RCI Hospitality Holdings, Inc.

Greetings and welcome to RCI Hospitality Holdings second quarter 2025 earnings conference call. You can find the company's presentation on RCI's website. Go to the investor relations section and all the links are at the top of the page. Please turn with me to slide two of our presentation. I'm Mark Moran of Equity Animal, and I'll be hosting our call today. I'm coming to you from Washington, D.C. Eric Langen, President and CEO of RCI Hospitality, and CFO Bradley Shea are in Houston today. Please turn with me to slide three. RCI is making this call exclusively on X Spaces. 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, Mark. Please turn to slide six. Thanks for joining us today. Let me run through some key takeaways. All comparisons are year over year unless otherwise noted. As we previously announced, revenues reflect the sale divestiture of five underperforming bombshell segment locations and the effect of severe weather on company same store sales in January and February. This was offset by improving trends in March and contributions from new and rebranded locations. Profitability reflects the lower The lower same-store sales offset by lower cost sales of bombshells-related units and lower impact. In addition, during and subsequent to the second quarter, we continued to make progress with our back-to-basics five-year cap allocation plan. We acquired two upscale adult nightclubs, Flight Club in Detroit and Platinum West in South Carolina. Price multiples were in line with our capital allocation strategy. We were also working on another acquisition. We opened a bombshells in Denver and rebranded and reformatted the Chica's Locust in El Paso. This reduced our list of development projects. And we repurchased 56,875 common shares for $2.9 million, ending the quarter with approximately 8.8 million shares outstanding. Now here's Bradley to review our performance in more detail.

Thank you, Eric. Please turn to slide seven. All comparisons are year over year for the quarter unless otherwise noted. Total revenues were $65.9 million compared to $72.3 million. a difference of $6.4 million, primarily due to closures or divestitures of non-performing bombshells and the effect of bad weather, as Eric mentioned. 18 club and bombshells locations had to close one or two days each. And even if clubs and bombshells were able to open, they experienced slower business, particularly on weekends when temperatures were below zero or had heavy snow and ice, for example, in Dallas and Houston. But with warmer temperatures in March, sales began to improve. Impairments and other charges were $2.1 million compared to $8.2 million, a difference of $6.1 million. That was due to lower impairments in nightclubs. As a result, net income attributable to RCIHH common shareholders was $3.2 million compared to $0.8 million, a difference of $2.5 million. Gap EPS was $0.36 per share compared to $0.08 per share. Net cash provided for operating activities was $8.5 million compared to $10.8 million, a difference of $2.3 million. That was primarily due to a reduced operating margins due to lower sales. As a result, free cash flow was $6.9 million compared to $8.8 million. Adjusted EBITDA was $14.2 million compared to $17.2 million. and non-GAAP EPS was $0.65 compared to $0.90. Now please turn to slide eight. Nightclub revenues totaled $57.5 million, a difference of $1.8 million, or a negative 3.1% year over year. Key factors included a 3.5% decline in same-store sales and the absence of baby dolls for work due to a fire. This was partially offset by $1 million from flight club acquisition and four rebranded clubs not in same-store sales. Alcoholic beverage sales declined 5.3%. Service declined 2.9%. However, food, merchandise, and other increased 2.4%. Impairment and other charges totaled $2.0 million, with impairments spread across four clubs. This compares to impairments and other charges of $8.2 million in the year-ago quarter. Operating income was $14.6 million compared to $11 million. Margin was 25.4% of revenues versus 18.6%. Results primarily reflected the impairment decline offset by sales decline. Non-GAAP operating income was $17.1 million compared to $19.8 million. Margin was 29.8% of segment revenues versus 33.4%. Non-GAAP results primarily reflected the sales decline. Now please turn to slide nine. Bombshell's revenue totaled $8.2 million, a difference of $4.5 million, or 35.6% year-over-year. The key factors here included sale and investiture of five underperforming locations in the fourth quarter of 24 and the first quarter of 2025, which impacted revenues by $3.7 million, a 13.4% decline in same-source sales, and bad weather. This was offset by two locations not in same-source sales, consisting of a full quarter of Stafford, Texas location, and a partial quarter of the New Denver location. Operating results were a loss of $227,000 versus an income of $699,000. Margin was negative 2.8% of segment revenues versus a positive 5.5% in the year-ago quarter. On a non-GAAP basis, the segment was virtually break-even with a loss of $67,000 versus income of $750,000 or negative 0.8% of segment revenues versus positive 5.9%. These results primarily reflect that the sales declined from open locations and bombshells Denver pre-opening costs, most of which were offset by the sell and divestiture of non-performing locations. Please turn to slide 10. Gap expenses totaled $5.5 million, a decline of $1.3 million. Non-gap expenses totaled $5.4 million, a decline of about $0.9 million. Expense margin was 8.4% of revenues versus 9.4% GAAP and 8.2% versus 8.8% non-GAAP. This decline primarily reflects lower overhead from fewer locations. Please turn to slide 11. We have slides in the upcoming deck that discuss free cash flow and adjusted EBITDA. which are non-GAAP. In advance of that, we wanted to present the closest GAAP equivalents, which are operating income, net cash provided by operations, and income. Please turn to slide 12. We ended the first quarter with cash and cash equivalents of $32.7 million. During the quarter, we used $6 million as part of the flight club acquisition and $2.9 million to buy back shares. As a percentage of revenues, free cash flow was 11% and adjusted EBITDA was 22%. Both primarily reflected lower margins. Please turn to slide 13. Our debt at March 31st increased $5.9 million from December 31st. The increase primarily reflects financing related to the Flight Club acquisition and the construction of Bombshells Rowlett and Lubbock, offset by scheduled paydowns. The weighted average interest rate was 6.7% compared to 6.6% in a year-ago quarter. Total occupancy cost was 8.5% of revenue compared to 8% a year ago, reflecting lower second quarter revenues, not higher costs. Debt to trailing 12-month adjusted EBITDA was 3.56 times compared to 3.32 times in the preceding quarter, reflecting the higher debt at March 31st and lower second quarter EBITDA. Debt to traveling 12-month adjusted EBITDA should decline as sales rebound with warmer weather and growth from locations that have come online more recently and from those anticipated to open. Debt maturities continue to remain reasonable and manageable. Now here's Eric.