RCI Hospitality Holdings, Inc.

Greetings and welcome to RCI Hospitality Holdings first quarter fiscal 2023 earnings call. 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. Please turn with me to slide two of our presentation. I'm Mark Moran, CEO of Equity Animals. I will be the host of our call today. I'm here in New York City with Eric Langen, President and CEO of RCI Hospitality, and Bradley Shade, CFO who is in Houston, home of one of my favorite clubs, Club Onyx, managed by Josh Brooks. 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's CEO and select the space titled Rick RCI Hospitality Holdings Inc. 1Q23 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 through traditional landline and webcast. With Twitter having glitches today, in the event of a crash, we'll restart the space, and if that fails, move to the dial-in. A question and answer session will follow, and this conference is being recorded. Please turn with me to slide four. I want to remind everyone of our safe harbor statement. 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 developments that occur afterwards. Please turn with me to slide five. I also direct you to the explanation of RICS non-GAAP measurements. I'd like to encourage everyone to retweet and share this space. Finally, I'd like to invite everyone listening in the New York City area to join me and Eric 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 Avenue and Broadway, a little in from Herald Square. If you haven't RSVP'd, ask for Eric or me at the door, where I will be deploying my own capital allocation strategy after 9 p.m. I'm pleased to introduce Eric Langen, President and CEO of RCI Hospitality. Eric, take it away. Thank you, Mark.

Thanks, everyone, for joining us today. Total revenue came in generally as expected, with nightclub segment having another great performance. This offset difficult bombshells comparisons. Gap EPS and net cash from operating activities and non-gap EPS and free cash flow were affected by repairs and maintenance capex that occurred in the first quarter. GAAP EPS also included 16 cents in non-cash intangible amortization and stock-based compensation compared to a year-ago quarter. Nonetheless, adjusted EBIT was up 13.9% year-over-year, and we ended the quarter with $34.1 million in cash. That was after making a number of club and restaurant and real estate acquisitions. Probably the most important thing that happened in the quarter is that we got off to a terrific start with our big three-year growth initiative. The goal is to continue our mission of growing free cash flow and EBITDA off a higher revenue base. We now have numerous acquisitions and projects in development. Highlights include our pending acquisition of a group of five Baby Dolls and Chica Locas clubs in Texas, the Rick's Cabaret Steakhouse Casino in Central City, Colorado, In addition, we have an even stronger lineup of new bombshells locations in three states in Alabama, Colorado, and Texas. I'll be back to tell you more and answer questions.

Now, here's Bradley to review financials. Thanks, Eric, and good afternoon, everybody. Looking at the sum of the major numbers for the quarter, total revenues were $70 million, up 13.2%. Gap EPS was $1.11, off less than 1%. Non-GAAP EPS was $1.19, up 8.2%. Net cash from operating activities was $14.9 million. That's off 8.4% from last year, mainly because we paid down more liabilities on our books in the first quarter compared to a year ago. Free cash flow was $13 million. That's off 14.6% because of the change in net cash from operating activities and about $1 million more maintenance capex that fell in the first quarter. Adjusted EBITDA was $20.5 million, up 13.9%. And weighted average shares outstanding declined 1.9% year-over-year due to repurchase over the last year. Please turn to page seven to review nightclub segment. Revenues totaled $56.3 million, up 20.4%. Gap and non-gap operating margin was 40.4%. That reflected increased operating leverage from higher sales In particular, higher margin service revenues, which increased 23.4%. This was partially offset by increased amortization of club licenses at leased locations. As a result, operating income increased 21.4%. Now, fiscal year 2022 and first quarter acquisitions added $15.3 million in sales. Same store sales were up 1.2%. This reflected strong contribution and growth from our white-collar clubs, mainly in New York, Illinois, and Florida, partially offset by some softness in our blue-collar clubs. In the second quarter, the 11 clubs we acquired in October 2021 will fall into same-store sales. Based on current trends, this should result in growth in same-store sales. Please turn to page 8 to review the bombshell segment with me. Revenues totaled $13.4 million compared to $14.8 million last year. Operating margin was 13.8%, primarily reflecting reduced operating leverage. Operating income was $1.8 million. Bombshells Arlington, which opened in December 2021, added $1.3 million in sales. Same-store sales were down compared to last year when the chain was experiencing very favorable local economic environment and a combination of government stimulus, people returning to work, and little competition. However, compared to pre-COVID first quarter of fiscal 20, Our December quarter same-source sales were up 3.6%. Please turn to page 9 to review our consolidated statement of operations with me. All comps as a percentage of revenue and compared to a year-ago quarter unless otherwise noted. Cost of goods sold continued at 12.9%. This reflected the increased higher margin service revenues in the sales mix. Salaries and wages were approximately level at 26.7%. Now, SGA was 32.5%. This reflected $900,000 of non-cash stock-based compensation and $400,000 of repairs. Now, if we exclude these two items, SGA would have been 29.5% compared to a year-ago quarter, which was 29.9%. Expenses associated with these newly acquired and reopened locations will subside as a percentage of revenues as they're self-built. The non-cash stock-based compensation is an ongoing item. While we have repair expenses every quarter, they're not typically as large as they were in this quarter. Depreciation amortizations were 4.7%. This reflected an increase in depreciable assets from newly acquired and constructed units. It also included increased non-cash amortization of licenses from the club's at-lease locations. Operating margins were 24.2% and 25.6% non-GAAP, the same as last year. Interest expense was 5.3% versus 4.2%. This reflected higher debt from our club and bombshell site acquisitions over the course of the year. Now please turn to page 10. We ended the quarter with cash and cash equivalent of $34.1 million. Free cash flow was 19% of revenues and adjusted EBITDA was 29%. That's a little below our targets of 20% and 30% respectively. Please turn to page 11 to review our debt metrics. Net of loan costs, that was $211.2 million at December 31st. That's an increase of $8.7 million from September 30th. This increase primarily reflected financing used in the acquisition of Heartbreakers Deal down in Dickinson, Texas, the Denver Food Hall, and the land in Lubbock, Texas for a bombshell location. Our weighted average interest rate continued at 6.35%. This compares to 6.6%. 6.26% a year ago and 6.73% five years ago. Our amortization continues to be within the $9 to $10 annual range, which is very manageable with our cash flow. Now please turn to page 12 to review some of our other debt-related metrics. The ratio of debt to adjusted EBITDA was 2.4 as of December 31st, well below our max comfort level of 3%. Occupancy costs were 7.8% of revenues, This continues to be well within the 6% to 9% range we've averaged when sales weren't dramatically affected by COVID. Please turn to page 13 to look at our December 31st debt pie chart. Our debt now consists of 61.9% secured by real estate, 25.2% secured by seller finance debt, secured by respective clubs to which the real estate data applies to, 4.9% of the debt is secured by other assets,