RCI Hospitality Holdings, Inc.

Greetings and welcome to RCI Hospitality Holdings first quarter 2024 earnings conference call. You can find the company's presentation on the RCI website. Go to the investor relations section and you'll find all the necessary links at the top of the page. 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 coming to you from New York. Eric Langan, President and CEO of RCI Hospitality, and CFO Bradley Shea are in Houston. Please turn with me to slide three. If you aren't already doing so, it is easy to participate in the call on X Spaces. Log in to X, formerly known as Twitter. Go to at Rick's CEO and select a space titled dollar sign R-I-C-K, RCI Hospitality Holdings, Inc., 1Q24 earnings calls. To ask a question, you will need to join the X space with a mobile device. To listen only, you can join the X space on a personal computer. RCI is also making this call available for listen only through a traditional landline and webcast. At this time, all participants are in a listen only mode. A question and answer session will follow. This conference call 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 RIC's non-GAAP financial measures. Now, I am pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric, take it away.

Thank you, Mark, and thanks everyone for joining us today. If you'll please turn to slide six. Our first quarter revenues were in line with what most people were expecting. They totaled $73.9 million, up 5.6% compared to last year. This was primarily due to club acquisitions. which more than offset a consolidated same-store sales decline of 9.8%. The fundamental nightclub business remained solid. We believe nightclub same-store sales reflect the macroeconomic uncertainty everybody is talking about. Margins were lower than what we had been expecting, mainly on bombshell side of the business. Bradley will go into that in more detail later. EPS was 77 cents per share with non-gap at 87 cents. Net cash from operating activities and free cash flow held up very well. They declined only 8% and 3% respectively. Please turn to slide seven for other key takeaways. We are pleased to report that during the quarter and after the quarter, we continue to make progress toward our key initiatives. We have a solid plan to lower costs, increase revenue, and return our margins to their target goals. The newest development is an agreement to relaunch Admirami with a strategic partner, already in the online and mobile adult entertainment business. During the first quarter, we also continued to buy back shares and we remain confident we have access to sufficient cash resources to implement our plans. Please turn to slide eight to review nightclub development plans. We continue to add value to our Baby Dolls Chicas acquisition. Sales in the first quarter were up 10% from the fourth quarter and have improved every quarter since we've owned them. In addition, Our margin improvement program resulted in 130 basis point improvement on a sequential quarter basis and 260% basis point improvement versus the acquisition performance in fiscal 23. Looking at new clubs, the replacement location in Lubbock, Texas is nearing completion. Due to the success of the Baby Dolls brand, we are converting the Appalene location to that format, which is awaiting installation of its audio and video systems and furniture deliveries. The planned Baby Dolls in West Fort Worth is simply awaiting a building permit to begin construction. A Chica's Locust brand has also been successful for us. And as a result, we have decided to remodel and convert a BYOB locations in Harlingen, Texas, into a Chica Locust. And we are currently awaiting the issuance of the liquor license. Regarding acquisitions, we are evaluating a sizable number of targets. The hardest part we face is coming up with fair value because owners want to be rewarded for post-COVID highs during 2021 and 2022. We are typically by on a two-year historical performance. You please turn to slide nine. We continue to be excited about our Central City Colorado casinos, Rick's Cabaret Steakhouse Casino and our Bombshell Sports Casino. In the few weeks since Christmas and New Year's, there have been no new developments with our gaming license. Meanwhile, interior construction on the Rick's Casino has been progressing on schedule and we anticipate completion in June of 2024. We will then await issuance of our gaming license so that we can install, test, and configure the devices and systems in order to open the casino. For the Bombshells Casino, we are awaiting the building permit. We continue to anticipate both casinos to open in fiscal 2024, and they will represent a significant free cash flow opportunity. In Colorado's most recent fiscal year, Central City slots averaged 131 adjusted gross proceeds per day, and nearby Blackhawk does 307, mainly because they run 24-7 as we plan to do. Please turn to slide 10. Admire Me is a service we've been developing to help club entertainers monetize their content and develop stronger relationships with their customers. Based on the agreement that we've recently signed, we worked out We will retain 75% ownership. Our new partner will own 25% and the service will be relaunched later in the June quarter under a new name. This partner has an existing internet platform with domestic and international traffic, safety controls, credit card processing, all necessary technology we need at a far less cost than if we did it alone. This includes highly valued live video streaming. The result is that overnight we obtain access to a strong, technology infrastructure with significant distribution and proven revenue collection and disbursement capabilities. This will provide club entertainers with even greater potential to make money, and RCI will become the largest publicly traded entity owning a worldwide interactive social media adult platform with streaming video, both live and prerecorded. Our vision is to create a digital extension of our physical brands, connecting tens of thousands of contractors and workers on the front lines the entertainers and waitresses, et cetera, and the customer who come through our door so they can continue to interact or receive content. We want it to be an easy and seamless way for entertainers and waitresses to monetize their relationships 24 hours a day, seven days a week, 365 days a year. You walk into the club, the entertainers are on the platform promoting themselves, getting customers to sign up and subscribe to them, and then come back and visit them in the club. Please turn to slide 11 to review our Bombshells Development Program. Our newest location, Stafford, a suburb of Houston, opened in mid-November. Construction is continuing at our Relic location, which we plan to open in late June or July of this year, and the Lubbock location construction is well underway, and we plan to open that in the fourth quarter of 24 as well. We are getting ready to begin the remodeling of downtown Denver location as soon as we receive our building permits. Since this is a simple remodel of an existing restaurant location, It should be a quick turnaround to get this site open. As for future developments, we have decided to list our Aurora, Colorado site for sale or lease and to put our second Austin location on hold. Both moves are intended to help us better focus on other opportunities. The Huntsville franchisee is still awaiting his building permits. The bigger issue is Bombshell's performance. After we've seen the results from the quarter, we have made a major structural management changes in bombshells team. And we are also considering any and all options to improve performance that potentially includes seeking an operational partner or selling the business. Now here's Bradley to go into more details on our results.

Thanks Eric. Please turn to slide 12 to review our nightclub segment, fourth quarter revenues.

Can you guys hear me? He says he can't hear me.

Okay. Please turn to slide 12 to review our nightclub segment. Fourth quarter revenues increased $4.7 million year over year. This was primarily due to an $8.9 million increase from acquisitions and a $4 million decline in same-store sales. By revenue type, alcoholic beverages increased 18.7%, food 14.1%, and other by 8.2%. Meanwhile, service declined 1.6%. The different growth rates reflected higher alcohol and food in the sales mix from the newly acquired Heartbreakers, Baby Dolls, and Chica's Locals Club. Gap operating income was $20.4 million, or 33.4% of revenues. Non-gap operating income was $21 million, or 34.3% of revenues. Margers were affected by a different sales mix from the newly acquired clubs, lower service revenues, and wage inflation. Please turn to slide 13 to review our bombshell segment. Fourth quarter revenues declined $700,000 year over year. This primarily reflected a $2.7 million decline in same-store sales and a $2.1 million increase from the newly acquired and new locations. The acquired locations are Bombshell San Antonio and Cherry Creek Food Hall with its Bombshells Kitchen. The new location is Bombshell Stafford, which opened in mid-November. GAAP operating income was a profit of $86,000 or 0.7% of revenues, and non-GAAP was a profit of $149,000, or 1.2%. Please turn to slide 14. The combined operating loss from our other end corporate segments was $400,000 less than that of last year. On a non-GAAP basis, they were about $100,000 less. I also wanted to note the effective tax rate for the year was 19.9% compared to 22.8%. The rate is affected by state taxes, permanent differences, tax credits, including the FICA TIP credit. Now please turn to slide 15. We have a couple slides coming up that will discuss free cash flow and adjusted EBITDA, which are non-GAAP. In advance of that, we wanted to present you with the closest GAAP equivalents on this slide, which are operating and net income. Now please turn to slide 16 to look at some of our other key metrics. We ended the quarter with cash and cash equivalents of $21.2 million. During the first quarter, we used $2.1 million to buy back shares. First quarter free cash flow was $12.7 million, or 17% of revenues. Adjusted EBITDA was $17.5 million, or 24% of revenues. Our more recent free cash flow and adjusted EBITDA conversion rates reflect the lower percentage of service revenues in our nightclubs. Now, please turn to slide 17 to review our debt metrics. Debt as of December 31st declined $5.8 million from September 30th due to scheduled paydowns. The weighted average interest rate was 6.61%, in line with what we have been paying. Total occupancy cost was at 8.2%, inched up a little bit on a sequential quarter basis, but we are still in our comfort range of 6 to 9%. At 2.9 times, debt to traveling 12-month adjusted EBITDA also inched up just a little bit, but continues to be in a comfort zone of less than 3. Please note that both occupancy costs and debt to adjusted EBITDA reflect the fact that we are developing a number of projects. As they open and we begin generating revenues and EBITDA, occupancy costs and debt to adjusted EBITDA should decline. Debt maturities continue to remain reasonable and manageable. We are also in the process of completing a $20 million cash out bank loan using $30 million of our unencumbered real estate. Please turn to slide 18 for our debt pie chart. We continue to pay down all our slices of our debt. The percentage share of our different pieces of debt remain largely the same as the fourth quarter. Now, let me turn the presentation back to Eric.

Thanks, Bradley. Thanks, Bradley.

Thanks, Bradley. Please turn to slide 19 before we go into Q&A for our new investors. I want you to know that everything we do is centered around our capital allocation strategy. We employ three different approaches subject to whether there is a compelling rationale to do otherwise. Mergers and acquisitions, organic growth, and buying back shares when the yield on our free cash flow per share is more than 10%. All this is being done with the ultimate goal of driving shareholder value by increasing free cash flow per share by at least 10 to 15% on a compound annual basis. To see more about this strategy, please visit our new website at rcihh.com. Please turn to slide 20. By sticking to our capital allocation strategy since the end of fiscal 2015, we have generated compound annual growth rates of 10.2% for revenues, 12.1% for adjusted EBITDA, 17.2% for free cash flow. We also reduced our fully diluted share count, including shares used for acquisitions. But nothing goes up in a straight line. The key point is we have the plans, tools, resources, and expertise to get the job done. We'll make more acquisitions. While taking a little longer to get projects up and running, the drag will be behind us, the doors will open, and our numbers will improve. We will get our free cash flow and adjusted even margins back to the 20 and 30% as we have in the past. Unfortunately, in the current environment, it has taken us a little longer to open new locations, and we have but we have dealt with economic downturns before. I know that these numbers are a little disappointing to some, and they are disappointing to us, but I ask you to have faith in our team's ability, as I do, that we will reach our future targets. Thank you to our loyal and dedicated team members for all their hard work and effort and all of our shareholders who believe and make our success possible. Now here's Mark.

Thank you very much, Eric and Bradley. If you'd like to ask a question, please raise your hand in the X space. When you finish, please mute your microphone to eliminate any background noise. We only have a limited number of speaker spaces, so after you ask your question, we may ask you to move to the back of the audience to free up space. To start things off, we'd like to take questions from Rick's analysts and some of its larger shareholders before moving into general Q&A. First up, we have Anthony of Sidoti & Company. Anthony, please take it away.

Anthony, I'm not sure if you're on mute. Well, Anthony works that out. We can hear me now.

Yeah, we can hear you. We can stay on Anthony. Anthony, take it away.

Sorry about that. I have a new phone over here. So apologies for that. So anyway, Thanks for taking the questions. I do want to get into a little bit more about the same store sales numbers as far as traffic versus average ticket that you've seen. And also in your January sales release, Eric, you talked about hopefully that I think the quote was basically saying that hopefully we've seen the worst of the same store sales declines given the uncertain macro conditions. Just wondering if you think that's still true. And I have a couple of other questions as well.

Yeah, sure.

I mean, the same store sales declined. Obviously, not much has changed from the last call. We got the December numbers. December was decent. January was starting off okay. Then we had the weather issues for a couple of the middle weeks, but finished very strongly. The first week of February has been a good week for us overall. I don't have breakdowns on same-store sales for January and February because it's just too early for me to have all those numbers yet. But hopefully we'll get an idea of those soon. I think the worst of it is behind us. I mean, bombshells is still an issue. We've had to make some cost changes there and some structural changes in management and how we're operating those locations. And hopefully we'll start seeing those results soon. as we move into, uh, March madness, I think March madness, we're doing a big push for March for March madness. Uh, some other changes we started today, uh, with our launch rate Thursday. So we're going to do a few more things. We, uh, take the bombshells concept, make it a little more risque. We, I think kind of the team kind of started focused on restaurant operations too much and, and what we're doing and we've got to get back to our basics, uh, and, and which is, you know, keeping our alcohol sales at, uh, you know, the 60% range of sales, those have declined a little bit. And I want to get that back to normal and making the place fun again, especially in the evening hours. So that's kind of what we're focused on right now.

Gotcha. Okay. Thanks for that. And then I know you recently hired a new assistant of director of operations for Bombshells. What has he done so far? And kind of what are your Lance, can you share any specifics as to what you're doing as far as to get that segment in better shape?

Yeah, sure. We've done some cost cutting at the management level, taking our regional managers, put them back in individual stores, having them focus on individual stores, which allowed us to get rid of some underperforming general managers. uh, and not replace, uh, other managers through that left naturally left to attrition by moving people around. Uh, the, the new guy has been in training in Houston. He's now in Dallas. Uh, he'll be working at the Dallas and the Arlington location to get those locations, uh, which are our biggest decliners, uh, back in, back in shape, uh, just making sure people are promoting, doing the things they do, uh, and really, uh, focusing on customer service, like I said, and then, and making, making the place, uh, making the place fun again to hang out in. I think I said earlier that, you know, they've been focused on restaurant operations more than, more than what I would consider the alcohol sales, uh, operations. And I think that's kind of the key. We've made some major changes in music formats, DJs, uh, some of the things that just kind of, as, as we went in business stores and our secret shoppers in, uh, just found things that, uh, that we weren't happy with on, uh, some of the direction, uh, that the current management team had been taking it, uh, And so we're on that. And then also by moving these regionals into direct stores, uh, we'll have a lot more accountability, uh, as we move into, you know, the March, April, May, uh, months, uh, and we'll see significant changes or, or we'll, uh, you know, continue to, uh, to make changes in management there as well.

Gotcha. Okay. And then switching gears that you talked about the admire me relaunch with a new strategic partner. T. You know how should we think about this as far as for my financial perspective as far as you know what this could mean to you guys. T. You know if you could add any additional color that'd be great.

Hey, Eric, are you speaking?

I'm sorry. Yeah, I'm sorry. For some reason, my mute turned itself back on. Sorry about that. Thanks, Mark. So for the new site, basically, our new partner already has the software up and running for their site. So we're going to basically white label that software. So we're waiting for the skins to be done right now, which hopefully will be done sometime in April. We'll begin early testing. and basically full launch this in that next quarter. It lowers our cost tremendously because we're spending about $40,000 a month on programmers trying to get AdmireMe up and running. So basically it'll cut about a half a million dollars a year from our expenses, which is a part of our overall cut to cut over $2 million a quarter in expenses from our budget right now. And so that'll be a big part of that. And we'll continue to move forward launching this new site with video streaming, which we didn't have on Admire Me and weren't going to have on Admire Me for some time. And who knows at what cost to get to that. So basically, I think it just moves the software light years ahead. The concept is still the same to get all of our entertainers and wait staff and employees that are interested in creating content to create content and have a means to do so.

All right, well, thank you very much. I'll pass it on to others and best of luck.

Fantastic. Thank you so much. And next up, we'll bring Scott Buck of HC Wainwright. Scott, take it away. Hey, good afternoon, guys. Thanks for taking my questions.

Eric, I'm curious on the licensing. I know you don't have an update for us, but I'm curious, at what point do you start to get a little nervous in your ability to get the properties open by year end fiscal 24?

May. We need to be on the agenda for approval by May. If we're not on by May, it will be very difficult. It's going to take somewhere between, oh, probably three and four months, so somewhere between 90 and 120 days to do all the install testing and get all the certifications we need from gaming to get the final go live approval. So we really, if we want to open in September, we need to have that approval for the license itself no later than the end of May. We have quarterly updates with them. The next update is in about a week from now. So once we have that update, hopefully we'll have better information on where they're at in the process. As far as me getting worried, I don't really worry about overall unless, of course, they start issuing a bunch of licenses to the other, of all the other licenses start getting issued to other operators that have applied. I think there's six licenses applied for in Central City right now. If all those were to start getting approved and ours was not getting on the agenda, I would be concerned. But as of right now, there's no concern. I think it's just the normal flow of operations and the way the Colorado Department of Gaming does their investigations.

Nope, understood. I appreciate that. And I'm curious, what's the remaining capex on the two properties to get them open?

It really depends on how we do certain things. So far, we're about $2.5 million in. I believe on my last update that I've gotten, we just signed about a $3 million contract for all the construction on the RICs, which includes some pretty major changes to the overall deal. And the HVAC systems are in Denver right now, so they will be installed as soon as weather permits and they can get all their ducts in a row because we're replacing the roof at the same time they put the units. So basically they're going to pull the existing units off the roof. We're going to put all the new curbs and stuff in for the roofing. They'll set the units and then they'll re-roof the building. So that'll be considerable. It should be done, I would think, no later than the end of March at this time. So six or seven more weeks we'll have all new heat in that building and have everything up and running. We think final construction, other than the actual gaming machine, should be completed sometime in June.

Hey, Scott, we can't hear you if you have another question.

Yeah, sorry about that. I went back on the mute. Yeah, so on bombshells and the strategic review, you talk about a potential sale or at least exploration. You guys hired some outside help to kind of speed that process along, or at this point, are you still kind of looking at opportunities internally to do something?

We are working with an outside group right now, as well as a few things on our own as well. Okay. uh when we say we're exploring everything i mean we're we're we're looking everywhere we're talking with lots of people uh but as far as getting ready to as far as listing and whatnot uh we haven't gone as far as listing them for sale at this point because right now we are really kind of hoping we can find uh either the right partner like we did with admire me or uh you know giving our making the changes we've done internally and seeing if that uh if that is going to make a difference in a quick enough time period for, for my liking. So those are, those are, that's where we're at with it.

That's helpful, Eric. And then just last thing quickly, uh, what's the timing look like on the cash out loan? And, uh, are you, you know, kind of in conversations with folks already about potential acquisitions?

Uh, we're pushing the loan because we have been in talk with several, uh, outside operators and would need significant cash down payments. So we're going to just try to get that cash sitting in our books. Uh, we've been working on this for about five weeks. We had to get appraisals, uh, in environmental studies on a couple of the properties, uh, cause they weren't current. Uh, that's all updated and, we should be going to loan committee, uh, in the next week or so.

Perfect.

So I would look for, I would look for our, our hoping, our hope is to close sometime in either the last week of February, first week of March, that's to close the, to close the loan. Uh, so hopefully we can stay on that timeline as long as nothing comes up or nothing comes out of committee that, uh, that was missed in the, in the betting. ran casinos in Blackhawk, ran casinos in Central City both for the past 20-some years. It was very knowledgeable. It's very well known by the Department of Gaming as well as many of the other operators, employees, and whatnot in that Central City Blackhawk area.

Great, and I'm sorry you broke up a little earlier, but can you talk about where do you see your budget for the casinos? But to the point where what do you believe the budget will be when you complete the casinos?