RCI Hospitality Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 9 speakers on the call.

Operator

As we get ready to kick this off, I want to give a few special shout outs to some great people in the crowd. We have Josh Brooks listening in, one of our favorite managers. We have Gary out there. Lynn, great to see you as always. And a lot of new faces in the audience.

Operator

Scott Buck is out there looking forward to your questions, Rob as well. Now that it seems like we have a decent amount People, let's go ahead and kick this off. Greetings and welcome to RCI Hospitality Holdings Q3 fiscal 2023 earnings call. You can find the company's presentation on RCI's website. Click company and investor information under the RCI logo that will take you to the company and investor info page.

Operator

Scroll down and you'll find all of the necessary links. Please turn to Slide 2 of our presentation. I'm Mark Moran, CEO of Equity Animal. I'll be the host of our call today. I'm here in New York with Eric Langan, President and CEO of RCI Hospitality.

Operator

CFO, Bradley Shea is participating from Houston. Please turn with me to Slide 3. If you aren't doing so already, it's easy to participate in the call on X, formerly known as Twitter, Spaces. Go to ricks CEO in select the space titled RIC, RCI Hospitality Holdings Inc. 3Q 'twenty three earnings call.

Operator

To ask a question, you'll need to join the X space with a mobile device. To listen only, you can join the X space on a personal computer. RCI is also making this call available for listen only through traditional landline and webcast. At this time, all participants are in a listen only mode. A question and answer session will follow.

Operator

This conference call is being recorded. Please turn with me to slide 4. I want to remind everyone of our Safe Harbor statement. You may hear or see forward looking statements that involve risks and uncertainties. Actual results may differ materially from those currently anticipated.

Operator

We disclaim any obligation to date information disclosed in this call as a result of developments that occur afterward. Now please turn with me to slide 5. I also direct you to the explanation of Rick's non GAAP financial measures. Finally, I'd like to invite everyone listening in the New York City Area, to join Eric and me tonight at 7 o'clock to meet management at Rick's Cabaret New York, one of RCI's top revenue generating clubs. Rick's is located at 50 West 33rd Street between 5th Ave and Broadway, a little in from Herald Square.

Operator

If you haven't RSVP'd, ask for us or Martin Shkreli at the door. Now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric, take it away.

Speaker 1

Thank you for joining us today. Thanks, Mark. Please turn to Page 6. We thought we'd begin by summarizing our Q3 and 9 month results in one place. It should be noted The year ago quarter aided by the end of COVID restrictions had one of the highest levels of operating leverage that have been experienced in the last 5 years.

Speaker 1

This affects direct comparisons to the Q3 of this year. Comparisons are also affected by the fact that the year ago Free cash flow included a benefit of $2,200,000 from a tax refund. Otherwise, the Q3 was similar to the Q2 with non GAAP earnings per share of $1.30 and it was approximately 9% better than 1st quarter's non GAAP EPS of 1.19 Now let's turn to the Slide 7 for the key takeaways. We achieved record revenues of $77,100,000 in the 3rd quarter, up 9% year over year. We generated $1.30 earnings per share non GAAP.

Speaker 1

Year to date, free cash flow and adjusted EBITDA margins are in line with our targets 20% 30%, respectively. The nightclub business continued to be solid. After 9 quarters of same store sales growth, We view the Q3 decline as a bump in the road that we experience from time to time. Bombshells continues to be profitable. We view the decline in sales we've been seeing as a return to the pre COVID run rates of $5,000,000 AUVs.

Speaker 1

No doubt same store sales for both clubs and Bombshells were held back in the Q3 by the uncertain economy, the huge amount of vacation travel and the extreme heat in Texas. To date, Q4 'twenty three, we purchased 10,440 common shares at an average $69.48 each. We still have $18,000,000 remaining in our stock repurchase authorization And we've got a strong lineup of new clubs, Bombshells, casinos getting ready for the Q4 and fiscal 2024. Now here's Bradley to go over more financial details of our results.

Speaker 2

Thanks, Eric. Please turn to Page 8 to review the performance of the Nightclub segment. Revenues increased 14.2% Year over year, primarily reflecting an increase in newly acquired and remodeled clubs, partially offset by same store sales decline. By type of revenue, service increased 4.8%, while alcoholic beverages up at 24.1% and food at 17.7% increase. The year over year changes reflect in part the lower proportion of service revenues from the newly acquired Baby Doll's Chica's local sales mix as compared to the nightclub averages.

Speaker 2

GAAP results also included $2,600,000 in non cash impairment related to 2 clubs. Operating income was $20,400,000 versus 22,500,000 On a non GAAP basis, it was relatively flat at $23,600,000 versus $23,300,000 I'll talk more about the margins in a couple of slides. Please turn to Page 9 to review the performance of our Bombshell segment. Revenues declined 8.8% year over year, primarily reflecting a decline in same store sales, partially offset by an increase in newly acquired and open units. Operating income was $1,700,000 versus $3,100,000 On a sequential quarter basis, however, revenues have now increased 3 quarters in a row.

Speaker 2

We still have more work to do on the margins. Now please turn to Slide 10 to review our consolidated operating margin. As Eric noted, The year ago quarter had one of the highest levels of operating leverage that we've ever experienced in the last 5 years. We believe that this was due to the benefit of the end of COVID restriction head on sales. As a result, non GAAP operating margin was 25.3% compared to 31 point 16% a year ago quarter.

Speaker 2

However, looking at our performance, this year the 3rd quarter was generally in line with non GAAP operating margin of 25.6% in the 1st quarter and 26.6% in the 2nd quarter. Please turn to Slide 11 to look at some of our other key metrics. We ended the With cash and cash equivalents of $23,600,000 up from $22,800,000 at March 31. Free cash flow was $14,300,000 This was in line with the level that we have been generating for the last three quarters. Again, as Eric mentioned, year ago free cash flow included a $2,200,000 from a previously disclosed tax refund that boosted free cash flow.

Speaker 2

Adjusted EBITDA was $22,700,000 This was the highest quarterly amount to date this fiscal year. Free cash flow margin was 18.5% and 29.4% for adjusted EBITDA. Year to date, it was 19.2% and 29.7%, respectively. Please turn to Page 12 to review some of our debt metrics. The debt At June 30 declined $2,000,000 from March 31st quarter.

Speaker 2

Weighted average interest rate on our debt was 6.52%, in line with what we've been paying. Total occupancy costs increased to 8%. This increase relates to new debt that we've used to buy properties that we haven't opened or fully optimized yet, but 8% is well within our range of 6% to 9%. For similar reasons, Debt to trailing 12 month adjusted EBITDA stayed relatively flat at 2.7% June 30th versus March 31st. Debt maturities Our debt pie charts are similar to the 2nd quarter.

Speaker 2

Now in the interest of time, let me skip Slide 13 and turn the presentation back to Eric.

Speaker 1

Thanks, Bradley. Please turn to Slide 14. Everything we do is centered around our capital allocation strategy, which is similar to those outlined in the book, The Outsiders by William Thorndyke. 1st and foremost, our goal is to drive shareholder value by increasing free cash flow per share at a 10% to 15% on a compound annual basis. We've set to this strategy since the implementation at the end of fiscal 2015 with 3 different actions subject to whether there's strategic rationale to do otherwise.

Speaker 1

1, mergers and acquisitions, specifically buy the right clubs in the right markets. We like to buy solid cash flowing clubs at 3 to 5 times adjusted EBITDA using seller financing and acquired the real estate at market value. 2nd is growing organically, specifically expanding Bombshells to develop critical mass Marcus Awareness. Our goal in both M and A and organic growth is to generate annual cash on cash returns of at least 25% to 33%. And 3 is buying back our shares when our free cash flow yield on a per share basis is more than 10%.

Speaker 1

Turning to Slide 15. In line with our capital allocation strategy, here's an update on the new projects we have in the works for the Q4 and fiscal 2024. 4th quarter nightclub sales should benefit from late June completion of the newly remodeled and expanded Babydoll Sportwork. We are also looking at adjusting some nightclub personnel, developing new drink promotions, party packages and changing keyword searches in our social media marketing. In fiscal 2024, a new club and a reformatted club should open in Fort Worth and Ty, Texas.

Speaker 1

Both are currently being remodeled. We also anticipate opening the replacement club in Lubbock, Texas. 4th quarter Bombshell sales should benefit from the opening of a new location in Houston suburb of Stafford. Construction has started on our Rowlett and Lubbock locations, both in Texas. Remiling should begin soon for our downtown Denver site.

Speaker 1

All three of these new locations are expected to open in fiscal 2024. Looking at our Central City Colorado casino projects, The liquor license process has begun and gaming license are continuing through the review process for Riggs Cabaret Steakhouse and Casino and the Bombshell Sports Casino. Both are planned to open in fiscal year 2024. Building permits have been submitted to the city for Rick's location and remodeling is expected to begin soon. Please turn to 16.

Speaker 1

Before we go into Q and A, I want to remind everyone We'll be holding our 30th anniversary Gentlemen's Club Expo Convention August 20 through 23rd at the Paris Hotel in Las Vegas. Judging by our hotel block, attendance looks great. Room Block is 100% full, so numbers are fantastic. Recently, I talked to Ed Anakar, President of management company. And he told me that his team has completed the integration of Babydoll's Chicas Locust acquisition and is ready for more.

Speaker 1

I'm looking forward to EXFO and meeting with owners who are hopefully willing will be ready to sell. Thanks to all of our local and dedicated teams for all their hard work and effort. We can't do it without them. Now here's Mark.

Operator

Thank you very much, Eric and Bradley. Before we get into the Q and A segment, I'd like to encourage everyone to check out the recently launched Rick's store at shop. Ricks.com. Now for the Q and A. If you would like to ask a question, please raise your hand in the X After your question, we may move you to the back of the audience to free up space.

Operator

To start things off, we'd like to take questions from Rick's analysts and then some of its larger shareholders. First off, we have Scott Buck of H. C. Wainwright. Scott, please take it away.

Speaker 1

Hi, good afternoon guys. Thanks for taking my questions. Eric, first, I'm curious, whether it's the 2 new clubs or the relaunched Baby Dolls Club, typically what's the ramp period for those to start to see similar, I guess revenue profiles as the existing clubs. Sorry about that. I got to hit that mute button, don't I?

Speaker 1

Babydoll has taken off pretty quickly and is doing very well. But typically, a new club will take about 6 months to ramp up to where we like it and then it will continue to grow for about up to about 18 months where it will level off and turn into a steady flows basically. Great. That's helpful. And I'm curious, could you remind us when the year over year comp starts to get a little easier on the bond sell side?

Speaker 1

Is it coming up here this quarter? This quarter, I would expect to be about the same as we've experienced over the last three quarters. I mean, it's still 100 plus degrees in Texas. It makes the patios impossible to use. I mean, you can't even hardly walk to your car, let alone sit outside for 25, 30 minutes to eat.

Speaker 1

So our interiors are doing well, but we really need our patios back. I suspect that that will happen hopefully Mid September, I think the weather will break. It could break a little earlier. It's Texas, who knows. But the comps get easier.

Speaker 1

If you go back to Q1 of 2023, you'll see about mid October, we started seeing a little bit of slippage that ran into pretty strong slippage in November and continued in December. So that's the nice thing is we've got a lot of exciting things coming up as well as the Babydoll's Chicas Locust, assume I get this out, Acquisition will be about 6 months old at the beginning of the quarter. We closed right at the end of March. And if you look back historically when we take over an acquisition, especially a multi club acquisition. It takes us about 3 to 6 months to get everything flowing properly.

Speaker 1

And That Q3 that we own it, you start seeing a lot of that new revenue increase and flow through to the bottom line to EBITDA. So I'm very excited about how the Q1 of 2024 looks, easier comps and a lot of exciting stuff that's kind of going to all peak at the same time and should put us into a really nice growth and run rate for 2024.

Speaker 3

That's great. And then last one for me,

Speaker 1

you guys did buyback a little bit Are we kind of sitting at that threshold level here at about $70 where that looks attractive from a capital allocation standpoint? Yes, I think so. I mean, basically, we were we talked in the office, the stock went below 70. We said, well, I guess we should be buying and we started buying about 100,000 today. Then stock went up back above 70 for a few days and it's back below 70.

Speaker 1

So we want to get the earnings out. Haven't bought anything this week, but probably I would look at as early as Friday depending on what the stock price does over the next couple of days and probably definitely be back out there next week when we get the market time to Bring, you know, take all the new information before we pull it back in the market. Great. That's helpful. I appreciate the time, guys.

Speaker 1

Thank you. Yes. Thank you.

Operator

Thanks so much, Scott. Next up, we have Anthony of Sidoti and Co. Anthony, take it away.

Speaker 4

Good afternoon and thank you for taking the questions. So looking at your service revenue, it did It lags the growth of alcohol and food sales. I know you said something about baby dolls, But just wanted to get a little bit more insight into that as to are you seeing less traffic with the Service component of your business or is it just lower average ticket? I mean, just wanted to get a little bit more insight since that's a Hi, excuse me, a high margin category for you.

Speaker 1

Sure. That's a 2 part answer. So Dallas doesn't allow VIP rooms. And so therefore, we lose a lot of that private room revenue in Dallas in the Dallas market. So that will affect the service revenues as a percentage of total sales in those markets.

Speaker 1

But the reality is also, especially June, we saw lower Service revenue and same store sales of about $2,000,000 And we believe that the biggest portion of that is Because our high end customers, the guys that come in to New York and Miami and whatnot are on European vacations or in the Caribbean or wherever they're with their families, they're doing vacationing, and they're just not out spending the big tickets in the clubs. I think that as we school starts back up in Texas and Florida in mid August to the end of August that We'll start seeing those customers returning, and also we'll have a pretty good idea of that when we announce the July, August, September numbers in early October, we'll have a pretty good feel for where that has headed and give us a really good idea of how we can predict and project the Q1 2024.

Speaker 4

Got it. Okay. So As far as the rest of your business, I mean, can you give us maybe just an update as to what you're seeing 1st few weeks so far in the Q4?

Speaker 1

Well, we're only 9 days in. So in July, I guess we have July, that's right.

Speaker 4

Well, July and early August, yes.

Speaker 1

Yes. I mean, we're seeing more of what we experienced in Enable May June. That's why I said I expect this quarter to be pretty flat with how we basically done these 1st three quarters, Maybe a little bit better. It really depends on how quickly that VIP spend comes back. It's kind of tapered in May, Went down in June, it's kind of holding steady.

Speaker 1

We have I know we've got a couple of decent VIPs this This weekend was actually a really good weekend, especially with the fight. So that helped. But We need those VIPs back home and back in the clubs. The problem we have is we can put a lot of people through the door at $100 put guys that spend $100 in the club and it takes a lot of them to make up a guy that drops $40 or $50,000 And so that's kind of the process we're going through right now. We are seeing strong customer accounts.

Speaker 1

We're happy with the customer accounts. We just Want to see that VIP spend come back up in the next 3 to 6 weeks.

Speaker 4

Understood. Okay. And then Just a quick other question. As far as Bombshells, so you're looking to expand that. Admittedly, you guys have struggled in that segment and And there's certainly a lower portion of your overall cash flow.

Speaker 4

So, just how should we think about that as far as your willingness to continue to invest in that segment, given the recent performance.

Speaker 1

I mean, we're working on the top line numbers. We're seeing those numbers start to grow a little bit quarter over quarter. And so we've just got to get to the point where now we're focusing on that bottom line, getting our margins back to that 18% to 22% rate that we're shooting for. I think we'll be there pretty quickly, hopefully in the next two quarters. We just reviewed everything, did some more minor Pricing increases to get certain items in line with costs.

Speaker 1

We have a Couple of points of labor costs. Our food costs are now back to pre COVID levels where we like them to be. So, just like I said, I got a couple of other little items we need to adjust there. And then of course, adjust the marketing and a few other items that are helping people in and get those costs back to a more normalized level as so we can bring the margins up to that 18% to 22%.

Speaker 4

Okay. Well, sounds good. Yes, if you could get those margins back to that 18% to 20% in the next couple of quarters, that would be wonderful. So, all right, well, thank you very much and best of luck going forward.

Speaker 1

Yes. Thank you so much.

Operator

Thank you very much, Anthony. Next up, we're going to have Lynn Collier of Water Tower Research. Lynn, the floor is yours.

Speaker 5

Thank you so much. Congratulations on a great quarter. Just have a couple of questions, that are somewhat general and then one Specific. First of all, I want to ask you about any trends that you're seeing geographically. I know This is slower and it has weather issues.

Speaker 5

But what are you seeing across the country? Any sort of trends geographically that you're seeing.

Speaker 1

Yes. I mean, overall, we're not I mean, we have a few locations that are still up pretty strongly from 2023. And I think that is you see Chicago, you see Denver. It's the very what I call the late bloomers, The cities that kept everybody locked down a little longer, we're still seeing some nice boost in those markets. But generally across the country in the other Markets, we're seeing slight declines in same store sales.

Speaker 1

But like I said, the biggest part of that is the VIP revenue. And we try to throw parties. We're going to throw VIP parties and our host will call VIPs and they're like, oh, I'm out of the country. I can't make it. Thanks for the invite, stuff like that.

Speaker 1

I'll see you when I get back. And So we know that a lot of our big spenders are on vacations, not just articles in the Wall Street Journal that tell us that it's actually talking to our guests and saying, when we try to throw VIP parties, so we're postponing VIP parties. We'll try to pick a lot of those up in that October, November, December quarter as we welcome everyone back. And I think we'll see a nice boost from that. Like I said, we have easier comps that we're going against.

Speaker 1

So I think it will be recognized. If you look historically, whenever we see a downturn in our same store sales. It typically lasts 2 quarters and then it starts to run back up for us on the nightclub side. Now the Bombshells has been a little different for us and a little tougher in comps. And of course, like I said, it's 100 degree heat is not helping that at all.

Speaker 1

So hopefully that will end soon. But I just looked at my 10 day forecast for Dallas, it's like 107 every day and Houston is about 102 every day. So for the next 10 days, at least, we know we're going to have some pretty tough weather in those markets. So we're right it out. Like I said, we'll keep pushing indoor stuff.

Speaker 1

We're starting to do some different social media marketing and some other trying some other new stuff, bringing some new faces into the bombshells. But I think our like I said, once our patios come back, I think that I mean, I know I'm dying to go sitting back outside and eat I mean, sitting in new restaurants indoors and whatnot. I really love I spend a lot of time in Colorado where almost Probably 50% of my meals outdoors now in Colorado and I really like to because it's 70 degrees up there and beautiful. So We'd love to see that back in Texas. I think our consumers will be right back on our patios once the weather permits.

Speaker 5

Thank you. I just have one more question regarding Texas, which you've spoken a lot about and it's obviously very hot here Being in Dallas, I know for sure. But are you seeing any trade down in terms of tickets in Texas? Or is it just It's so hot, no one can go outside. Are you observing anything else in Texas other than weather?

Speaker 1

Not really. I mean, like I said, we're missing big ticket spenders. That's what we're missing. I think that I predict it would happen last year that the wealthy would run out of the United States and run to Europe and run to the Caribbean and go on all these fancy vacations. And the reality of it is, I was off by a year.

Speaker 1

It actually took another year before everybody went out of town. If you look up European hotels and European flights. I mean, it's crazy if you can find them if you can even find anything available. It's extremely expensive. And I think people just didn't go last year and so they all started booking this year and everybody ran.

Speaker 1

If you look last year, we got the benefit of no one left the country, but they all ran to Miami. They all ran to the South. They all ran every tourist place in the United States was overbooked last year. All the VRBOs started filling up. And this year, you're hearing about the VRBOs being down, a lot of them being empty, especially in tourist areas.

Speaker 1

And so I think that's affecting our sales in certain markets that were really, really good last year that are being off a little this year. And those were big ticket spenders. I mean, those are in the smaller markets, those are your $1500 to $5,000 guys. In our bigger markets, they're dollars $10,020,000 $30,000 $50,000 guys. So with those guys out of town, it doesn't take a lot of them for $2,000,000 of revenue.

Speaker 5

Thank you. I just have one quick follow-up on Bombshells. Your comment about pricing, do you know Approximately how much menu pricing at Bombshells you're carrying this year versus last year, just a ballpark figure?

Speaker 1

We tried to price with inflation pretty much, but we've also made some adjustments based on food costs coming down. So some items we maybe have just held steady because the food costs actually came down. So we'd already marked for the food cost, so you took the adjustment on that side. So we moved on the other side where the food costs are up and we had to raise prices. But I'd say overall, we're trying to run about a 6% to 8% increase across the board as best we can.

Speaker 5

That's great. Thanks again and congratulations again.

Speaker 1

Thank you.

Operator

Thanks so much, Lynn. Next up, we will have Rob Dwyer of Granite Research. Rob, please take it away.

Speaker 3

Good afternoon. Hey, Eric, you've laid out your For 2024, are you looking at anything in 2025 at this point?

Speaker 1

I'm really not at this point. I mean, yes, we have enough things on. We have about 14, I think we're down in 12 projects now. I think we have about 12 projects that are running right now. If we get the 2 casinos open, the 3 Bombshells and the 3 clubs, That'll be 8 of them.

Speaker 1

So let's talk about 6 items on the burner that we can shoot for 2024 or 2025 with, I mean. And of course, the acquisitions. I think the focus as we open these new things, we'll only need to find 1 or 2 more New locations for Bombshells since the rest are already set. And those will be toward the end of 2020 target for the end of 2025. So we won't need to find for the end of 2024, which gives us close to 14 to 16 months where we really have to worry about that.

Speaker 1

I'm hoping that the casinos will be heavily involved in close Investment spending those between February April, hopefully for late April or May openings, Depending on licensing, of course, that's the big unknown. But we have to get the keyed in HVAC systems. There's very long lead times on those right now, which puts us at the end of January, early February where we get those units in. And I just don't want to spend any real money without the heat in there and have a pipe freeze or something in the winter or something not have fire protection on because we decided to do some work, but we turned the water off. I don't want to do any of the expensive stuff until we have the heat and air conditioning systems in the buildings.

Speaker 1

So, the one of the units one of the buildings will have all their units put in hopefully by the end of September. We will begin the remodel on that, but it's lower cost remodel in a smaller unit or smaller casino. So it He'll take less expense and be quicker, so kind of where we're at right now.

Speaker 3

Thank you for that. We've been in a somewhat inflationary environment, but when I look back at the pre COVID nightclub comps, they've been somewhat flattish in 2019 to the present. I was wondering if you could give us a feel for that? I

Speaker 1

mean, like I said, if you look at this quarter, it's The first two quarters was kind of the blue collar. The blue collar is kind of stabilized now. We've kind of got that down. We're doing the right discounting, the right marketing That customer has kind of leveled off, their spends kind of leveled and we're pretty solid there. If you look at our you can just Look at the sales breakdown, you'll see the service revenue declined.

Speaker 1

We had the biggest drop this year or this quarter. And like I said, it started about mid May. It was pretty strong in April, it started dropping in mid May and June It was pretty bad. July was a little better, I think, than June, but not a lot. And like I said, I suspect over the next 2 weeks to start seeing that spin come back.

Speaker 1

We saw a little bit of it this weekend. So we may just see it on the weekends for right now. But we'll just have to keep watching. I just don't know when it's going to come back. I guess when you said, I think when school starts back up and everybody gets back from on their vacations and start selling back in and going back to work.

Speaker 1

We'll see that spin come back.

Speaker 3

When we emerge from an environment like COVID, do you find that RCI tends to be the price leader raising prices coming out of it into a stronger economy? Do you And to be a lagger?

Speaker 1

I'd say we lag, is what I would say. I mean, we're not We're making plenty of money and we're doing very well with our customer accounts. And we see our competitors raising prices. We will hold off and take some of that, especially on the lower end on the blue collar, we were able to do very well. As you've seen, we've steadied off very quickly.

Speaker 1

Like I said, it tends to be about a 6 month trend for us. We're this quarter into it, like I said, we saw a little bit of the weakening with the blue collar earlier on. And now we're seeing that, like I said, level off and actually saying a little build in some markets. So we're just going to have to watch the white collar spend, the high end spend. That's the key to success, I believe, on the nightclub side.

Speaker 1

On the Bombshells, obviously, like I said, we need to get the patios open. We did raise prices, but it was towards the end of June, when we made a lot of those changes and adjustments as we got enough data from April May to figure out where we were headed and what we needed to do. So you're not seeing any of that results in this quarter, which is why the margins were, I think 12% or 13% between 12% and 13% for Bombshells this quarter. I do suspect that And I'm very hopeful that as we get through July, August, September that we're going to be closer to the 18% to 22%, if we're not in the 18% to 22%. And I definitely think in the Q1 of 2024, we will bring those margins back.

Speaker 1

The new store will be open. Other stores or construction are moving along, so starting to energize the team. They're getting excited about the growth COVID stopped all growth at Bombshells and without growth of restaurant chains, it's hard to keep some of your top people, right, because there's other chains they can try to scale them away and promise them new positions and that. So we want to make sure we can keep and attract the management team that we need to keep Bombshells going and that's I think part of it. The growth is part of that process.

Speaker 3

Okay. Thank you. And last question, the company has laid out a lot of cash for a number of projects At this point, at what point would you see bank financing or obtain bank financing for those projects?

Speaker 1

Well, when I need it, I can go get money from the bank anytime. We're still sitting on $25,000,000 in cash. I don't see a reason to not Keep using our cash. We're tying the cash up. The only other thing we have to do is buy back stock with it.

Speaker 1

The stock is not in Such a huge discount rate that I think, oh, let's borrow money to buy back stock. We'll just use normal cash flow, buy $100,000 a day in stock like we've always done. So not trying to affect the stock price. We're trying to get the best price for the stock we can get for our long term shareholders. I just don't need the cash.

Speaker 1

I mean, we've got we've put out about $29,000,000 to $30,000,000 I think in the last 9 months in cash. So we're not building up on the balance sheet, but it's being invested that's going to give us fantastic returns. When you think about How we've typically grown in the past, we've added $20,000,000 $30,000,000 in debt. We've had those debt carrying costs. And so when the new stuff opens, You're still carrying that interest expense.

Speaker 1

We're going to have very little interest expense with these new operations as they open, which is going to increase The flow through to the bottom line, stop the carrying cost drag, what little there is from utilities and property taxes and those things, which will all be paid out of operating revenue. So I think it's going to be I think 2024 is going to be a great year for us. We had that momentum rolling as we ran into 2019 right before COVID hit us, right? I mean, we who just hitting our stride, really taken off in that January, February, March quarter, even though we were closed for I think we're closed for 15 days, we still beat the previous year without having 15 days. So, you look at 2019 over 2018.

Speaker 1

And I think you're going to see 2024, we're going to have another one of those types of jumps. And that's all with no acquisition. I do believe the team is ready. Like I said, Ed I talked with Ed, Ed is in New York with me. He'll be at the meet and greet tonight.

Speaker 1

His team is ready. They've got the Babydoll's acquisition all up and running. They've got great management teams in place now. Our Systems are in place. We're starting to see the revenue growth that we expect to see as we enter that 3 to 6 month period.

Speaker 1

We're working early to get that flow to the bottom line, making some pretty decent adjustments to lower some of the costs that we picked up with the acquisition. And like I said, I think everything kind of comes to a great meeting point starting the Q1 of 2024. So I'm excited, very excited for 2024. I think that It's going to be our best year ever.

Operator

Thanks so much for the questions, Rob. Next up, we will have Josh of Noble. Josh, please take

Speaker 6

it away. Hey, good afternoon, guys. Thanks for taking my questions.

Speaker 1

Thanks, Josh. What can we do for you?

Speaker 6

Hey, so you guys answered most of mine, but I just kind of want to see how The overall environment is just looking like for any just new potential club acquisitions, how are owners being obviously in this kind of cautionary environment?

Speaker 1

Yes. I mean, we haven't pursued, so I don't really know. I've told almost everyone that has called me in the last 2 months that we've got to get this other acquisition under our belt. We're working on it. Let's talk at Expo.

Speaker 1

Let's talk at Expo. I'm hoping, I mean, seeing the hotel room count full already means there's going to be lots of people there. So I'm very optimistic that and I've got some meetings set up and some people that I'm going to make sure we talk to while we're out there and people that want to talk to us while we're out there. So I think we'll get a kind of a list put together and we'll talk multiples and locations and trying to figure out what's the quickest and easiest for us in timing and what the best deal is and cherry picked the best clubs like we've been doing for the last 10, 15 years. But expo every year at expo, We always meet someone and we always start the process.

Speaker 1

So the reality is just how quickly we can do it. We're ready now, so we could close something pretty quickly. I think we have, if I'm correct, approximately dollars 45,000,000 or $46,000,000 worth of unencumbered real estate or under encumbered real estate, we could roll into a loan had a 70% loan to value that would pull about $28,000,000 with the unencumbered parts probably $4,000,000 or $5,000,000 we'd have to pay off. So we could easily pull a $20,000,000 down payment out from our bank right now if we need it. I'm not counting our line of credit, so we could hit it we paid down our line of credit a little bit, so we could probably hit that line of credit again if we needed to.

Speaker 1

So we're in good shape and we still have $25,000,000 cash on the books. So we're in great shape to make an acquisition. Obviously, we're not using equity at these prices. So it would be a debt and cash acquisition right now. I don't Unless of course the stock from bankruptcy runs back up over $80 over the next few weeks, which the market where it's at, some of the uncertainty out there, I think That's probably unlikely.

Speaker 1

I would love that if it did because it would give us even more ammunition as we go to Expo in a few weeks. But If it stays under, then we'll just continue to buy back a little bit every week with some of our cash and just keep following our capital allocation strategy. Always We've proven from 2015 on, it works. There's no flaw in it so far at this point. So I think we'll just Keep doing what

Speaker 6

we do. Yes, perfect. Yes, I'm just kind of, I guess, kind of leapfrog into this question. I know you guys talked about the $200,000,000 investment goal in the last couple of quarters. I just kind of want to see just the status of that right now.

Speaker 6

Do you think the company can really achieve this, the goal this year?

Speaker 1

I think it's going to be very difficult by September 30 to put 200 in the 1st year. And I've said before, the goal is $200 per year. We may not hit it each year. However, I think we can get pretty damn close over a 3 year period of buying the amount of EBITDA we want. Obviously, we did a $66,500,000 acquisition.

Speaker 1

We're at about 29,900,000 I think, are between $29,000,000 $30,000,000 So if you do that, we're at $96,000,000 $97,000,000 We probably put another $5,000,000 out in July that I know of. So we're $100,000,000 plus right now. There's only a couple of months left, so probably not going to hit $200,000,000 But we could. I mean, we could find an acquisition in August. We probably wouldn't close it, but at least We have that money lined up.

Speaker 1

We still have with everything going, we probably have about another $40,000,000 to $50,000,000 where we that we know we're going to invest over these 12 projects that we have out there, maybe a little bit more than that. So it is lined up. We basically allocated I'm probably getting close to allocating $150,000,000 of the $200,000,000 So we can go find another $50,000,000 acquisition, then we've at least allocated the 200 for this year. I know we have to may not all get put out till the following year, sometime probably between, I don't know, November April would be my guess.

Speaker 6

Okay. Perfect. And then I guess the last one for me is, Is there any really updates on Admire Me? I know you guys mentioned in the Q1, the new team, how they're working on bug fixes and how?

Speaker 1

Yes, it is up and running. You can actually go on the site now. We have figured some new entertainers and feature stars on there. We're actually doing a live hard launch at Expo. So we have a bunch of feature entertainers that are going to be going on the site that week, coming to the site that week and start doing some push, Some traffic, we're going to start flowing some traffic to it and see what happens.

Speaker 1

We get out there, do some marketing. Once we get the girls up, how do they call it on ramping or whatever, once they get them on the site and have them posting and using the site regularly, then we'll start directing more traffic to the site. But we should have an interesting next 3 months with the miner. We'll see how that goes. I'm optimistic finally.

Speaker 1

I've been pretty pessimistic, I won't lie. I mean, it's very difficult, but I'm not a programmer and Understanding, we had a team that worked on it for a year, the Ukrainian war kind of destroyed the team and the model there. And we finally had to make a switch to get it done. And then of course, now your new programmers have to learn everything and go back through and They pre coded some things and because we had lost programmers throughout that year where the Ukrainian company was there, but the One program we work on it, then another program we take over. And so there were some coding issues that had to be fixed and whatnot.

Speaker 1

But I believe that all of that is done. We're actually adding new features, I think almost on a weekly or biweekly basis right now whenever they upload from the program environment to the active environment. And it's actually starting to come along pretty good. I talked to a couple of the girls that post on there fairly regularly and they're really starting to like how the features are. We brought in a group of feature entertainers that are on other platforms that are going to come to our platform as well.

Speaker 1

And they've given us a lot of feedback and what we need to do and how we need to do it. They've been in the basically in the practice environment, not the programming environment, not the live environment. So they could basically work through and then we could As they made the fixes or changes, they were able to basically beta test and make sure they're working properly. And that environment seems to be going very well. And like I said, we're starting to see the changes in the live environment on a weekly to biweekly basis.

Speaker 1

So I'm very excited about it. We'll see how it goes over the next 3 months.

Speaker 6

Thank you, guys. Thank you.

Operator

Thank you so much, Josh, and to all of our research analysts. We're now going to open up the Q and A to the broader audience and would like to encourage everyone who has a question to please raise your hand and we'll put you in the queue. I'd also like to encourage everyone to retweet and share this space. First up, we're going to have Orchid Wealth. The floor is yours.

Operator

Hey Orchid, I think you need to unmute.

Speaker 7

There we go. Hey,

Speaker 1

just a couple of quick things.

Speaker 7

I think the main focus here should just be really talking about the casino plans for next year because the cash flow looks a lot bigger than what I originally thought it would be. You've got 2 locations now for different casinos in the market. How many total slot machines do you guys think you might be coming to market with?

Speaker 1

Well, The current estimate is about 500 gaming devices. This includes table games and slots, about 500, but be Less than 20 of those will be tables. So mainly it's going to be slots. If you look at the average take in Central City right now, The Keep is $139 a day. If you look at Blackhawk, it's about $3.30 something a day.

Speaker 1

I hope to be somewhere in the middle, to be honest with you. So each machine somewhere in the 200 range, 180 to 220 range per day, 3 65 days a year. You lose maybe 19 days a year because of weather up there. So you can do the math and use a 3 40 day year instead of a 3 65 day year, you're going It gets you a pretty nice deal there and then you that's your gross revenue and then typically after all your casino costs and everything you're running about 40% of margins on that. So if we can keep that, that's how our budgets are being built, that's how everything's being set up with our fair rewards, all those types of things, all in that budget.

Speaker 1

So it should be pretty interesting. And then you have the table games and the nightclub revenue, the alcohol and food sale revenues. I think, yes, the casinos are A little bit we can do a little bit more money than we originally anticipated, but we're getting more a lot more machines and space in there than we originally anticipated as well.

Speaker 6

So Okay.

Speaker 1

So and that does include the sports book. We're going to have a sports book as well.

Speaker 7

When As soon as you receive approval from the gaming license people, is that then I'm assuming you're already talking with people about the sportsbook?

Speaker 1

Yes, absolutely. We've been talking with lots of people about Sportsbook. We'll have our skin deal done prior to that license being issued, but it won't be effective until the license is issued. And hopefully I'm hoping originally we anticipated getting a preliminary approval sometime between the end of August and end of September. However, talking with the Colorado Department of Gaming, They are running behind.

Speaker 1

They have been short staffed. They are working on staffing issues and hiring right now and hoping to speed the process up here, from what we understand. But it could be, maybe as late as November, December before we get our preliminary. Once we have our preliminary, it will take us about 90 days to get everything, maybe I say 90 days, it could be 120. So that's why I'm saying I'm predicting now April to May openings at the earliest.

Speaker 1

That also has to do with how quickly we can get the AC in the construction. So it's kind of all it's longer than I wanted, but it's all coming together at the same time. So it's actually working out beneficial Okay.

Speaker 7

So I'm just going to kind of the town next to you guys, Blackhawk,

Speaker 1

Right.

Speaker 7

They do 330 on their slot machine, the town you're in.

Speaker 1

I believe that's correct. Now I don't know how old that data is, I haven't ran it recently. But I tell you, you can just go to the Colorado Department of Gaming's website, all of its public information. By city. I won't tell you by casino, I won't tell you, but it will give you every slot machine that's in the of Central City, all of their keep, all of their coin ends, their keeps, all those numbers are all available.

Speaker 1

Same with Blackhawk, same with Cribble Creek. So you can actually look at Cribble Creek down in South of Colorado Springs as well.

Operator

So you get all three cities and

Speaker 1

you can see How many machines are in there? What their average keep is? And do your math though, they've been $1,000,000,000 going in. They kept this amount of money. And on a per machine basis.

Speaker 1

This is what it was and then divided by 365 and you kind of get the just how we do the math.

Speaker 7

Well, the numbers you're talking about are between $7,000,000 $10,000,000 But just to work backwards though, when you do a slot machine in Colorado, you got to pay 20% as Hair cut off the top. I mean from that number, you're left with about 40% after you pay all your bills?

Speaker 1

Yes, pretty much.

Speaker 7

Okay. So you're looking at like something in the neighborhood of about $65 per machine per day. In the town that you guys are in, Are the casinos open 20 fourseven or is it they're not?

Speaker 1

No. That's why I think we will run higher. Most of them close by 2 o'clock, some close at midnight, some close by 2 am. Okay. And It's just it's a different it's different than Blackhawk.

Speaker 1

Blackhawk, yes, most everything in Blackhawk is open 24 hours a day. You've got some These are the casino operators that have been there for years years. They've owned their properties. Now one casino, if you look up Century Casinos, they're publicly traded as well. They are open 24 hours.

Speaker 1

So they're the only casino that's open 24 hours a day in Central City. Okay. I think the Z casino might be as well. So I guess I should say none of them are. Less than half the machines are open are on 24 hours a day.

Speaker 1

To say that. I always forget about the Z Casino because it's downhill. It's not on Main Street there.

Speaker 7

Okay. So in that number, if I go look it up, I've got to assume you guys are going to be open 20 fourseven, so to speak. Yes. And half the people into town, when they come up with that $139 per slot machine. I got to do some sort of a factor.

Speaker 7

Okay.

Speaker 1

Yes. Exactly. So I can

Speaker 7

understand why you're modeling. I just want to understand why you're doing saying you think you could do about $180 to $200

Speaker 1

Yes. Well, I think part of it is going to be the fact that we're open 24 hours and we're going to have entertainment and food that the other casinos don't have. We're going to have I think we have a lot younger employees as we draw from our base of waitresses, bartenders and entertainers in Denver, Colorado, they're 45 minutes away, where we can have a split shift type deal where they work 2 days up in the mountains and then work 3 days back home. So it will be an interesting I think we'll have an interesting drawing on The quality of customer service that we're going to be able to offer at our casinos versus Blackhawk the worst of Blackhawk Casinos. If you look up the numbers, Blackhawk's went about 140% of their pre COVID revenue with 65% of their employee staff that they had in 2019.

Speaker 1

So there's definitely a shortage of employees out there. So if you can get the employees, which we believe we can get, we've been talking with our staffing, talking with our people, they're very excited in the Denver market. We'll get the new Bombshells open prior to these casinos openings. We'll have another 200, 300 employees with that Bombshells to draw from as well. So we're very excited about the potential to draw the younger people up there that the other casinos have not been able to do.

Speaker 1

Okay.

Speaker 4

All right. So we're going to

Speaker 7

go from 13 Bombshells to 17 in the next year, if give or take. You're going to go from 57 clubs with the reopening and so forth, you're going to be at 60, not counting any acquisitions that you make and you're going to have 2 new casinos, right?

Speaker 1

Correct. Right. And we make no acquisitions. Right.

Speaker 7

All right, perfect. Sounds great to me.

Speaker 1

Yes. Thank you.

Speaker 7

Thanks.

Operator

Thanks so much for the question. Next up, we're going to have Adi Suttapara. Please take it away.

Speaker 8

Eric, hey Bradley, congrats on the great quarter, fellas. I really have two questions. The first one's around, you mentioned the outsiders and one of the most Accretive assets you can have is your IP, your brand. And I'm wondering, is there something on your roadmap where You kind of stop investing in your own organic IP around Bombshells, building that brand up and think about leveraging and buying something bigger

Speaker 2

that might have more of a national presence.

Speaker 8

I would answer that first.

Speaker 1

Yes. I mean, obviously, it would depend on the multiple we could buy it at versus the multiple we trade at. If we looked at other restaurant chains right now, they would have to basically be willing to merge with us at a multiple rating similar to ours, and then tied the multiple expansion up with us. If someone was willing to do that, I think we'd definitely look at that and acquisition of that type, especially if we could bring a strong management team in, a growth management team. While I'd have to have the right concept, it would have to have the right numbers to make sense to me.

Speaker 1

What would be most important to me is that we're bringing the team on that's then going to take and run a true restaurant division and not only build help us not only build the brand that we're buying, but help us with our brand as well and expand and build our brand as well. And then of course, if that's successful, we get that right team, we put that together, then we can basically wash, rinse and repeat. We do it we've been doing it with strip clubs for 30 years. So acquisitions are acquisitions. It's just math, right?

Speaker 1

Anybody can do the math and the rest is just, like I said, the right people. So far, I've been pretty good at putting the right Together in these situations, we have to build the clubs, build out our teams, and then we just have to do the same for the restaurants. We're in the process of doing it for the restaurants. I mean, We don't have to buy anybody to pick up a team. We're building our team.

Speaker 1

Just the building process is always slower than the acquisition process.

Speaker 8

Yes. No, that makes sense. I'm glad you brought up people because that was kind of my second question. It's 2023, the era of chat, GPT and AI. I know you guys run pretty decentralized, but how do you guys think about automating even basic workflows or even team members and seeing other on productivity changes.

Speaker 1

Well, I mean, Bradley has been doing a great job of keeping our Office corporate office costs down using technology to keep costs lower. We've picking up and learning more of these FICA tip credits and all these other earning credits, tax credits You can get for different employment of people, different hiring, different in different markets, different areas, enterprise zones, all these things. We're actually working on one of the casinos as a historic building in a historic zone. So we're going to get historic tax credits for all the improvements that we're taking in a building been used in 15 years and going to make it usable. So we're going to get tax credits on that we believe.

Speaker 1

So Basically, Federal Government is going to help us build half of 1 of our casinos, I think, is kind of what it works out too. Bradley can probably explain it better than me at this point, but It's kind of where we're at.

Speaker 8

Awesome. Well, fellows, congrats on the quarter once again. A lot to celebrate. I'll Probably see you guys tonight at

Speaker 2

33rd, so I'd like to finally meet in person.

Operator

Fantastic. Thank you so much for that question. Now before we go on to a submitted question, I'd like to encourage anyone to raise their hand here for us to call on you. So Eric, we have a question that was submitted from a follower in the audience. The capital allocation structure has been proven due to its performance since 2015.

Operator

Ratings downgrade increases risk of higher and longer interest rates by the Fed in addition to other macro factors. Does that change your calculus. Are you comfortable with current debt levels?

Speaker 1

I mean, I'm comfortable with our current debt levels at the moment. Obviously, I've said in the past, We want to say under 3 times. We're at 2.7 times. So but I think that number will drop down as our VIP spend comes back, October, November, December, new stuff opens in 2024. You're going to see a bunch of new revenue, new EBITDA come in and drop that back down probably in the 2.2% range.

Speaker 1

So that gives us plenty of room to take on additional debt. Of course, we buy Anything we pick up the EBITDA from any acquisition as well that helps keep that debt level in check. I'm not too worried about it. I think I bought my first house in 1993 and my interest rate was 7 and 5.8%. So 7.625% is not horrendous.

Speaker 1

I think rates are still below that. So we're still not at 19.93% level from when I bought my first house. So I'm not too worried about it right now. I think our weighted is 6.52. If we were to readjust right now and refinance 100% of all our debt into one thing.

Speaker 1

We probably get around a 7.5%. I think we just closed a loan at 7.12%. So to think we get a 7.5% loan, I mean that wouldn't be the end of the world to raise our interest a point on $240,000,000 in debt, which is a considerable amount of money, but nothing that's going to stop our growth or stop us from continuing to take on debt.

Operator

Fantastic. Thank you so much, Eric and Bradley and to all who asked questions. With that, we will be concluding the Q and A segment of this earnings call. I'd like to encourage everyone to check out the Rick store at shop. Ricksdot Tom.

Operator

And to follow Eric at Rick's CEO, for his 10000th follower, we're going to be doing a little giveaway with merchandise from the store as well as tonight. For those of you who joined us late, you'll be able to meet management tonight at 7 o'clock at Rick's Cabaret New York, one of RCI's top revenue generating clubs. Rick's is located at 50 West 33rd Street between 5th Ave. And Broadway, a little in from Herald Square. If you haven't RSVP'd yet, Please ask for Eric Langan, myself, Martin Shkreli or DKNY at the door.

Operator

On behalf of Eric Bradley and the company as well as our subsidiaries, Thank you and have a good night. As always, please visit 1 of our clubs or restaurants and have a phenomenal time. Thank you all.

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Earnings Conference Call
RCI Hospitality Q3 2023
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