RCI Hospitality Holdings, Inc. (RICK) CEO Eric Langan on Q1 2019 Results - Earnings Call Transcript

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About: RCI Hospitality Holdings, Inc. (RICK)
by: SA Transcripts
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Earning Call Audio

RCI Hospitality Holdings, Inc. (NASDAQ:RICK) Q1 2019 Earnings Conference Call February 11, 2019 4:30 PM ET

Company Participants

Gary Fishman - Investor Relations

Eric Langan - President and Chief Executive Officer

Conference Call Participants

Frank Camma - Sidoti & Company

Marco Rodriguez - Stonegate Capital Partners

Darren McCammon - Cash Flow Kingdom

Operator

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.

Gary Fishman

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. 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 of non-GAAP measurements that we use and are included in our presentation and news cast. Finally, I'd like to invite everyone listening in the New York City area to join us tonight at 6 o'clock to meet management at Rick's Cabaret, New York, Manhattan's #1 gentleman'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-ed, ask for me at the door.

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

Eric Langan

Thank you, Gary. Thank you everyone for joining us this afternoon. If you will 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 include $1.2 million in pre-tax gain from the sale of non-income producing assets. It also included $447,000 in pretax non-operating 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. All together 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 would like to note that in 10-Q filed today, we identified mechanical errors and our goodwill impairment analysis in our fiscal 2018 10-K. It involves tax rate and debt service assumptions for two clubs and taxes and resulted in an additional impairment of $834,000, This is 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 night clubs, and to a lesser degree 3.2% increase in Bombshells. As previously reported, night club 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 to 21.8% or $2 million that was driven by a $2 million improvement night clubs. The segment benefitted from higher revenues, in particular higher service revenues, and that $1.2 million gain on sales, but night clubs 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 three assets in the first quarter for $1.9 million, resulting in $1.2 million gain, including where the former club on 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 three-year seller note at 8%. We expect to record a pre-tax gain of approximately $383,000 in the second quarter results.

At the end of January, the only asset we held for sale were two access parcels near Bombshells I-10 and US 249. We anticipate closing those sales soon. We have several other tracks near our Bombshells location that we hope to have under contract in this fiscal year. I would 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 return money-losing asset into money-making asset 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 review of sales and margin. At $44 million, the first quarter of 2019 was a record quarter and it marked the eleventh quarter in a row of total same store sales increases. This is the longest streak we’ve ever had. Our operating margin can fluctuate between quarters due to the seasonality of our business. You can see on this slide that we have been making progress, expanding margin as we grow larger. We hope to keep that up.

Please turn to Slide 8 for a review of cash generation. Our cash totaled $9.4 million at December 31. We had $17.7 million at September 30. The September balance included proceeds from debt used to finance the cash portion of the two 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, it was $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 break point 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 for 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 clubs’ 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 instalment 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 65% or less loan to value by the end of fiscal 2019, at that point amortizations will drop $250,000 a month, freeing up $3 million on an annualized basis.

Looking forward ahead, or looking further ahead, the $3.1 million realty balloon in fiscal 2020 relates to access Bombshells parcels and we plan to sell those before that becomes due. As you know, we also look at occupancy costs and debt to adjusted EBITDA for debt manageability. Occupancy costs are rent plus interest as a percent of revenues. Both of these metrics, increase 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 location. Occupancy costs and the debt ratio should decline with a full quarter of Chicago and Pittsburgh clubs and the Bombshells I-10 in the second period and then as the other three Bombshells open.

Please turn to Slide 12 and 13 to recap our fiscal 2019 plan. 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 gentleman's club chains to nine locations. We must also keep our eyes open for the right club acquisitions at the right price.

With Bombshells, we will complete and open the three 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 access 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 has 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 is truly appreciated. Operator, let's begin the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Frank Camma with Sidoti & Company. Please proceed with your question.

Frank Camma

Good afternoon, guys. Thanks for taking the question.

Eric Langan

Hi, Frank.

Frank Camma

The beat to my number one, I adjust the numbers, was pretty nice considering probably already knew the revenue and it sounds like it kind of, when I go through my model, it really goes down, boils down to the service revenue and a margin to that which actually called out, but why would that be so strong in the quarter, you know it seems pretty outstanding, so, just wondering was there something particular there that are missing as the mix or something like that or just continues to be strong causing consumer confidence.

Eric Langan

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

Frank Camma

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

Eric Langan

Yes.

Frank Camma

Okay. Alright. And so just, I know you focus a lot on capital allocation, you have a pretty clear strategy, one question on that, just as obviously you keep throwing 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 just wonder if you have any thoughts there?

Eric Langan

You know when the stock was $6 that was a problem because we were buying large number of shares with very small amount of money, but with the stock with, you know $22, $23 range as you can see, we spent well over [six hundred and some thousand dollars] between basically November and the January and we bought 28,000 shares. So, I don't see it being a problem, you know taking out 3% to 5% of our float in a calendar year at this point, I don't see that being a huge issue. I certainly think, there’s plenty of shares out there in the float that will trade.

Frank Camma

Sure. Okay. And just one quick question on Bombshells. I didn't catch – 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?

Eric Langan

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 three locations, which are exciting our management team and we – but so we've been marketing and hiring new management, they're build and train further new stores. And I think, that's really helping, excuse me, re-motivate our existing stores.

Frank Camma

Okay. And it looks like the schedule is unchanged, I think compared to last time, showing – it wasn’t not long ago, but looks like the opening schedule is exactly the same effort as for right now.

Eric Langan

Yes, right now we're on schedule. The only thing is the 249 stores could run into early March, first week of March or something if inspections run over, we have the inspection issues because there's always, those are out of our control. Everything within our control is, 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'll – we would be any later than the March 10, opening, and I think we can be as early as right around the end of February.

Frank Camma

Okay. Great. Thanks, Eric.

Eric Langan

We're planning on right now to get help and right for that first week in March.

Frank Camma

Good, thanks.

Operator

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

Marco Rodriguez

Good afternoon. Thanks, for taking my questions. Just wondering, if we could talk a little bit about Bombshells and the operating margins non-GAAP obviously, down here in a single-digit area. Just kind of trying to understand if this is just a function of the same-store sales aspects, were there are other sort of promotional activities that are kind of driving that down versus historical numbers?

Eric Langan

Now, I 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 the depreciation and deferred rents were booked in this quarter. So, I think some of those changes hit in this quarter as well, because of the – 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 that have happened.

This is crazy. I know – I can look at the cash and say, we generated all this cash from Bombshells. Well, you tell me I didn't make any money, it doesn't make any sense. And so, some of the non-cash stuff kind of work through there. But because of the way it booked its GAAP. And it could be affected into the non-GAAP number as well. So, we didn't – none of it was attracted for non-GAAP purposes.

Marco Rodriguez

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

Eric Langan

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 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 was – the Austin location was as all in the past now too. So, I think, we're going to see a normalized quarter this quarter. I'm hoping so anyway. Because, it's hard for me to...

Marco Rodriguez

Got you.

Eric Langan

I mean, I know you guys are looking at into and what is there – I'm having 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 – all the stuff is non-cash, taking out, showing what we’re doing in cash. Okay, we're doing good numbers in cash.

Marco Rodriguez

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

Eric Langan

Pittsburgh is doing great, a little ahead. Chicago had some extreme weather. All three of our Illinois club, St Louis, Kappa and Chicago are all affected by the big snowstorms and stuff, as well as Minnesota, little bit in January. So, and of course, this year, we didn't have receivables in Minnesota. So, there are certain markets that are down a little bit. But overall, I think we're about – I would say we're flat to down a little bit through the first five 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, 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 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 these next eight weeks to really beat last year's numbers so that we have a boost in same store sales for the twelfth consecutive quarter. But this is a tough comp quarter for us for sure.

Marco Rodriguez

Understood, got you. And then in terms of the acquisition landscape for Nightclubs. And if you could kind of update us there, if you have some possibilities that are moving along the line, further down the line if you will, to potential close?

Eric Langan

I'm sorry. Can you just begin on, I missed the first part of it?

Marco Rodriguez

Yes, the acquisition landscape on the Nightclubs, just kind of wanted to get an update?

Eric Langan

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 the April to June quarter.

Marco Rodriguez

Got you. Thanks a lot, guys. Appreciate your time.

Eric Langan

Thank you.

Operator

[Operator Instructions] Our next question is from Darren McCammon with Cash Flow Kingdom. Please proceed with your question.

Darren McCammon

Hi, guys. Most of my questions have already been asked, so I just really have two.

Eric Langan

Okay.

Darren McCammon

First, on the margin improvement that we saw this quarter, is that something we expect to continue or is it just a one-time kind of thing?

Eric Langan

If you've seen 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.

Darren McCammon

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

Eric Langan

All of our VIP [indiscernible] there's more people through the door in December, bigger parties in December. Just a little bit of a little bit of everywhere.

Darren McCammon

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

Eric Langan

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

Darren McCammon

Okay, well, I'll be able to see once the…

Eric Langan

In the queue. Yes, definitely show up in the queue.

Darren McCammon

Okay, that's all I had. Thank you.

Eric Langan

Thank you.

Operator

[Operator Instructions] Are there any final questions? [Operator Instructions] There are no more questions at this time. I would like to turn the conference back over to management for closing remarks.

Gary Fishman

Thank you, operator and 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, New York from 6 o' clock to 8 o'clock, at 50 West 33rd Street between Fifth and Broadway. If you haven't RSVP-ed, ask for me at the door.

The next event on our calendars is our appearance March 28 at the Sidoti & Company Spring Investor Conference in New York City. The registration is free for professional investors. We encourage our tri-state 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 currently 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.

Operator

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