RCI Hospitality Holdings, Inc.

Good afternoon. We are going to wait for a few more seconds and then go ahead and kick this off. Greetings and welcome to RCI Hospitality Holdings third quarter 2024 earnings conference call. you can find the company's presentation on RCI's website. Go to the investor relations section. All the necessary links are 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. I'm coming to you from the Commonwealth of Virginia. Eric Langan, President and CEO of RCI Hospitality, and CFO Bradley Shea are in Houston. Please turn with me to slide three. RCI is making this call exclusively on xSpaces. To ask a question, you will need to join the space with a mobile device. To listen only, you can join the space on a personal computer. 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 everybody 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 Rick's non-GAAP financial measures. Now, I'm pleased to introduce Eric Langen, President and CEO of RCI Hospitality. Eric, take it away.

Thank you. If everyone will turn to slide six. I'd like to thank you for joining us today. and we made a lot of progress during the third quarter. It reflects the first full quarter of our back to basics approach to our business and our capital allocation strategy. Specifically, we are taking aggressive actions to increase revenues, reduce costs, expand margins. We're concentrating our core club business, improving the bombshells and buying back shares, all with the goal of increasing free cash flow per share. Yes, we had a lot of impairment that affected our GAAP results in the third quarter, but that was non-cash. The key takeaways are that nightclubs achieved record revenues with year-over-year increase in total sales and the first quarter of year-over-year increase in same-store sales since the second quarter of fiscal 23. Sales also increased from the last quarter. Bombshell sales increased sequentially and margins grew from 5.9% last quarter to 10.8% this quarter, reflecting our back-to-the-basics approach starting in February of 2024. Looking at our list of new projects, we have opened, converted, or enhanced seven locations to date this fiscal year, and we are working on opening, reopening, or reformatting seven more as fast and efficiently as possible. As per this effort, we formally withdrew our application for the Colorado Casino license to better focus on projects that will provide more immediate results. Looking at our capital allocation strategy, we added $20 million to our war chest through a bank real estate loan. The board of directors authorized increasing the amount available under our share repurchase program by $25 million. And we took advantage of our low stock price during the third and fourth quarters. To that end, I'm pleased to announce we have reached our short-term objective of reducing shares outstanding to less than 9 million. Please turn to slide seven. I'm also pleased to announce that as part of our share buyback program, we bought back 700,000 shares in the open market, reducing our share count by the same number we used in our big October 21 and March of 2023 acquisitions. As you will see on this slide, we bought back those 700,000 shares at a 22% discount to the average share price used in those transactions. Please turn to slide eight. Over the last few years, we have achieved some major accomplishments. We more than survived COVID. We then managed through the post COVID bounce. Then we made our two biggest acquisitions ever, successfully integrated them and improved their results. Now that things have settled down and given the uncertain economic environment, we want to take a good hard look at what we should do next to best increase free cash flow per share and return value to our investors. We are now working on a five year strategic plan. We plan to implement it starting in the fiscal year 2025 and tell you more about it on our next earnings call. Here's a general outline. Right now we see two pillars to the plan. The first is to continue our back to the basics approach to our business. We want to make sure our locations are running as efficiently and profitably as possible. Our priorities would be to grow same-store sales, improve margins, and rebrand and reformat underperforming locations or sell them. The second pillar is capital allocation. Assuming no growth, we should have approximately $250 million of free cash flow to deploy. Our priorities would be to target less than 10% of discretionary free cash flow to ensure a stable and modestly growing dividend. Target about 50% of discretionary free cash flow for selective M&A, focusing on base hits and the occasional home run, making sure we capture synergies at the acquired clubs, and to target any excess cash not used in M&A and dividends for regular share buybacks. Now, here's Bradley.

Thanks, Eric. Please turn to slide nine. The core strength of our business enabled us to generate $76.2 million in revenue in the third quarter. GAAP EPS was a loss of 56 cents per share. This primarily reflected non-cash impairment of $17.9 million in the current quarter. A good portion of that is related to the impairment of right of use and leasehold improvements on several operating leases. Now on a non-GAAP basis, EPS totaled $1.35. In addition, free cash flow reached a year high of $13.8 million, as did adjusted EBITDA at $20.1 million. Please turn to slide 10. Nightclub revenues of $62.8 million increased $374,000 year over year. This primarily reflected same store sales growth of 1.7%. Two new and reformatted clubs and a strong pro sports playoff lineup in May. In turn, this was partially offset by some temporary closings of clubs being reformatted to liquor from BYOB and severe weather in Texas and South Florida. By revenue type, alcoholic beverages increased 4.9%, food, merchandise, and other increased by 5.1%, and service revenue decreased by 5.3%. The different growth rate primarily reflected a higher alcohol and lower service revenue mix from clubs acquired in the past year and a half. Non-cash impairment of $7.6 million in Goodwill, SOB, and leasehold improvement impairments related to six clubs. GAAP operating income was $13.6 million compared to $20.4 million with a margin of 21.7% of revenues compared to 32.7%. Non-GAAP operating income was $21.9 million compared to $23.6 million with a margin of 34.9% compared to 37.7%. Comparing to the last quarter, revenues increased 5.8%, non-GAAP operating income increased 10.5%, and margin increased to 34.9% from 33.4%. All of these improvements reflected higher sales, including service and reduced costs. Please turn to slide 11. Bombshell's revenues of $13.1 million declined by 8.7%. This primarily reflected reduced same-store sales and temporary closings due to severe weather in Texas. In turn, this was partially offset by three locations not in same-store sales, Bombshell San Antonio and Stafford in Texas, and Cherry Creek Food Hall and Brewery in Colorado, with its Bombshell's Kitchen. The Strong Pro Sports playoff lineup in May also helped. Non-cash impairment of $10.3 million reflected operating lease right of use asset impairment and leasehold improvement impairment related to five bombshells. GAAP operating results were a loss of $8.9 million compared to an income of $1.7 million, with a margin of negative 67.8% of revenues compared to 11.8%. Non-GAAP operating income was $1.4 million compared to $1.8 million, with a margin of 10.8% compared to 12.8%. Now comparing it to last quarter, however, revenues increased 2.9%, non-GAAP operating income increased 89.3%, and margin increased to 10.8% from 5.9%. These improvements reflect the first full quarter of changes initiated in mid February, 2024. Please turn to slide 12. We've made some progress on reducing corporate expenses. Year over year, they were 9.4% of total revenues compared to 8.1. But compared to last quarter, they were level at 9.4% on a GAAP basis. And on non-GAAP basis, they were 8.4% compared to 8.8%. Please turn to slide 13. This slide puts our operating performance into perspective, looking at the third quarter compared to the second quarter, so you can see how results improved on a non-GAAP basis. We also added some data on the number of location day closures for club and bombshells during the third quarter due to severe weather. During the third quarter, we had one day closure for clubs and 10 for bombshells. To date in the fourth quarter, we've had 10 day closures for clubs and 26 for bombshells. all in Houston due to Hurricane Beryl. Please turn to slide 14. We have a couple of slides coming up that discuss free cashflow and adjusted EBITDA, which are non-GAAP. In advance of that, we wanted to present the closest GAAP equivalent on this slide, which are operating and net income. Please turn to slide 15. We ended the third quarter with cash and cash equivalents of $34.9 million. This included proceeds from our $20 million bank real estate loan. During the quarter, we used $9.2 million to buy back shares. As a percentage of revenues, free cash flow was 18% and adjusted EBITDA was 26%, both highs year to date. Please turn to slide 16. Debt at June 30 increased by $13.5 million from March 31st. This reflected a combination of the new bank loan and scheduled pay down the weighted average interest rate was 6.74% only 22 basis points higher than a year ago total occupancy costs at 7.9% decline from 8% year over year on a sequential quarter basis. year over year and on a sequential quarter basis. Debt to trailing 12-month adjusted EBITDA increased to 3.27, primarily due to the new bank loan. This should decline over the coming year as sales grow from locations that have come online recently and from those anticipated to open. Debt maturities continue to remain reasonable and manageable. Subsequent to the quarter, we paid down $1.5 million on the playmate note and extended the balance 16 months out. The balloon payment at the extended maturity date was adjusted accordingly. The monthly installment payment and principal and interest has remained unchanged. Please turn to slide 17. We continue to pay down all slices of our debt with the exception of real estate because of the new bank loan. As a result, that slice is larger at 61.4%. And all the other slices are proportionately lower adjusted for their net debt pay downs. Now let me turn the presentation over back to Eric.