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Edited Transcript of RICK earnings conference call or presentation 27-Feb-20 9:30pm GMT

Q1 2020 RCI Hospitality Holdings Inc Earnings Call

HOUSTON Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of RCI Hospitality Holdings Inc earnings conference call or presentation Thursday, February 27, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley Chhay

RCI Hospitality Holdings, Inc. - Controller

* Eric Scott Langan

RCI Hospitality Holdings, Inc. - Chairman, CEO & President

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Conference Call Participants

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* Adam D. Wyden

ADW Capital Management LLC - Founder and Managing Partner

* Daniel Patrick Boyle

Schwerin Boyle Capital Management, Inc. - President & Portfolio Manager

* Douglas Weiss;DSW Investment;Principal and Managing Member

* Jason Scheurer;Orchard Wealth and Legacy Management;Founder and President

* Marco Andres Rodriguez

Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst

* Yaron Naymark

1 Main Capital Management, LLC - Founder & Portfolio Manager

* Darren McCammon

* Gary Fishman

Anreder & Company - MD

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Presentation

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Operator [1]

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Greetings, and welcome to the RCI Hospitality Holdings conference call and webcast. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce Gary Fishman who handles Investor Relations for RCI.

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Gary Fishman, Anreder & Company - MD [2]

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Thank you. For those of you listening to this call on the phone, you can find our presentation on the RCI website, click Company and Investor Information just under the RCI logo. That will take you to the Company and Investor info page. Scroll down a little and you'll find all the necessary links for this call, or you could go to the webcast where you'll see our slides.

Please turn to Slide 2. I want to remind everybody of our safe harbor statement. It's posted at the beginning of our conference call presentation. It reminds you that you may hear or see forward-looking statements that involve risks and uncertainties. I urge you to read it. 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 afterward.

Please turn to Slide 3. I also direct you to the explanation of non-GAAP measurements that we use and are included in our presentation and news release.

And please turn to Slide 4. Here are comparable GAAP versions of 4 charts and tables we will be using in today's presentation.

Now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [3]

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Thanks for joining us today. I'm here with our CFO, Phil Marshall; and our Controller, Bradley Chhay. Before we start, I'd like to thank our staff and our new auditors again. For the last 2 weeks, they worked long hours to get our first quarter 10-Q filed and bring us current with our filings.

Please turn to Slide 5 for today's news. After the market closed, we filed our 10-Q as we had expected to do during late February. We reported $48.4 million in total revenues. That's up 9.9% year-over-year. GAAP EPS was $0.60 compared to $0.65. The year ago quarter included $1.1 million in pretax net gains on sale of excess assets. On a non-GAAP basis, EPS was $0.62 compared to $0.61. The star of the show was our Bombshells segment. Quarterly revenues hit $10.4 million, up more than 72% year-over-year. Not only that, but the segment margin rebounded to 15.2%. Based on that and other trends I'll discuss, we expect performance to continue to grow.

Nightclubs maintained our strong contribution despite an unusual calendar. We had one less holiday sales week during the important Thanksgiving to Christmas period. As we previously reported, performance has also picked up due in part to a great second quarter sports calendar in markets where we have some of our largest clubs. Our Northeast Corridor acquisition continues on track. Regarding our capital allocation strategy, we generated $9.3 million in free cash flow. That's in line with our current $30 million run rate. We used $6.4 million in excess cash to buy back 333,000 shares in the first quarter. That reduced weighted average shares outstanding 4% year-over-year. And we still ended the quarter with more than $13 million in cash.

During and subsequent to the first quarter, we eliminated $10.8 million in near-term balloon debt to retain cash and increase our financial flexibility. This flexibility will be further enhanced when we close on approximately $6.7 million in excess properties under contract to sale and when we sell or lease the remaining excess properties with approximately $9 million in market value. After the first quarter, we also increased our buyback authorization by $10 million, giving us a total of $13.8 million available, and we increased our annual cash dividend 7.7%.

Please turn to Slide 6 to review our first quarter operating results. Nightclubs segment sales were on a similar level to last year. The first quarter of fiscal '20 included 2 new clubs, Rick's Cabaret in Chicago and Pittsburgh, which we acquired in November of 2018. 2 clubs were closed for part of the quarter, and as I mentioned earlier, one less holiday weeks -- our sales week. Bombshells had a record performance. This reflected 3 units in the new sales count for the full quarter. Bombshells Katy, which opened in the second half of October to great numbers and more than 19% same-store sales growth from our first 5 restaurants.

Nightclubs' operating profit were down $1.6 million. Most of that was due to $1.2 million in gains on sale of noncore business assets in the year ago quarter. Bombshells' operating profit jumped to $1.6 million from a relatively small amount in the year ago quarter. That reflects both improved revenue and margin despite preopening costs for Bombshells Katy for several weeks and Bombshells 59 for the full quarter.

Corporate expenses were $1.2 million higher. This was primarily due to higher audit, legal and overtime expenses related to our 10-K filing, as I had indicated they would be in our last call. On a non-GAAP basis, operating profit was off only $375,000 from last year, which was made up for on a per share basis through our stock buybacks.

Please turn to Slide 7 to review our sales and margin trends. First quarter revenue hit a record -- hit a new record, largely due to Bombshells. The segment's higher contribution offset the increase in corporate expenses. Looking ahead, you can see our total operating margin should begin to improve. Bombshells segment margin is expected to continue to grow with all new units open and continued improvement in same-store sales.

Nightclubs segment margin should expand with all clubs open and big sporting events near our larger clubs. I'm talking about the pro football championship in South Florida, the pro basketball weekend in Chicago, both in February, and the college basketball tournament in New York and Houston in March. And as I've mentioned on previous calls, corporate overhead as a percentage of revenues should decline in the second half with reduced auditing and related legal fees and over time.

Please turn to Slide 8 to review our Bombshells segment. Last call, we titled this slide, Bombshells: Turnaround Taking Shape. This call, we've retitled it, Bombshells: Turnaround is Happening. All the new units continue to do very well. In the first quarter, average revenue per unit totaled approximately $1.15 million, which was up more than 30% year-over-year. That gives us increased confidence and all 10 locations should generate annualized sales of $40 million to $50 million, and as sales grow, margins should expand, especially with the elimination of all pre-opening costs as of February. Our internal target continues to be in the 18% to 21% range.

As we sell or lease out the excess property around some of our newer Bombshells, we expect to generate additional increases in store traffic as those properties are developed. We haven't currently selected any new Bombshells locations, and we are waiting to build up our management teams after opening 6 stores in such a short amount of time. And we want to evaluate our ROI on our new investments.

Please turn to Slide 9 to review the Nightclubs segment. I've covered most of this already in this call and our call 2 weeks ago, but I'll be happy to answer any questions you may have during the Q&A.

If you'll please turn to Slide 10 to review our cash generation. Also -- I've also discussed most of what's on this slide. The key thing I'd like to point out is that maintenance capital expenditures were significantly higher this quarter versus a year ago. This can have a noticeable effect on free cash flow. The reason why is that we stepped up our spending at our South Florida clubs in anticipation of the pro football championship this quarter, as I mentioned in the last call, and we also remodeled and expanded our Bombshells in Dallas. We expect these investments to have significant payoffs.

Please turn to Slide 11 to review our capital allocation strategy. We don't have any updates on this slide from 2 weeks ago. We'd just like to reiterate that based on where we are today, we would continue to be comfortable buying back shares up to $32 per share.

Please turn to Slide 12 to review the progress we have achieved with our capital allocation strategy since we started it going in fiscal '16. Revenues have grown about 34% based on a 7% increase in units and a 25% increase in average revenue per unit. That reflects our strategy of weeding out poor-performing locations, organically growing better locations and acquiring our building, in the case of Bombshells, larger revenue-generating locations. With this base of business, we've generated a 124% increase in free cash flow. As we've shown on a previous slide, this reflects our ability to convert revenue dollars into more free cash flow dollars. At the same time, we have reduced common shares outstanding close to 7%. In total, over the last 5 years, we have spent $13.6 million to acquire 1.2 million shares for an average price of about $11.43 per share.

Please turn to Slide 13 to review our long-term debt. Long-term debt net of loan cost fell $1.7 million from September 30 and $11.3 million from a year ago. That reflects scheduled debt amortization, debt pay down as a result of certain asset sales and new debt associated with the development of our new Bombshells. We added a notation on this slide regarding our operating lease liabilities. In line with the new accounting standard, they totaled $28.3 million as of December 31. These are liabilities, not debt, as I had referred to them on our last call.

Please turn to Slide 14 for a look at our debt manageability, which continues to look good. As I mentioned earlier, during and subsequent to the first quarter, we eliminated $10.8 million of near-term non-realty balloon payments. We did this to increase our financial flexibility by eliminating any large cash needs for debt repayment. During the quarter, we moved $3 million due in May of this year to fiscal '23. That is already incorporated in the bar chart on this slide. Subsequent to the quarter, we converted 2 balloons totaling $7.8 million in the 10-year notes. That's not reflected in our maturities bar chart yet. So the next time you see this chart, $4 million in non-realty balloon will come out of fiscal '21 and $3.8 million in non-realty balloons will come out of fiscal '22.

Looking at other debt metrics. The ratio of long-term debt to trailing 12-month adjusted EBITDA continued to fall. That's largely due to our reduced debt and stable EBITDA. And occupancy costs fell to 7.3% of revenues. That largely reflects increased revenues from Bombshells including the Katy location, which opened during the first quarter.

To conclude, please turn to Slide 15. Going forward, our focus remains the same, running the business for maximum free cash flow. Looking at Nightclubs, our priorities continue -- are continuing to improve operations, finalizing and integrating our Northeast Corridor acquisition and ensuring that any acquisition opportunities fit our parameters. Regarding Bombshells, our priorities are guiding all new locations to ensure their success and continue to grow same-store sales and margins at older units.

In terms of asset management, we would like to close all of our pending opportunities. We continue to be focused and we have the financial strength to grow free cash flow per share at least 10% to 15% through a combination of buying back shares, buying the right clubs in the right markets, and of course, internal growth. Now that we have filed our 10-Q, we are up to date with our filings and look forward to resuming our pre-fiscal '17 track record of always filing on time.

Operator, let's start with the Q&A. As always, I'm happy to talk about all aspects of the business, but I appreciate if you would understand that I'm limited in what I can say when it comes to certain legal matters.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Marco Rodriguez with Stonegate Capital Partners.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [2]

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Real quick, just wanted to circle on the accounting cost, the extra cost that you guys are expecting in Q2. Can you quantify how much you're expecting to be excessive, if you will?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [3]

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I mean I don't have the numbers yet, obviously, because we're still in the queue, but several hundred thousand dollars of the auditing fees will be paid in this quarter for the '19 audit and a lot of it's overtime.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [4]

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Right. So I think you identified about $0.5 million in Q1 that was excessive, so maybe another $200 million, $300 million in Q2?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [5]

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Possibly, could be a little higher. Like I said, it's just too early. We don't have all the -- I mean we just filed the K 2 weeks ago. I don't even think we've gotten all the bills in from the auditors from that period yet, from the January period yet even.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [6]

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Understood. And then as it relates to Bombshells, just wondering if you might be able to help us understand and quantify some of the preopening costs associated with the ones you just opened here in the last couple of quarters?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [7]

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Sure. Well, I mean we've had to carry management. An average store has about 10 managers. Our average manager go through a training process of 4 to 6 months. So we've been carrying for almost 1.5 years now, an excessive amount of additional managers, because we knew we were opening all these stores. So we've had managers in training, we've had cooks in training -- excuse me, kitchen managers, and then just other staff. We knew the stores are opening, so we run our staff a little higher than average. And of course, pre-opening, we have our training teams. When our training teams are actually opening the stores, there's a lot of additional costs in the first month that a store is opened associated with actually opening the store.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [8]

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Got it. And last question, kind of a difficult one here, a big unknown, the coronavirus and a lot of the news has kind of come to the forefront here in the U.S., and obviously, with all of your locations in some pretty major cities, just wondering kind of how you are guys are thinking about that. And then I know it's still very early days, but have you seen any sort of change in the traffic patterns at your places?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [9]

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We've seen nothing right now. Our numbers are fantastic. If anything, I guess people are going out more right now just in case they get locked up for 2 weeks after reading about some of those cruise ship quarantines. Like I said, so far, we haven't seen any effect. Obviously, the virus isn't in any of our markets at this time. So we will monitor it and basically follow the advice of the health officials at the time and do what we need to do.

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Operator [10]

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(Operator Instructions) Our next question comes from the line of Jason Scheurer with Orchard Wealth.

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Jason Scheurer;Orchard Wealth and Legacy Management;Founder and President, [11]

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Quick question for you. Just reiterate a little bit more if you can, on the stock buyback. So basically, you're saying you've got $13 million available for the buybacks as of today. And when can you commence doing that? And approximately how much of the average daily volume can you do?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [12]

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Well, I mean, we only -- we buy within safe harbor or we do block transactions where it -- which exempt us. So we follow those deals. Basically, right now we're current. So as long as we don't have any material insider information, we can purchase stock within 3 days from today. That's typically what the rules are for us.

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Jason Scheurer;Orchard Wealth and Legacy Management;Founder and President, [13]

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Okay. And then in your free cash flow numbers that you're looking for the year, you're not including those numbers from the sale of these properties that are outstanding?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [14]

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Correct.

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Jason Scheurer;Orchard Wealth and Legacy Management;Founder and President, [15]

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Okay. So if anything, it could be looking at like a $6 million surprise at some point throughout the year?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [16]

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Well, you got to remember, that's not our profit on those sales. We do have costs on those sales. But yes, there will definitely be some upside on the sales of the assets as we move through the year.

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Jason Scheurer;Orchard Wealth and Legacy Management;Founder and President, [17]

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When you're doing the -- when you're looking at the Bombshells properties, do you find that actually just like putting your location there or you, maybe at some point have come up with an average that, hey, guess what, every time we buy a property, the subsequent property goes up by 30% or something? Because, obviously, this -- I love your idea about like making sure that the businesses that you're selling to are complementary to the club itself, or the restaurant itself.

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [18]

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I mean it's varied. We basically have done 3 of these developments. One is completely under contract. Hopefully, we close. We're -- I think we're scheduled to close in the next 3 weeks on the last piece of that property. We originally bought the property for about just under $9 a foot. We put about $2 a foot into developmental costs, bringing in utilities and retention and those types of things. So we had just under $11 a foot into the property. After we built our store, we've contracted the property. The first lot, I think, we sold at $16 a foot, and the second lot, we've got under contract at $18 a foot. So obviously, we'll add significant value as more places are developed and built there.

The other property we bought, a considerable amount of property. We've got one piece sold for almost double what we paid for the property originally, which is a frontage piece. We've got a piece on the back under contract at about 40% over what we paid for the property, and we'll have an additional piece there for sale. And we still have -- in the Pearland, we still have both of those -- both those properties listed for sale. We do not have a contract on either yet, but there's a lot of road construction going on right there -- down there. And we knew it was going to be -- we bought the land really cheap, and we knew it's going to be a considerable amount of time that we probably have to hold the land, up to about 18 months. It's been about 12 so far. So I think in the next 6 months is that construction starts to complete, we'll see activity on that property down there as well.

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Operator [19]

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(Operator Instructions) Our next question comes from the line of Adam Wyden with ADW Capital.

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Adam D. Wyden, ADW Capital Management LLC - Founder and Managing Partner [20]

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This is just a follow-up on the last question here. So I guess, you have some real estate that's held for sale today that you expect to make a profit on in some capacity, that will be in your free cash flow and then some real estate is not -- is kind of under development, but not quite held for sale. I mean can you try and quantify like over the next, call it, 12 to 18 months, how much cash you can take out of real estate sales, maybe not just profit but actual cash?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [21]

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Yes. I mean it's really hard to say because, obviously, I don't know when things will close. But if we sold everything, if we sold all $16 million or $15 million -- $15.7 million worth of property, and we got, what I consider our kind of minimum ask price on it, probably an additional $4 million to $6 million in cash. And we'd eliminate another $10 million in debt or so.

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Adam D. Wyden, ADW Capital Management LLC - Founder and Managing Partner [22]

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Okay. So what you're saying is another $4 million above the carrying value?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [23]

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Well, above the debt value. I don't know about the carrying value, but yes. But the level of debt -- Remember, we put cash down. The problem is we built some Bombshells on some of this property, so what happen is, let's say, there's a loan on the property for $5.5 million and we sell the excess land, we -- the way the note is written, we have to pay off 100% of the net proceeds to pay -- go against the loan. Even though the Bombshells has worked $7 million by itself, we still -- the way that note is written, we have to pay off. Now what we'll do is, come December -- November/December of this year, as Chicago and Pittsburgh become 2 years old, we will do a big refinance again like we did in 2017, where we'll take all of our existing Bombshells properties, the location in Pittsburgh, location in Chicago and probably do a refinance into a large, long-term 20-year real estate note, where we'll be able to pull out some of that equity, probably on a 65% or 75% loan-to-value ratio, eliminate these other loans and then pay out from there.

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Adam D. Wyden, ADW Capital Management LLC - Founder and Managing Partner [24]

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Right, they're higher interest loans that you have outstanding, the $15 million unsecured and stuff. You'll be able to basically refi that out and get more kind of...

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [25]

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Right, and then turn it into real estate debt against the existing real estate. Kind of like we did in 2017, very similar. We made a whole bunch of notes and come up with one -- turn it into one note.

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Adam D. Wyden, ADW Capital Management LLC - Founder and Managing Partner [26]

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Perfect. Let me ask you something else. So you guys have about $15 million authorized on the buyback. Your free cash flow, I guess, your run rate is about $30 million, but that probably on some level is burdened by your excess legal and accounting which will kind of get through. But I mean when you think kind of forward in terms of closing for Boston and kind of getting out of the kind of in the back half, I mean, your run rate free cash flow should be materially higher, right? As you kind of pro forma for these accounting costs and kind of Boston. I mean how do you think about doing anything else with your money other than buying back stock? I mean the stock -- this coronavirus on some level, I guess, is a gift, right? I mean the stock went for almost $30, something you guys publish in your filings and now you're back at almost $20. And your free cash flow run rate at the end of the year will probably be closer to $40 million than $30 million. I guess my kind of more philosophical question is, how do you think about doing anything other than buying back stock here? I mean it seems like this is just a wonderful opportunity. Do you think you can do more like an...

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [27]

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As you've seen in the last quarter, that's all we did. We bought back $6.4 million worth of stock. With all the cash flow we generated and all the debt we paid, everything else, we ended up with $1 million less in cash than we started the quarter with and bought $6.4 million of the stock back. As we move into this quarter, if the stock continues to sell off into next week, we'll be out there buying it, I'm sure. So I mean if the market wants to continue to discount our assets, we're going to continue to buy them back.

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Adam D. Wyden, ADW Capital Management LLC - Founder and Managing Partner [28]

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So is it fair to assume that next week, the stock's at $18 that you guys could -- I mean within the guidelines of safe harbor and volume blocks, you could, in theory, execute against all 7% of that in whatever, $14 million or 7% in the next kind of in this quarter, all things being equal?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [29]

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Well, we have to have -- obviously, we have to have about $8 million to $10 million in cash to operate. So we're not going to get ourselves into a situation where we're short of cash on hand for operations. But yes, I mean, we would be extremely aggressive. It would depend on if blocks became available. In the last quarter, we had 2 major blocks come available that we bought from a single investor. If those blocks become available, then we're definitely going to look at them. We've now eliminated $10.8 million worth of balloons over the next few years. We've got a couple of smaller balloons out there still we're dealing with now. We'll decide whether we're going to try to push those or pay those off as we move forward.

The real estate balloons will be paid off with the property sales, so I'm not really worried about those. I mean right now we're in a great position where we have the flexibility to basically do whatever we need to do or whatever we want to do depending on what the market allows us to do. If the market continues to allow us to buy our own assets at these prices, we will be very aggressive. If they get more expensive, we will slow down. But unless they get fully priced, I don't see us doing a whole lot of stuff other than buying back stock. I mean obviously, we're going to continue to grow the business at our 10% to 15% clip, but we're doing most of that through debt financing right now. And I think we'll continue to do that. I think after debt service -- even with after debt service right now, we're probably in the $300,000 -- $250,000, $300,000 a week in free cash flow after debt service that we can put into the stock. We're sitting on several million dollars of extra cash right now today. And as we close on these other properties, we're going to pick up. I think the first 2 properties we pick up about $2.8 million in additional cash. So right now cash is not a problem for us. So it's just going to be a matter of whether we can find available shares for sale and what the prices continue to be.

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Adam D. Wyden, ADW Capital Management LLC - Founder and Managing Partner [30]

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Got it. Can you talk -- I mean -- can you talk a little bit about the last 3, 4 openings of Bombshells, and why you think they've performed a lot better than the previous ones?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [31]

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Sure. We've learned a lot opening 10 stores. You've got a cookie-cutter floor plan now. So they're all almost identical. We've learned our demographics. We've learned the traffic flows and what's important. And the locations that we bought were very, very good locations, very high-traffic locations, class A restaurant locations. I think as we continue to look -- the thing of it, it costs me the same amount to build a store, whether I build it in a class A location or a class B locations, so we -- before we were growing, we weren't really as, I will say, as wise as we are today where we've really learned which locations and what traffic flow patterns we need to do the $100,000 a week, $140,000 a week store. So you're doing a $5 million to $7 million store. I've looked at a lot of locations that we've passed on, that are probably $4 million, $80,000, $90,000 a week store. So they're doing $4 million, $4.5 million, but it costed me the same amount of money to build that store as it cost me to build one that does $7 million. So we're trying to really hold out and find the right locations right now, build these stores that will do these higher numbers.

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Adam D. Wyden, ADW Capital Management LLC - Founder and Managing Partner [32]

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Got it. And in terms of -- I mean, you guys, I think, more or less you publicly committed to, not building any new Bombshells this year, kind of showing people the kind of the true earnings power of Bombshells and kind of showing people kind of a clean year with less legal and less accounting. I mean, how -- looking forward, taking a step back, you've grown this thing from $2 million of EBITDA, whatever it was gazillion years ago to maybe next year, exiting this year, you'll be run rating close to $60 million. How do you think about the next move from $60 million to $120 million of EBITDA? Your -- there are a lot of big strip club chains out there, but they're going to cost more than these smaller deals. How do you think about kind of getting your cost of capital to a level where you're not just buying the stock, but you're able to use it to kind of do more transformational deals? What do you think the market needs to see to kind of get you to that next level? Obviously, you had to get your financials in order and all the rest, and that was a prerequisite. But I mean do you think that -- do you have confidence that you'll be able to get back up? I think before all the financial shenanigans with the -- as you guys were trading at 12, 13, 14, 15x cash flow. Do you have confidence that if the numbers are in order and the financial performance is there, that you'll be able to get the stock back up to those types of levels where you can use it to do more transformational deals?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [33]

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I mean the idea -- that's why we put Slide 13 in there to kind of show you -- or Slide 12, I'm sorry, Slide 12 to kind of show the progress of the capital allocation strategy. What we're going to do is, we're just going to keep taking it 1 year at a time. We're going to keep growing at a 10% to 15% compounding rate of free cash flow, and eventually, the market is going to have to recognize the consistency. I think once the market recognizes the consistency, then we'll get the multiple expansion, especially as we continue to prove ourselves over and over. Or what's going to happen is, there's going to be a few shareholders left that won't sell their stock, that have been with us for a long period of time and have seen the consistency. And so anybody else that wants to own part of this is going to have to pay up for it. I mean, that's kind of the reality of it.

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Adam D. Wyden, ADW Capital Management LLC - Founder and Managing Partner [34]

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All right. Well, I look forward to the buyback, all right? And I'll jump back in the queue.

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [35]

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All right. Thanks.

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Operator [36]

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Our next question comes from the line of Douglas Weiss with DSW Investments.

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Douglas Weiss;DSW Investment;Principal and Managing Member, [37]

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Congrats on your quarter. Most of the questions I had have been asked. But on the -- I guess on M&A a little more, could you talk a little bit about how much -- how many deals you're seeing and whether the pricing is interesting in at this point?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [38]

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We're seeing new ones every week. Pricing is not the issue on most. A lot of it has to do with where it's at and those types of things. So some of it's pricing. But we're just taking it easy right now. We've got this big acquisition. We're getting ready to close. We want to get that done. Our accounting team needs a breather, at least for -- at least give them a couple of weeks. So we'll let them relax for a couple of weeks through spring break, get them back to work in April. We're looking at quite a bit of stuff. There's new stuff every week. I'm getting new e-mails, new text message and calls from people, stuff all over the country right now. So really, it's just about finding what fits best for us next. That's kind of what we're -- we've been discussing internally at some of these acquisitions that we have on our plate, like which one do we want to really move on next.

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Douglas Weiss;DSW Investment;Principal and Managing Member, [39]

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Do you think it's better? Or are you looking at expanding in existing markets? Or are there advantages to -- are there other new markets you'd be interested in expanding into?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [40]

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We're looking at both. I mean obviously, existing markets are easier for us for the most part, or something that's -- we wanted a new market that's close to an existing market. That works out best for us. That way we have a sports staff that's close, but we're also entering a new market, picking up new market shares in another market. That's why Pittsburgh and Chicago were both very good acquisitions for us. So those are the types of acquisitions we're looking at right now. Something in that price range as well, we're trying to stay in that probably $10 million to $15 million price range. It's easy.

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Douglas Weiss;DSW Investment;Principal and Managing Member, [41]

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Right, right. As far as your accounting and accountants, I know you brought in an outside consultant to help remedy the internal controls issues that were cited. Would you say that work is done at this point? Have you kind of implemented their recommendations, or is that still a work in process?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [42]

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Well, we're through 4 out of 5 of our material weaknesses. I mean it's constantly evolving, right? Because the worlds are constantly evolving. And as we grow, we've got to make sure our systems grow. The biggest problem we had is, we grew so fast and we were in the process of doing our ERP system, but it hadn't been put in place in '16 and '17. And we just grew so fast that the accounting system couldn't keep up. And as we converted from one accounting system to another, while our numbers all checked out every time, there were no material changes to any of our financials or any material restatements of our financials, but we have to learn. And the biggest problem you have as you get larger and larger is you don't know what you don't know, and so we had to go through that learning process.

The new ERP system is incredible. It gets -- I think it gets better. Every quarter, we find something new that it can do and get better reports. And we're continuing to grow with it, and it's very scalable. So the nice thing is to go from where we're at now to double in size or triple in size, this software won't even know -- you won't even stretch it. I don't know what numbers, how high we have to get to in revenues before this software has any problems. Well, hopefully, someday, we'll find out.

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Douglas Weiss;DSW Investment;Principal and Managing Member, [43]

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Right. Oil prices have come down quite a bit. Have you seen any impact in your Houston, either in the Bombshells or in the clubs as far as attendance?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [44]

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Nothing since January and February for sure. We'll watch and we'll see through March if we have any real effect. The only -- we only have really 2 locations that are affected by oil prices. That's Odessa and Longview, Texas. Longview is a very small club anyway. You wouldn't even know if it's affected. We know but I mean, the market would never know, it's too small.

The Odessa market is a big market for us. 2 very large clubs out there, very profitable clubs for us. And so we watch that. And we're definitely seeing some slowdown in that market on a year-over-year basis. But oil was, I think, $70 last year, it's in the $50s this year. And we'll just watch and see. I mean it's still very profitable, still very profitable club for us. But Houston is not really affected by oil at all or any of our -- really any of our other markets. I think the real markets that are affected. If anything, they're helped, because gas prices get cheaper, so people have more disposable income.

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Douglas Weiss;DSW Investment;Principal and Managing Member, [45]

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Right. And then I guess last question. Do you have any thoughts generally on comps, looking out for the rest of the year? I guess it sounds like the sporting calendars might be helpful, but anything you'd say there?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [46]

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Yes, this quarter. I mean, January, February, March is going to be some really nice comps. I think our comps were a little weaker last year. Super Bowl was in Atlanta. So we didn't get any big push from that. We've got a huge push from that this year. The NBA All-Star game this year is big for us. So -- and I'm hoping that the college basketball tournament is going to be fantastic for us, too. So we'll watch as we move forward. And the big fight -- the fight last weekend was great. We had a really big weekend.

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Operator [47]

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Our next question comes from the line of Darren McCammon, a private investor.

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Darren McCammon, [48]

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A few of them have already been answered. Can I get -- I think you already partially answered this, but maybe I can hear it again. On the -- you had about a $2.5 million increase in SG&A cost. Could you detail out how much of that was non-recurring, one-time?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [49]

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Probably not. I mean to be honest with you, we've been too busy getting everything done and not really looking at what everything costs. In the next quarter or 2, yes, we'll be able to break it out because you're going to be able to see the differences as the costs come down. But the reality of it is, is not -- I don't really know. I know a lot of it is accounting, a lot of it's legal, and a lot of it has been -- it's overtime. I mean our accounting staff has been in this office for about 8 a.m. to 10:00 p.m., 6 days a week, and almost the entire month of January. So...

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Bradley Chhay, RCI Hospitality Holdings, Inc. - Controller [50]

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That's an estimate.

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [51]

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Yes. Bradley says that the accounting and legal is probably between $800,000 and $1 million of it just by itself, just related to getting the 10-K and stuff done, yes.

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Darren McCammon, [52]

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Okay. So it adds up to about $0.27 a share, so yes. Maybe offline, if I could get a little more breakdown, I'd appreciate it. But the $800,000 to $1 million is pretty helpful all by itself, actually.

So I'm going to ask the same thing I asked a couple of weeks ago. You're at a $9 million run rate on your free cash flow, which the way I add up, adds up to about $36 million. Why are you using $30 million for your stock buyback?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [53]

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You got to remember, we did $9 million this quarter. So we don't have those kind of numbers in the fourth quarter typically. And the third quarter is usually down a little bit. Let's see how this January, February, March quarter goes, and maybe we'll have some adjustment to it. But I still think pretty much, we're pretty close to that $30 million actual run rate. So -- we'll see. I mean the second half of the year will have a lot to tell. It's hard. It's just hard to tell with all these added expenses, where, for sure, we're at. $30 million is just the number that we're most comfortable with right now.

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Darren McCammon, [54]

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Fair enough. So you're going to look at it again in -- well, in your second quarter, which is after the March quarter basically?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [55]

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May. Yes, we should put our second quarter results out in May. So we'll have a better -- probably, have a better idea of where we're at and how things are looking in May. If we're going to be -- if our run rate is increasing, we'll let you know at that point.

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Darren McCammon, [56]

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Okay. Well, just a comment, I get confused every time you guys say Q1, Q2, Q3. If you guys use December quarter or March quarter, September quarter, December quarter, it would -- it's just easier to keep track of.

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [57]

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I know, but then I get confused. But yes, I understand what you're saying. And this was the December quarter. So -- and the March quarter, which will -- results will come out in May, we'll have a better idea of how these first 6 months have gone, how the costs are starting to get in line. And I think, definitely, the June quarter will be the real telltale, because I think we'll have no real outside costs, other ordinary business costs, I think, in that quarter, hopefully. That should be an exciting quarter for us, which will come out -- those results will be out in August.

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Darren McCammon, [58]

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Okay. Do you think -- you talked before about doing some ROI modeling on Bombshells. Do you think you'll have that out in May, August time frame also?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [59]

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It's possible. We'll see how these guys do. They're going to be sitting around here twiddling their thumbs a lot compared to what they've had to do for the last 2 years. So maybe they'll be able to model some of that for us, get us a good idea of what it's looking like. I definitely want to see the actual cash outlays on all these new stores, what the property purchase is and whatnot, especially as we start selling off these added pieces. So we're getting a bunch of our cash back. It's going to be interesting to see the cash-on-cash returns on these stores.

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Darren McCammon, [60]

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And you're going to share those kind of models with us, to some extent, both with the property sales and without?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [61]

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If we can get them all done and put it out into a format that makes sense, certainly. I mean it is what it is. So at the end of the day, I mean, if it's great, that's even more reason to show it if it's good. I mean it can't be bad, I can tell you because I know -- I can see the returns. I know what cash we spent. And I think it's going to be a lot better than we've even anticipated as we sell off these properties. And the numbers are coming in so strong from these new stores. New stores are opening at about $150,000 to $170,000 a week in sales. At that rate, even after the honeymoon period is over, those stores are $6 million, $6.5 million, $7 million a year stores, depending on what they hold out at. And we started $150,000, $170,000 and we bounce down to $120,000, $110,000 and then climbed and hold that steady $130,000, $140,000 a week, we're going to be just under $7 million a unit on those new stores, which are very highly profitable.

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Darren McCammon, [62]

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I suspect kind of the same thing, but the market is always going to assume the worst, unless you give them something concrete. So that's kind of why I'd like to see it, basically, is to show the market that whatever is true, I want to see. But I suspect what's going to be true is Bombshells is a better business than they think it is.

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [63]

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I mean I think it's certainly starting to show that. We just got bogged down with accounting stuff and didn't have the time to sit here and evaluate every little nuance as we built these new stores. We just, more importantly, let's get them built, let's get them open. Everything will catch up with itself later. And I think that's what we're going to see. Like I said, as we get into this June quarter and get into the end of this fiscal year in September. You're going to start seeing those numbers. I think we're going to start hitting our margins, we're going to hit 15% to 21% margins. That's our first goal. I mean obviously, if these stores come into 15%, 20% margins or 18% to 21% margins and we do $45 million in sales, all of a sudden, you've got Bombshells cranking out $45 million in revenues and $9 million in earnings. I think that's kind of show they pay for themselves pretty quick.

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Darren McCammon, [64]

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Yes. So on the M&A front, just an addendum to the previous question. I've noticed that you tend to do most of your purchases towards the latter half of the calendar year. Is there -- is that just coincidence? Or is there something built into it that tends to happen?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [65]

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Now everybody wants to sell their clubs in August. This is one of those businesses where in October to March, you're going, "This is the greatest business in the world." And then in the summer, you slow down and they're like, "Uh-oh." Then of course you hit -- school starts back up in August, and we're all dying. You'll see our fourth quarter. I mean even our numbers, our fourth quarter is, if you go back to history, our fourth quarter is our lowest revenue numbers. And so that's when guys start thinking, "Oh, I should get out of this business." Happens every year. So nobody likes (inaudible). Everybody wants to get that one. So guys start getting really serious about summer clubs in the summer, August, September starts coming around, they really get serious about it. And then by the time we make a deal, do the due diligence, do all the paper, get it all closed, we close between November and February typically.

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Operator [66]

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Our next question comes from the line of Dan Boyle with Schwerin Boyle.

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Daniel Patrick Boyle, Schwerin Boyle Capital Management, Inc. - President & Portfolio Manager [67]

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Eric, first, I want to complement you on how you've handled yourself through this somewhat challenging period. We appreciate that.

Secondly, a question on the acquisition, how it actually works. Are there many other bidders out there for clubs of the sort like Boston, Miami? Or is that just -- how competitive are these sorts of deals?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [68]

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I mean I'm sure there's other people out there that would love to be in these markets and whatnot. The trick is coming up with the cash. If you look at our next acquisition, we're putting $11 million cash down to the buyer. Now we're borrowing that money from a bank, but the seller is still getting $11 million in cash. So as far as the seller is concerned, he's getting $11 million cash down, he's carrying a $4 million note. I don't think there's a lot of other buyers out there that have the wherewithal to pull up that $8 million, $10 million, $11 million cash down payments like RCI has been able to do.

Second, I think we have a great track record of closing transactions now which I think that the sellers are taking note of our reputation on actually, not only making the deal, but actually closing the transaction. And all of the sellers, they get paid and they're happy, which definitely helps. So I think our reputation, it helps us to be able to buy additional clubs.

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Daniel Patrick Boyle, Schwerin Boyle Capital Management, Inc. - President & Portfolio Manager [69]

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When you do the -- you net the EBITDA that you kind of put out for the acquisitions, you're sort of netting out, as I understand it, a rental expense, that sort of net of a rental expense. Is that -- am I correct on that thought, observation?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [70]

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Yes. We use what's called adjusted EBITDA. And what we do is we take the revenue that they're earning and let's say that the revenue they're earning is $3 million and then we buy the real estate for appraised value. The real estate is $7-point-some-odd million. We would take an 8% cap rate or about $630,000. We take that $630,000 off of the $3 million, which will give us an adjusted EBITDA of about $2.4 million. We pay a 3x multiple of that, giving us a $7.2 million purchase price for the business. So we pay 3x adjusted EBITDA for the business and then we buy the real estate in addition to that. So if you want to do -- I've seen people out there saying, "Oh, you're paying 6x or you're paying 5x." If you want to look at an overall deal, sure, we paid -- we're buying $3 million, and we're paying $15 million for it. But we're getting a $7.8 million piece of real estate. People want to forget that, that real estate has real value. And as we pay that real estate down because since we own it, we pay those mortgages down, we're able to go out and reborrow that money again at 5%, 5.5% and take and reinvest that money again in the next deal. And so each deal, I think gets a little bit better and a little bit better for us, especially as we're using 100% -- basically, we're 100% financing. So the reality of the company is not using a single dollar of its own cash and they're picking up $3 million in new dollars.

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Operator [71]

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Our next question comes from the line of Yaron Naymark with 1 Main Capital.

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Yaron Naymark, 1 Main Capital Management, LLC - Founder & Portfolio Manager [72]

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Congrats on another strong quarter. I guess just looking at your free cash flow, I mean, if we look at the current run rate, it looks, I think, previous -- someone else asked on the call that it looks like you're run rating closer to $36 million of free cash flow, but I understand you're comfortable using the $30 million as a starting point because there's a lot of puts and takes this year. But just thinking about that $30-ish million starting point, that number, it sounds to me like it's burdened by basically your preopening expenses from the new Bombshells locations, you have training costs associated with in other -- those are the preopening expenses, I guess, but you have the accounting charges this year and the legal, which sounds like that's a few million bucks. Your maintenance CapEx sounds like it's elevated this year because you spent money on the Miami locations in anticipation of the strong Super Bowl. You're paying down debt associated with the asset sales that you earmarked when you sell those, so interest expense should go down. And you have the Northeastern Corridor acquisition as well as I guess, next year, you're going to have the full year benefit of the new Bombshells locations that didn't open up until Midway through Q1 of this year. So just thinking through -- I mean, if I look at a $30 million run rate that you're talking about, that you're comfortable talking about for this year, is there any reason to think that the run rate entering next year, assuming you don't do any more M&A or don't open any more Bombshells, won't be higher than that's -- decently higher than that $30-ish million or the $36 million that you're run rating?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [73]

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Oh, I agree, if we were giving you '21 run rate. Yes, the '21 run rate will definitely be higher than the $30 million 2020 run rate is. There's going to be a lot of -- there's a lot of onetime stuff in '20 that should not carry over into '21. So our run rate going forward in the '21 is definitely going to be higher than $30 million.

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Yaron Naymark, 1 Main Capital Management, LLC - Founder & Portfolio Manager [74]

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And then, any M&A on top of that would be incremental. So you have that -- you're going to be at a run rate above this year going into next year. And then if you do M&A, that will be incremental, correct?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [75]

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Correct. And the idea is that we grow that at a 10% to 15% clip, right? So we need to do enough acquisitions that we increase that run rate at a 10% to 15% annual growth rate.

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Yaron Naymark, 1 Main Capital Management, LLC - Founder & Portfolio Manager [76]

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Got it. Okay. And then if you guys were able to get back to, I think, in 2018, you guys were trading at a double-digit EBITDA multiple before all this stuff started to hit the stock price, I mean, if you guys got back to, I don't know, 11, 12x EBITDA or what you were selling at 18 months ago. I mean do you think it's possible to accelerate the M&A and do potentially bigger deals if you're able to pay up with stock? And if you're able to buy stuff at 3 to 4x EBITDA by issuing a little bit of stock, is instead of paying 3 to 4x, you're willing to pay 5 or 6x if you're selling for 11 or 12x? I mean do you think that would help you accelerate M&A or if you're willing to pay a little more, it wouldn't necessarily...

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [77]

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Well, it wouldn't hurt. Anytime we're willing to pay a little bit more, we're going to have more deals on the table, number one. Whether we want to use equity or not, I don't know. But if I didn't have to use my stock, if I didn't have to use my cash to buy back stock, my cash will be building up. So if I hadn't bought back $6.4 million of the stock because the stock was trading at $34 right now, and so my $6 million or $7 million in cash was sitting on the books, I could do a deal where -- I can do a much larger deal where I use $10 million of company cash, $10 million worth of bank debt and another $8 million or $10 million worth of owner financing, and I could be doing $30 million transaction, right, and still not use any equity. But we have to get a much larger transaction. So there's definitely benefits to our equity trading at a fair market value.

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Yaron Naymark, 1 Main Capital Management, LLC - Founder & Portfolio Manager [78]

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Are those [out there]?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [79]

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They're out there, oh, yes. We want to come up with the cash. I mean like I said, there's deals out there. They're just going to require some of the larger, I call, multi-club operators. They're going to want a considerable more amount of cash down. They're going to want $20 million, $30 million in cash down on a $40 million, $35 million acquisition, close to 50%, 60% cash down. And so those are the type of things we're looking at. And I think we're getting -- we'll get there. In the meantime, we found some nice basically one-off acquisitions. We're buying one club at a time. And we're continuing to hit our growth rate.

The only thing that -- the only concern for me right now is, do I have the next acquisitions lined up, so I can continue to grow at that 10% to 15% growth rate? I want to take Slide 12, and I want to run it out 5 more years, and I want to continue to see that compounding growth rates growing where free cash flow is, doubling in 5 years, every 5 years or so. And we can keep that going where we're doubling free cash flow every 5 or 6 years, then I think the market cannot continue to ignore the opportunity that we've created. We know how to start rewarding on -- rewarding the share price for it.

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Yaron Naymark, 1 Main Capital Management, LLC - Founder & Portfolio Manager [80]

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But I guess, the follow-up to that is -- so you say there's these $30 million acquisitions or even bigger where you need to put down more cash. If your stock was at 12x EBITDA, do you think those sellers would be willing to accept equity as a down payment?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [81]

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Oh, they want equity now. Yes. I don't think we'd have a problem using our equity. We used it for years. It's just the problem is the math doesn't make sense because our equity is the most expensive form of capital we have right now. Especially, now we're getting back up there, where it's going to get down to 10% -- $32 at a 10% and borrowing money at 5%, 5.5%, and I get to -- get a 22% tax benefit on that. So my true cost is 4%, 4.25% on the capital. So why would I want to use an equity that's costing me 14% or 15% right now when I can use debt that's costing me 4%? And that's really the key with using equity. So -- but like you said, if we were trading at 12x cash flow, now all of a sudden, it might make more sense. And we will look at it, we'll do the math. The beauty of it is, it's all fifth grade math. We just figure out the cost of capital, and we use the cheapest capital we can because that's what gives us the highest return.

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Operator [82]

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Our next question is a follow-up question from the line of Adam Wyden with ADW Capital.

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Adam D. Wyden, ADW Capital Management LLC - Founder and Managing Partner [83]

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This is just a follow-up on Yaron's question, I think. But I mean, I totally get your math in terms of -- and it's like music to my ears. It's like when a CEO says, "Hey, 5% debt money with a 22% tax shield." That's great. I think what Yaron might be getting at, and perhaps what I'm getting at is that there's a balance in terms of optimal capital structure as it relates to, if -- investors like to see a certain amount of -- they don't like to see companies excessively leveraged. So there is -- I mean there -- even though you can borrow at percent or 4%, there's a limit to the amount of transactions you can do as it relates to the gross amount of debt or net debt-to-EBITDA. And so I think maybe the question is, and maybe the question I have is that like, if you could get your equity cost of capital -- I haven't done the math on 12x EBITDA, but I can probably do it, it's 8% -- it's -- if you have no Capex, it's roughly an 8% pretax yield, and after-tax, it's 6%, right? So if you could trade at 12x EBITDA, that's a 6% equity yield and you were able to buy assets at a 10% or -- 10%, 12%, 15%, it would actually avail you of the opportunity to buy things faster because you wouldn't have to wait for the deleveraging.

So I guess the question is, if you could access equity at an 8%, a 9% and 10% pretax and after tax, whatever, that would allow you to, as you said, not have to wait for the cash that you're kind of filling up on your books as it goes, right? You could buy something big and give equity to the seller or more importantly, I don't know if you ever done this, but go to a bank and say, "Hey, I want to raise $30 million to buy x, y and z club." I mean, I don't know...

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [84]

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We did it in '07 and '08. We're very familiar with it. When our -- if our equity gets to the point where it's cheap for us to use equity, we can use equity. We're not adverse to issuing equity. We're only adverse issuing equity at a high cost. And if we can find the right acquisition, of course, it would make a lot of sense. I mean if we're getting 22% or 20% -- say we're buying at close to 5x, we're getting a 20% yield, and we're able to do equity at even at 8% cost. Like you said, we're still getting a 12% spread there. And if we're doing it on a large-scale transaction of $60 million acquisition or $70 million acquisition, all of a sudden, yes, it makes a whole lot of sense because that's a lot of -- that's a pretty big number when you look at the spreads.

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Adam D. Wyden, ADW Capital Management LLC - Founder and Managing Partner [85]

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Right. And as you get larger, presumably, I'm sure the multiple -- there's more diversity, you're more diverse, geographically. I mean a $60 million EBITDA business is worth more than a $10 million and a $120 million is worth more than a $60 million. So the bigger you get, the more justification you have for a better cost of capital and multiple. So taking a step back, how many large club chains are there in the United States? I mean just how fragmented do you think this whole thing is? And how many $10-plus million EBITDA change that you would be interested in? I mean how many of those exist in the United States right now?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [86]

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I mean there are several. I don't know off the top of my head, but I think there's probably 500 clubs that we'd like to own. Out of those 500 clubs, 300 of them are owned by probably less than 40 people. So there's definitely some significant acquisition targets out if we -- when we get serious about it. We got to have some cash.

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Adam D. Wyden, ADW Capital Management LLC - Founder and Managing Partner [87]

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There's -- what you're saying, you got to have cash?

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [88]

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Yes. When we have that kind of cash available to us, we could go start knocking on different doors. We knock on the doors that we can knock on. It doesn't do any good to knock on a door if I can't consummate a transaction with the seller that I know the seller would be interested in. So I haven't really -- we haven't really talked to too many very, very large operators out there because we're just not in a position, I think, at this time to really close the transaction with them.

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Adam D. Wyden, ADW Capital Management LLC - Founder and Managing Partner [89]

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So we've got to figure out how to get back to trading at 12x EBITDA again, that's the answer.

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Eric Scott Langan, RCI Hospitality Holdings, Inc. - Chairman, CEO & President [90]

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Consistency, yes, but that is the answer. We've got to stay consistent.

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Operator [91]

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Are there any final questions? This is the last chance for questions.

There are no further questions in the queue at this time. I'd like to hand it back to management for closing remarks.

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Gary Fishman, Anreder & Company - MD [92]

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So thank you, operator, and thank you, Eric, and thank you, everybody who called in with their questions tonight. We've included a few supplemental slides in our appendix. We'll also be meeting with investors and presenting on March 26 in New York at the Sidoti Spring Conference. If you are a professional investor and would like to have a one-on-one with management, please let me know. Just e-mail me. We might also hold a meet management that night at Rick's Cabaret in New York, that hasn't been decided yet.

On behalf of Eric, the company and our subsidiaries, thank you very much for calling in and listening to us tonight. And as always, please visit one of our clubs or restaurants. Thank you.

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Operator [93]

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Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.