working better. I'll begin the conference call with an overview. We’re going to talk about Q3 '13 financial results, the debt update and the cash flow, talk about our new project status, where we are with those projects and what we’re doing, review our shareholder value strategies, industry roll up and diversification update, kind of let you know where the industry was as a whole, how we think we stand in the roll up of the industry and talk about our diversification and why we’re working on that, talk about the pain over last four years, for the company and our shareholders and how that’s behind us and how we’re looking forward to the remainder of 2013 and 2014, and then we’ll end the call with a question-and-answer session. Starting with 2013, $28.3 million in the third quarter, total consolidated revenue up 18.3% from the previous year, strengthened our Jaguars’ acquisition and the Bombshells of Dallas we’re very happy with. Both of those are doing very well and our New York and Minneapolis markets both performed very well in this quarter. Income from operations, GAAP number $5.7 million, non-GAAP $7 million with adjusted EBITDA of $6.9 million. Our GAAP net income of $0.23 per share was impacted by $540,000 in one-time unusual expenses and settlements of lawsuits. Those one-time unusual expenses are mainly the startup costs from any location that's not still open. Once we open the location we're going to take them out of there and actually that'll just be end of the startup cost of opening that location, and then the settlement of two lawsuits that were pending, that we're very happy to get rid…

(Operator Instructions). Our first question comes from the line of Eric Beder from Brean Capital. Please continue with your question.

In terms of the restaurant you are now expanding Bombshells. What should we think about is the end game for the restaurants group, and can they do the returns that you get from a regular night club?

I think the main thing one has to realize that these are not typical restaurants. We run in 50-50 liquor, actually Ricky Bobby is running even a little higher than 50-50 liquor. So what I like with them is we’re a theme sports bar, with a restaurant that converts in a live music venue when the sport ends. And so we’re basically a destination location and an entertainment place where people come to entertain and hang out and not just come and grab dinner and go home. I think the end game, we got lots of options, A, we can keep growing it, growing it ourselves as we grow internally. At some point we prove the concept, we lay it out and we franchise, we can (inaudible) start on partners. At some point we may build it to a certain point and maybe somebody buys it from us giving us a influx of cash to grow our adult business. I mean I think we just have lots and lots of positives with it. As far as the margins go, based on the layout on approximately $300,000; $3 million a year rotation to a $3.5 million year rotation. We think that we can get the margins around 20%. Excuse me, that’s a little lower than say some of the strip clubs especially the high volume strip ups. But it’s right in line with the basic club. So I think we can grow it pretty successful.

In terms of the clubs, is there a geographic area you’re looking for in acquisitions or it’s really just kind of that deal fits in with your criteria?

Well if we do multiclub obviously we're like some clustering in the acquisition which is probably put us in a dent, which is typically how operators operate. They open up in general areas. So that may get us into some new areas. The Jaguar’s acquisition, while in Texas it was within the same state, it was still in some fairly different geographic areas that we didn’t operate in, so we are very happy with that and plus we got a location in Phoenix, so that helped. so we’re really looking at that as well as single acquisitions that are complementary to our existing operations which makes it very easy for us to operate and of course save money by cross marketing and purchasing powers.

Okay, and finally you’ve hired some new people, trying to make sense of that kind of what should we expect those people would do, that they haven’t done before in terms of the beverage people and restaurant people.

Yes, well with the beverage people, the beverage guy we hired in, and he has been setting up national accounts for us, national marketing stuff which is lowering our cost of goods sold by getting us the same price in every market and getting us discounted prices for product placement in multiple markets and volume discounts because when you track multiple locations and all the buying that we are doing we become a much larger purchaser and we are able to shrink those prices down as well. And then of course with energy drink companies we have been able to work out some deals with some energy drink company that’s lowered our cost on energy products. Same thing we are doing now with food as we expand the restaurant, some of the products we sell it out at Rick’s locations where we are able to get discounts on specific items or products as we grow and I think we will continue this to see more and more of that as we get larger and larger. And that’s really what his job is about. On the restaurant side we brought a new guy that worked for Planet Hollywood for several years. He has done multiple restaurant startups and he started helping launch these restaurants help us find the new locations and do kind of the things that have been his expertise. We understand the adult club business and we understand that the liquor side and the bar side of it. He is really helping us to learn and understand and develop our systems for our food service. And it’s made a drastic difference when he came on board, the Bombshell location was doing about 35,000 a week and now it’s consistently doing 65, I think during the playoffs we had a couple of $80,000 weeks and it’s very exciting. The quality has gotten better. The reviews and the amount of positive customer response has gone up drastically since he’s been on Board.

(Operator Instructions) Our next question comes from the line of Igor Novgorodtsev with Lares Capital. Please proceed with your question.

Couple of questions, can you just tell me I know additional couple of losses and you have several outstanding. Can you just tell me which (inaudible) you have settled and what is your outstanding?

We settled a claim that was in excess of our insurance coverage from 2009. We had several claims around the country under that policy under our assault and battery policy which has a $1 million limit. So we severed the claim there that cost us about $160,000 in addition to what the insurance company policy had left on it. And we figured that was the easiest way to discard that claim and move forward kind of finish out our 2009 claims that we had possible and ensured claims on. So that was nice to move forward from that year. And then we also settled the lawsuit with the landlord in Las Vegas on a Las Vegas property. When we closed Las Vegas property we made claim that we owed them several million dollars in rents and what not. And that case was preparing to go to trial in Nevada where we’re going to have some pretty hefty trial expenses and discovery and what not, and so we were work out a settlement that got rid of that claim as well.

So the (inaudible) break issue which was followed in New York is still outstanding, right?

Well actually whether they are employees or independent contractors is really what's at stake there. We’re working on that now and we had oral arguments there is more for summary judgment and basically we're waiting on the course. So we’re kind of in a hurry up and wait mode to kind of see what all the different issues are going to. There are going to be facts of law that we have do and what not. And then we’ll go from there. I still think that it will probably be another year plus before we really know what’s going on. We’ll probably get some summary judgment rulings here in the next few months that will kind of give us idea of what the judge is leaning towards, what he is thinking and what not. And then of course we’ll see if we believe it’s still a class or not, whether we should move for a certification on the case based on what the judge does, and those types of things. So there is still a lot of open issues, so really nothing’s really changed at this point. We’re still kind of in a wait mode.

Okay, I guess from a positive side of lawsuit I know that you were lawsuit to the state (inaudible) income tax and that you actually were thinking that you can actually win the case. Was there any movement on that?

There has been no movement at all. We thought we were going to get something, an agreement worked out with the other side and pass some legislation and the (inaudible) session of course takes place later is now recessed and won’t meet again for two years. So we’ll probably get some type of court ruling that will either be appealed or move forward in that time period. So right now I guess kind of basically at the mercy of the courts waiting for the court to make some decisions in that case as well. So it’s kind of hurry up and wait. in the meantime we continue to expense the placement tax but we’re continuing not to pay that patent tax.

Okay, I’m just curious as soon as the worst case scenario moves the case, would there be additional charges, interest charges or penalties applied (inaudible) to what you approved?

No one really know how that falls in work at this point. We’ve basically got an agreement to stay this data collection. we filed the force, we’ll filed the forms. And I guess what’s really going to happen more than likely is there with the judge maker ruling I would assume that at some point during the appeal process that everyone will reach some type of settlement is my guess on this deal. Whether, I mean, obviously if they win the tax they don’t want to close all the businesses down because they all go bankrupt because they can’t pay what they owed in the past. They want to start collecting the money. I would assume they will work out some type of payment plan or some type of settlement on a go forward basis. We don’t consider that a super high risk at this point because we just believe that under Texas law even the judge tries to make some changes and there is a lot of (inaudible) case law that really says that the legislator has to make those changes not the judiciary section of the government. And so I guess we’re just basically going to have to sit and wait. And I wish we had more information on it but we really don’t know. I don’t think anybody or any of the lawyers aren’t really a 100% sure; it’s kind of new stuff. So as it moves through the courts, reality of it is we'll probably know in about three to five years.

Okay, and my last question (inaudible) state of things your openings already soft launched Vivid cabaret in Los Angeles, you are opening one in New York, positively it will take a few months to see how all the competitors are working out, but I am just curious I mean Vivid obviously being a more recognized brand, if this cabaret concept works out, do you plan to have any other Greenfield development of Vivid cabaret or any in the existing motto in the existing cabaret in Vivid cabaret. I mean what makes it…

I mean we've had discussions. right now we want to see, we want to open, we want to see what happens, we want to see the response, we want to see how their marketing plan works, they have got lots of internet access on cable television, they have cable television stations there, have Jewish radio stations. So we just kind of want to kind of see how it all works, how to promote, how many people they bring through the doors of the clubs and how the Vivid girls, the Vivid girls performances at the clubs, how they draw our customers in and as we move forward the relationships working, yeah absolutely we would love to continue to expand that concept and grow it. I guess it's not exactly competing with Rick's Cabaret concept; it's a little different concept. It's more of party; it's more of night club concept, with entertainers, where Rick's is more of a raw gentleman's club concept. I think that as we move forward, I think we're going to be very happy with the relationship and I think they will too. We've gotten along with them for many, many years and this relation goes back, we have talked about other things together and done some other things here and there together. And I think this is going to be very successful concept for both of us.

And you don't disclose how much you paid for using their name?

Actually we have a non disclosure to not disclose that at this time. Obviously once we are operating and the revenues are going, it's going to be kind of pretty easy to figure out.

Our next question comes from the line of David with (inaudible) Acquisition. Please proceed with your question.

I just had a quick question for you, you obviously have gotten past for last four years of some restructuring. Have you thought about forward guidance at this point and how that might help the investing public, look at you guys in terms of the organic growth versus what you are doing in the acquisitions.

Yes certainly we were working on guidance to put some guidance in this deal; we decided that it was just a little pre-mature, we want to kind of move a little bit later in this quarter. But before the quarter end or yearend, before our fiscal yearend we expect to get back into the guidance, back to our guidance model for 2014. And I suspect sometime before September 30, we will get that guidance out to public. We want to kind of let everybody know what our plans are going forward. We think it's going to be much easier and more predictable like I said with the ability to open up restaurant concepts if an acquisition falls through. We're having a nice steady growth and we'll know if we get our surprise acquisition, it will be surprisingly up instead of in the past where we have had, we thought this acquisition was going to close but it didn't, and supplies in the wrong direction. I think we'll definitely be back to some type of guidance model before the end of the quarter.

And second follow up question, you have Ricky Bobby just opening, Bombshell is the new concept. At what point do you expect those businesses to be let's say a significant portion of your business on a per club basis as well as overall revenue basis?

I mean it looks like these concepts are going to be in line with what we expect, somewhere between 3 and 5 million in annualized revenues. So I mean as you look obviously we said we are looking at three new Bombshell locations right now. One we actually have the billing under contract on a owner financed deal which was an old restaurant and night club. So as we move forward we're finding some restaurants that where the owners weren't successful because they opened the wrong type of food service or something in the area but they had a great location. We're starting to find those types of locations and looking at those right now. Much cheaper (inaudible) the kitchens are already built, the bathrooms are pretty much already built, everything we're going to do is basically cosmetic. Instead of having it spend $1 million to $3 much like we did with the Bombshells refurb, which had never been a restaurant before or the Ricky Bobby which we built from the ground up, we believe we can do these and the $500,000 to $600,000 range and total start up costs. We're currently looking across (inaudible) like that right now, one in Austin and one in Houston. We're going to continue to look of course in the Dallas Fort Worth expand the brand in that market as well. But we have got some pretty serious leads on specific pieces of property in the Austin and the Houston market that we're working. To answer your question I think probably we open two to three more by March of ’14 we continue to look and find as we move into October three or four more lined up and it could $15 million to $20 million worth of revenue pretty quickly by the end of fiscal 2014.

Thank you. (Operator Instructions) Our next question comes from the line of David (inaudible) Capital. Please proceed with your question.

So, I am looking at your numbers, it’s pretty great actually. And obviously you guys seem to be doing a fine job managing your business. I mean looking at it over the last five years your revenue gone from almost 30 million annually to over 100 million, earnings at the same time 3 million over 10 million annually. But I think is at the point where it’s pretty clearly your shareholders are going to want a piece of the action. And more or less if you look at, even though, over the last two years, you’ve generated close to 60 million in total EBITDA in just two years at the same time your market cap remains under 100 million. And I think you studied yourself. You’re buying the stock today personally because you feel that’s the best investment around. So I’m just curious as to why not boost the share buybacks or pay down debt is set off more or less acquisitions?

Well, I think that’s one of the nicest things that we’re getting to as we’re getting to the point where we’re going to be able to do both. In fact we have. If you look we’ve returned $1.5 million last year. In the first nine months of this year, we returned almost $1.5 million in our stock buyback program in addition to paying additional 600,000 in debt reduction just on the Miami deck we’re just the (fact) we’ve also paid off a couple of other loans early, paid back the $8 million convertible debenture that we had done in 2009 that fully paid off and gone. So I think you’re starting to see some of that and we’re taking somewhere (inaudible) even, okay. We’re growing here and we’ve got enough money to do all this growth while we’ve got access to capital where we can (bout) capital cheaper in the return on the growth. So, let’s figure how to best use this other cash and increase our earnings per share. At the end of the day the stock is going to come back to a (mean), it’s going to trade at some type of multiple based on the earnings per share, the cash flow and our rate of growth.

More or less referring to that if you look at the acquisition so far they’ve been great and obviously you can see by the numbers. If you were to put a run rate numbers on your current earnings tower, you’re looking at something that should be north of a $200 million company and more or less, so what I am more referring to because I know is that okay the acquisition tag’s been great so we’re looking the use of capital. The focus is what I hear you saying is still the focus really should be on shareholder value rather than acquisitions at this point just because at the run rate you’re going you’re going to be generating enough cash where the cash should be going back into the business and not in too far of the business.

But we’ve just, I mean, if you look we just recently gotten to this point.

And gradually you’ve been saying for now it seemed that the you’ve got it’s all run rate and at this point shareholder buyback or anything else that you’re heavily investing in company as well the best return would be buyback your stock or do whatever you could just to bring the value out of the business because I think if that’s done we’ll all be about wealthy in given time because I think as I said this is a $200 million company. And it’s not trading as it is.

And if you look at us and try to compare to other restaurants, sports bar, whatever entertainment company you can kind of take a whole ménage of different types of business that are similar but not the same because there is really nothing that’s exactly the same with us. But if you take and cover up the names, cover up the names up, don’t even look at what the name is, cover up our name, cover up all their names and just put the financials down, side by side. Look at the rent expenses that they’re carrying; look at their debt expenses that they carry. Most of them don’t carry lot of debt because but look at their rent expense, their rent expense runs 9%, 10%, 11% of revenues where you could got it written and together with 8% something. Take just the numbers and compare them side by side and look at the market gaps and look at their EBITDA numbers and you’ll see where the cheapest thing on the table, I don’t think you can, I think you’re going to find anything that trades at the multiples on a go forward basis was paid on. And that’s one of the things was we working, moving, to giving guidance that we really want to lay out to investors and we think we’re going to get out and tell our story for the next four months very hard, very strong and then continue to build and work those relationships with the institutional investors. It was hard because we had a lot of relationships with institutional investors but in the institutional investor market just got flattered after 2009 and 2010 and all those relationships we’ve developed and worked it’s not that we had any problem with those relationships if those businesses themselves had huge problems and cash calls and we were a pretty good winner form so a lot of our stock was sold.

I understand that and I really want to congratulate you on the business and making more or less thing I just hope that translates into a higher stock price. And I just would like to see that will be the focus because all in all we can make $10 million, $15 million in a year but as you know investors don’t see any of their money after few years it becomes firm. So, again…

As the largest shareholder of the company, I promise I want to see the stock rise up. It’s not that I want to buy more, I’d love to diversify some of my holdings and own other and make other investments but it’s hard to do that when I, like I said lay out finances about the company and go gee, I can buy this, buy my own company, much better.

Understood, with this understood that when you look at other acquisition take a look at your company you’ll see that’s probably is buy around.

Thank you. There are no further questions at this time. I’d like to turn the floor back over to the management for closing comments.

Well, thank you everybody for participating in our conference call again any of you who are recently near city area tonight please stop by Rick’s Cabaret and get a quick tour of the club and really in depth look at how we operate. We do appreciate your calling as always, if you any further questions please address them IR at ricks.com. Thank you very much.

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