RCI Hospitality Holdings, Inc.

Greetings and welcome to RCI Hospitality Holdings fourth quarter and fiscal 2022 earnings talk. You can find RCI's presentation on the company's website. Click company and investor information under the RCI logo. That will take you to the company and investor information page. Scroll down and you'll find all the necessary links. Additionally, it will be available in the tweet that will be pinned to the top of this space. Please turn with me to slide two of our presentation. I'm Mark Moran, CEO of Equity Animal. I'll be the host of our call today. I'm here with Eric Langen, president and CEO of RCI Hospitality, as well as Bradley Shea, CFO of the company. Please turn with me to slide three. If you aren't doing so already, it's easy to participate in the call on Twitter spaces. On Twitter, go to at Rick CEO handle, and select the space titled $RICK FY22 Earnings Call. To ask a question, you will need to join the Twitter space with a mobile device. To listen only, you can join the Twitter space on a personal computer. RCI is also making this call available for listen only for traditional landline and webcasting. At this time, all participants are in a listen only mode. A question and answer session will follow. This conference is being recorded. Now please turn with me to slide four. I want to remind everyone their safe harbor statement. It reminds you that you may hear or see forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of development that occur afterwards. Now, please turn with me to slide five. I direct you to the explanation of non-GAAP measurements that we use. I'd also like to invite everyone listening in the tri-state greater New York City area to join Eric, Bradley, and me tonight at 7 o'clock to meet management at Rick's Cabaret, New York, one of RCI's top revenue-generating clubs. Rick's is located at 50 West 33rd Street between 5th Ave and Broadway. a little in from Herald Square. If you have an RSVP, ask for Eric, me, or bullish intern at the door. Now I'm pleased to introduce Eric Langen, president and CEO of RCI Hospitality. Eric, take it away.

All right. Thank you, Mark. Thanks for joining us today. Please turn to page six on the slides for today's news. We had a great fiscal 2020, actually, we got a great fiscal 22. and look forward to a strong fiscal 23. A big thanks goes out to our team members for making this possible. We couldn't have done it without you. Year over year for the fourth quarter and fiscal 22, our key metrics continue to increase on a double-digit percentage basis. This resulted in strong growth of free cash flow, adjusted EBITDA. This is helping drive future growth. We are a much larger company now, so we have been working on much larger agenda of growth initiatives. In fiscal 23, our nightclub business should see a benefit, full-year benefit of the 15 clubs acquired and the two reopenings from fiscal 22. The addition of this year's Heartbreaker acquisition, the pending acquisition of Baby Dolls and Chica Locust Chains, and other possible acquisitions under consideration. We'll also be developing our exciting new Ricks Cabaret State Casino in Colorado. As for bombshells, we have six company-owned or franchise locations in development, These should start coming online over the course of fiscal 2024. I'll be back to tell you more and answer questions later. And for now, here's Bradley to review the financials.

Thanks, Eric, and good afternoon, everybody. There's a lot of numbers on this slide, so I'm going to focus on a few big ones. Total revenues were $71.4 million for the quarter, up 29.9%. For the year, revenues were $267.6 million, up 37.1%. Free cash flow was $14.5 million for the quarter, up 71.6%. For the year, free cash flow was $58.9 million, up 63.3%. Adjusted EBITDA was $24.2 million for the quarter, up 37.8%. For the year, it was $86.7 million, up 44%. Non-GAAP EPS for the quarter was $1.45. That's down 8.2% year-over-year, primarily due to the fact that our effective tax rate was 23.4% this year versus 11.7% last year, and also because we had 2.8% more weighted average shares outstanding due to the Lowry acquisition. For the year, non-GAAP EPS was $5.38, up nearly 32%. Please turn to page seven. With our fiscal 22 performance, we continued our strong track record since implementing our capital allocation strategy to the benefit of our long-term shareholders. We thank you again. We initiated the strategy at the end of our fiscal 2015. Free cash flow has grown at a CAGR rate of 22%, while we reduced weighted average shares outstanding 1.5% on a compound annual basis. Our free cash flow conversion rate increased from 11% to 22% of revenues since 2015. We also survived our toughest challenge yet, COVID, in fiscal years 20 and 21. Please turn to page eight to review our fourth quarter in more detail. The nightclub segment had another excellent quarter. Revenues totaled $56.6 million. This was our second sequential quarter not affected by COVID. Operating margin was 39.7%. 41.6% non-GAAP. Operating income was $22.5 million GAAP and $23.6 million non-GAAP. Our new acquisitions added $14.9 million in sales. Same-source sales were up, reflecting strong growth in New York, Illinois, and Florida, and high-margin service revenues increased 53.6%. Please turn to page 9. The bombshell segment also held its own during the fourth quarter. Revenues totaled $14 million. Operating margin was 15.5%. Operating income was $2.2 million. Same-store sales were down for the quarter, but total sales improved sequentially through the period and were up 7.4% year-over-year in September. Bombshells Arlington, which opened in December of 2021, added $1.4 million in sales. The San Antonio franchise added more than $100,000 in royalties since its opening on June 27th. It also incurred $300,000 in startup expenses as part of our franchising agreement. Now, excluding those expenses, operating margin would have been about 18%, which is in line with our target range, and operating profit would have been about $2.5 million. Please turn to page 10 to review our consolidated statement of operations. All comps are as a percentage of revenues and compared to a year ago fourth quarter, unless otherwise noted. Cost of goods sold declined to 12.9%. This reflected the increased mix of higher margin service revenues of 36.5%. Our salaries and wages were approximately level at 25.3%. Now SG&A was 31.3%. This reflected newly acquired and reopened locations and around $2.4 million of non-cash stock-based compensation. This relates to previously announced $100 per share options granted to a limited number of top executives and management team members. Excluding those stock-based compensation, SG&A would have been approximately 28%, about the same as a year-ago quarter. Depreciation and amortization were 6.7%, reflecting non-cash amortization of intangible assets on newly acquired lease locations. Other charges reflected $1.7 million gain on the sale of businesses and assets in the nightclub segment compared to $11.9 million impairment in the segment last year. Operating margin was 25.2%, 30% non-GAAP. Interest expense was 4.8% versus 5.3%. This was a function of higher sales in the fourth quarter, partially offset by higher debt from club and bombshell site acquisitions over the course of the fiscal year. Please turn to page 11. We ended the year with cash and cash equivalents of $36 million, a little higher than a year ago. Free cash flow was 20% of revenues for the fourth quarter and 22% of revenues for the year. Adjusted EBITDA was 34% of revenues for the quarter and 32% for the year. Both of these metrics exceed our target performance of 20% of revenues for free cash flow and 30% for adjusted EBITDA. Now, if you will, please turn to page 12 to review our debt and related metrics. Net of loan costs, debt was approximately $202.5 million at year end. That's an increase of $14.5 million from June 30th. The increase primarily reflected seller financing used in the July 2022 Cheetos acquisition. Our weighted average interest rate for the fourth quarter was 6.35%. This compares to 5.64% a year ago and 6.73% five years ago. Our amortization continues in the $9 to $10 million annual range, which is very manageable with our cash flow. Now to pay off our balloons, our periodic refinancing enables us to convert higher rate seller financing and other unsecured financing into lower rate commercial real estate bank debt. We continue to have multiple unencumbered properties in our portfolio that we can borrow again if need be. and occupancy costs were 7.3% of revenues. This continued to be well within our 6% to 9% range we've averaged when sales weren't dramatically affected by COVID. Please turn to page 13 to look at our September 30th debt pie chart. Our debt now consists of 59.8% secured by real estate, 26.7% secured by seller finance debt secured by the respective clubs, and or real estate to which it applies to, 5.1% of our debt is secured by other assets, and 8.4% is unsecured debt. Please turn to page 14. We continue to talk to new investors, so I'd like to take time to review our capital allocation strategy. Our goal is to drive shareholder value by increasing free cash flow per share 10 to 15% on a compound annual basis. Our strategy is similar to those outlined in the book, The Outsiders by William Thorndyke. We have been applying these strategies since fiscal 2016 with three different actions subject to whether there's other strategic rationale to do otherwise. One is M&A, specifically buying the right clubs in the right market. We like to buy solid cash-flowing nightclubs at three to five times adjusted EBITDA, use seller financing, and acquire the real estate at market value. In fiscal year 2022, we deployed $141.8 million in capital to acquire 15 clubs in new and existing markets. Another strategy is growing organically, specifically expanding bombshells to develop critical mass, market awareness, and sell franchises. In fiscal 2022, we deployed $10 million in capital to open up our 11th location and buy property at five more locations. We also signed a second franchisee. Our goal in both M&A and organic growth is to generate cash on cash annual returns of at least 25 to 33%. Now, the third action is buying back shares when the yield on our free cash flow per share is more than 10%. In fiscal year 2022, we deployed $15.1 million in cash to buy back 268,185 shares. Now, let me turn the call over back to Eric to review our growth plan.