Transcript
of
Rick’s
Cabaret International
Fourth Quarter and Full Year 2012 Earnings Conference
Call & Webcast
December 14th 2012
Allan Priaulx,
Investor Relations Officer
Eric Langan,
Chairman, CEO & President
Phil Marshall, CFO
Operator
Greetings and welcome
to the Rick’s Cabaret International first quarter and full year earnings conference
call and webcast. At this time all participants are in a listen only mode. A brief
question and answer session will follow the formal presentation. If anyone should
require operator assistance during the conference please press *0 on your
telephone keypad. As a reminder this conference is being recorded. It is now
my pleasure to introduce your host Allan Priaulx. Thank you Mr. Priaulx, you
may begin.
Allan Priaulx – Rick’s
Cabaret International Inc. – Investor Relations
Thank you Shay and thank
you everyone for joining us this afternoon. I just want to remind everybody
that our Safe Harbor Statement is posted at the beginning of our PowerPoint
presentation which is available at www.ricksinvestor.com.
It reminds you that you may hear or see forward-looking statements that involve
a number of risks and uncertainties. I will not go into the entire statement
on this call but I do urge you to read it as well as the explanations of other
measurements we use that are included at the bottom of our PowerPoint. I would
also like to remind you that our press release and the 10K are posted at www.ricksinvestor.com as well as the
PowerPoint presentation itself. Now it my pleasure to present to you our
president and CEO, Eric Langan. Eric?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
Thanks Allan and thanks everyone for joining
us today on a Friday. We were really hoping to try and get this out earlier
than late Friday afternoon which is the last day we are able to file today, but
with our audit going on and with the audit of the Jaguars acquisition, our
staff were just entirely too busy to get this done any earlier than today. So
thanks for joining us today. The conference call overview; we are going to do
a summary of our Q4 and our fiscal year 2012. We are going to discuss the
important factors that affected FY2012, give you an update on all of our
current projects, discuss the debt and cash-flow of the company and discuss
some strategies we have for unlocking shareholder value on a go-forward basis
and then our outlook for 2013 and we will end it with a question and answer
session, as always where you can ask direct questions.
Starting with our snapshot of our fiscal 2012
fourth quarter total revenue was up 11.3% to a total of $23.9 million. Net
income $1.5 million versus $2 million in the fourth quarter last year mainly
due to the acquisition costs of the Jaguars acquisition and several legal
settlements that we entered into at the end of the fiscal year to lower our
legal costs going forward. Our fully dilated earnings per share was $0.15
versus $0.20 in Q4 2011. The earnings per share without the one time cost
would have been $0.20 against the analyst estimate of $0.22. The analyst notes
that he did not include the legal or acquisition costs in his estimates
either.
Moving to the fiscal year snapshot. Revenue for
the entire year up 14% to $95.2 million and net income of $7.6 million
with fully diluted earnings per share $0.78. Using our non-GAAP net income
number we would have made $10.5 million or earnings per share of $1.08 and our
adjusted EBITDA of $24.4 million but I think most importantly net cash-flow
provided by operating activities of $18.4 million showing that the company is
continuing to generate strong cash flow.
Important factors for fiscal 2012: This is
our third year of consecutive double-digit growth averaging 12, 13, 14% revenue
growth during what was considered a recessionary period. Our same store sales
growth for the year was up 4.1%; a little lower than we would like. We would
like to see it closer to 6-8% but given all of the economic factors we have
faced in 2012 we are happy with 4.1% growth this year.
The Jaguars acquisition was done using only
$4 million of our cash which demonstrates we can leverage our name and our
reputation and build up an increased cash-flow in the company and build the
company without using a ton of cash. We did this by taking on debt and all of
that debt is at a subsidiary level which I will explain later in the cash-flow
and debt section. We have also refocused our high growth going forward and our
expectations are to grow between 20 and 30% annually over the next three years.
To give you an update on our current projects
we have six projects in the works right now that should all open by the end of
2013. Two of these projects are slated to open in January 2012. The first one
to open will be the Vee Lounge which is a nightclub/tapas type restaurant that
is going to be in Downtown Fort Worth. We are going to be able to use our
synergy from all of our clubs to give VIP cards to our girls and bring girls
and bring business down to the downtown Fort Worth area as well as bring in
DJ’s from Miami, New York and LA. It is a new concept for us but we are very
excited about it and we have got a lot of backing from the local Fort Worth area so we think we’ll do very well. That will open probably around the 17th
of January and with the grand opening weekend of February 1st and 2nd.
The next opening will be our Bombshells location.
It is going to be basically a restaurant type nightclub where we have food and
restaurant services in the daytime until around 10p.m. where we will bring in
live music four to six nights a week. Also our L.A. joint venture, which we
expect to open sometime in the March quarter; the Ricky-Bobby Sports Saloon
that we are working on; and the Ricks Cabaret Odessa. We expect both of those
properties to open in the June quarter and we expect to close on to start
construction in January of our second New York City location and open that
location by year end. We also expect to announce further acquisitions
throughout the year as we are working on several other acquisitions and have
pipeline acquisitions on going forward.
I think most importantly for our shareholder
is to look at our cash-flow and our debt situation. Our cash-flown remains
strong and we expect it to continue to increase as our new projects come on
line. We paid $7.1 million in debt reduction repayments in 2012. We added
approximately $30 million debt in connection with acquisitions in 2012. One of
the other exciting things is we made our final put option payment in November.
In the last two years, we paid out about $6.5 million buying back our stock on
those put options from 2008 and 2009. Our last payment has now been made on
those.
Our last payment on our 2010 debentures will
be made in June of 2013; so we have a December payment this month and then only
two more payments on that debenture and that eliminates some more debt.
The Jaguar debt that we took on will be
easily serviced with the cash-flow from the acquired clubs, so while we have
eliminated cash going out with the put options, cash going out with as this
debenture ends in June and we continue to pay down our other long-term debt
including accelerating our 14% debt on the Tootsies acquisition that we have we
have been paying approximately about an extra $170,000 a month on that which
would get us around a little over $2 million a year reduction on that, and
hopefully have that paid off by 2015. But in addition to that the Jaguars debt
is subsidiary level debt for Jaguars Acquisitions corporation, which is the corporation
we formed to purchased those clubs, and that debt is separate from the parent
company. So, we are eliminating debt so our cash-flow should be increased from
the existing operations and all the debt that we took on the Jaguars deal will
be serviced from clubs that we acquired.
Looking forward and unlocking shareholder
value. Obviously the stock has been kind of stuck in a rut here between $7 and
$10 for the last two years. We will continue to grow the company. We made major
acquisitions and the market doesn’t seem to be really paying any attention to
the things we do and so we are going to look at other ways to unlock
shareholder value and what we are considering in that is increased stock buy
backs and a possible dividend. The board is reviewing some of the effects of
paying a dividend and the tax consequence of that; but really we want to look
at releasing the hidden real estate value. Out of our debt $25.7 million is
real estate related debt, which we look at as basically lease payments. Options
include a sale lease back on the real estate; or we could form a private or
public REIT which would allow us some tax benefits there. We are reviewing that
with our investment bank to decide what is the best strategy is there which may
allow us to pay a dividend to the public through a REIT versus the current
public company. It would lower the tax effect of the pay outs. We are also
going to continue accelerating paying down our high interest debt. Anything
that is not real estate backed debt or high interest debt; we are going to be
looking at eliminating as we move forward.
Our Outlook going forward. We are planning to
grow 20% to 30% annually. The difference between our current programs and the
programs in the past of this growth rate is that we are not going to rely
strictly on acquisitions. In the past we have had to rely strictly on
acquisitions for growth and with our new projects coming on line, we believe it
will be much easier than in the past to achieve these growth plans rather than
through acquisitions only. Also, we are going to use our real estate portfolio
and leverage that real estate going forward to raise capital, because with our
stock at these prices we are not interested in issuing any equity at these
prices. In fact any time the stock is under $8 we are going to probably be
active in the market through our stock buy back program.
We are also going to focus on consistency
going forward. We want to try to have that consistency and make our growth
more consistent than we have been able to do in the past. Because of
acquisitions that for some reason haven’t closed in the past, we have ended up
missing on our quarter or what not. This way we have new projects we can
bring on line, like the Odessa Rick’s or the second New York City club, and we
are looking at some other possible places to build from the ground up rather
than just buying just existing clubs so we can continue that consistent growth
on a go forward basis.
And at this time I will take any questions
that anyone may have about the company or the quarter or the year or our future
growth.
Operator
Thank you gentlemen.
We will now be conducting a question and answer session. If you would like to
ask a question please press *1 on your telephone keypad. A confirmation tone
will indicate your line is in the question queue. You may press *2 if you
would like to remove your question from the queue. For participants using
speaker equipment it may be necessary to pick up your handset before pressing
the * key. One moment please while we pole for questions. Our first question
comes from the line of Eric Beder from Brean Capital. You may proceed with
your question.
<Q>: Good
afternoon, could you tell me about the logic of the recent acquisition of the
land in New York City?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
Yes, we have a lease
obviously, I think with about 11 or 12 years left on it, I think. What a lot of
people don’t realize and why we had the put out an 8K is that this is a
significant transaction based on our numbers so we just put the 8K out because we
didn’t really want to put a press release out since the closing is six months
down the road, a June closing. We haven’t lined out exactly how we are financing
it and we have got several options open to us for real estate financing. But
what’s really important is that we are getting air rights. This is a 15 FAR
and I know that doesn’t mean much to most people, but basically it gives us the
right to build an additional 52, 000 square feet in New York City and those air
rights are very valuable -- between the residential air rights probably between
$200 and $250 a foot and the commercial as much as $300 and $350 a foot. And
so we are in negotiations with a couple of parties on possibly selling those
air rights or developing those air rights. So it is a moving transaction right
now, but the main thing is that our club is a grandfathered location, which
means the adult business can never be moved from the physical address, and if
it ever discontinues operations for two years the license would go away and no
one would be able to operate there again. So, by owning that property we control
our destiny on that as well. So that is the real philosophy of it -- to lock
down and to make sure that we will always have that property. I don’t know how
many people are familiar with the Scores East property on the Upper East Side, but the original rent was $40,000 but when they finally ended up losing
the location to the landlord their rent was like $300,000 a month. So that is
one of the things we want to avoid in the future. By owning our real estate we
will not have a landlord that can basically become our 50% partner.
<Q>: Okay, In
terms of the legal expenses going forward what shall we be thinking about with
legal expenses for fiscal 2013?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
Well to give you an
idea for 2012 legal was 5.9% of gross revenue, the highest level it has ever
been. The previous year was about 2.3%. I would like to see it drop down into
that 2% range; definitely don’t want to see it over 3%. That was the reason fpr
settling a couple of these class action text messaging cases, even though we
didn’t feel that we had any real risk in them. But we were able to settle them
relatively inexpensive to defending them and so we kind of had to look at our
cost of defense versus our cost to settle and make it go away. We weighed those
factors out and really just wanted not to be distracted by any lawsuits, you
know, that we weren’t really insured for. The only lawsuits that we have now
are the labor lawsuits in New York, which we are now finished with the discovery
phase, which are a very expensive part including the depositions and all those
types of things, and we have moved into summary judgments and motions and
basically the lawyers are doing all their stuff. But it has freed up management
to run the business and that was the real factor in getting rid of these
lawsuits on a go forward basis, as well as lowering these costs.
<Q>: Okay, you
have had the Jaguars acquisition for a while now, what are your thoughts on the
deal and what upside do you see from it?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
I mean it has been
great. Obviously when we took over 11 clubs at one time you know we ran into
small unexpected things here and there with personnel. We have added some new
management, we have lost a little bit of their management and brought some new
guys in, moved some of our guys around. I think we are pretty strong. It is
obviously still the first quarter of the acquisition, but we are seeing good
results. The cash-flow from the business has been fantastic, we are able to
make all the payments for the real estate debt and the clubs themselves generate
cash-flow to run the operations of those businesses and still have plenty of
cash left over. So you know it has been a win-win for us in that we only had to
come out of pocket for $4 million and all the rest was leveraged. So we are
paying them with their own cash-flow basically.
<Q>: Okay,
when you are looking at acquisitions going forward is this kind of the model 10 to 12 clubs, bigger deals going forward?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
I mean I think we are
going to continue to see the small deals that we have always done because they
are easy, but I think our focus is definitively multi-club operations going
forward. We want to grow at a faster rate than we have grown in the last few
years, we are very confident in our cash-flow on a go-forward basis. We are
freeing a bunch of cash with the put options being paid off. We have got a
couple of pieces real estate loans that are going to be paid off; I think one
property in Austin, Texas the last payment is in April that is a $20, 000 a
month payment and that property is going to paid off. The debentures which are
about $1 million a quarter, we have only got December and then two more
quarters of that left. We paid out $4 million, this last fiscal year we are
only going to pay out $3 million in this fiscal year so there is an extra million
in the year, you know on a calendar basis that is $2 million more dollars
between now and the end of December. So these types of things really start
freeing up cash-flow for us and we are going to continue to move that cash
around and make acquisitions with it, or pay off long-term debt, and then
actually look at ways to pay a portion of our cash-flow back to the
shareholders because the stock is not really performing. We want to get the
people who have been with us for a long time, people who held and stayed with
us a long time, some type of yield or return on their investment while they
continue to wait for us and wait for the market to catch up with the gross and cash-flow that the company is creating.
<Q>: Okay. Thank
you.
Operator
Thank
you. Our next question comes from the line of Chris Brown from Arista Capital.
Please proceed with your question.
<Q>: I
apologize if I missed this in the 10k, but there was a press release, I believe
it was in August of this year, of a wrongful debt suit filled in Texas. Has that been settled or is that still outstanding?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
That is an outstanding
lawsuit at this time, they succeeded in moving it to another county. We have
insurance. The insurance company is handling that claim at this time and that
is really all I can say about ongoing litigation. And yes the litigation is
out there, we do have insurance that is handling at this time and the rest will
have to wait and see how everything works out.
<Q>: Can you
comment at all on any risk of insurance that is potentially not covering the
entire judgement or entire settlement in that case?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
Not really, it is
ongoing litigation, I really can’t say too much on it. I mean I can tell you we
have insurance and they are handling it at this time.
<Q>: Okay,
fantastic, thank you.
Operator
Thank
you. Our next question comes from the line of David Kasarowsky who
is a private investor. Please proceed with your question.
<Q>: Hi,
thanks for taking my questions. Maybe you can straighten me out a little bit
when it comes to the Odessa club. You said that there is a June opening target
on that. Was that a Jaguars legacy club?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
No, Jaguar
in Odessa is open up there. This is a another location that is about, I want
to guess, about 1500 or 1800 feet down the road from the Jaguars location. The
Jaguars location is a BYOB location, the new location will serve liquor and
basically be a Rick’s Cabaret.
<Q>: Okay.
And I think in a prior call you talked about the Odessa and Lubbock locations
were both BYOB and you were looking at changing the licence on that?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
No, no we added an additional
club in Lubbock; it is already open. And then we opened a Rick’s Cabaret in Lubbock. It’s open and it serves liquor and we are going to do the same thing in Odessa basically -- to open a second location that has liquor. The Jaguars locations will
continue to operate the way they have operated all along.
<Q>: Okay.
Thank you. And then as far as the whole chain for Jaguars, are you rebranding
that are you keeping the Jaguars?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
We did rebrand, they
were actually the chain before we purchased was actually called Jaguars Gold
Club and most people knew them as the Gold Clubs, we just dropped all the Gold
Club stuff and we have just called them Jaguars. We are just keeping the Jaguars,
we are not going to rebrand, we could rebrand [INAUDIBLE] Cabaret brand, but
when we sat and looked at it, you know we have five locations that I think are
Cabaret’s right now, to turn around and rebrand nine locations with this and change signs and those types of things was much easier just to eliminate the Gold Club stuff
out of there name just the word Jaguar and use that brand on a go forward basis
and we are basically building created a brand called Jaguars.
<Q>: Alright,
you also released a press release about that hurricane Sandy was not a problem
for you in New York Club. In final analysis did everything work out there?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
We didn’t have any
real damage, some minor wind damage on the roof, the roof top decking and most
of that was repaired within a day or so. We were closed for three days. So we
did have three days that we were closed, but we reopened with a big Halloween
party as it was already planned. We were thinking about closing for another day
or so, but the employees were very excited to get back to work and, you know
get electricity; some of them didn’t have electricity, running water and those
types of things so it really became a place for everybody come and hang out as
well and charge there cellphones and do those types things, it definitely has
been tough on a lot of our staff, lot of our employees, lot of people in New
York, but our particular property didn’t have any real problems.
<Q>: Okay, was
there a major change in the business cadence in the aftermath?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
No, not really, I
mean we opened back up and the Garden is going strong, we have been having a
really good December.
<Q>: And then
last one: so in Dallas, I believe last time around you mentioned an October
opening and now you are saying a January open, any problems there that you
think may continue to be an issue?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
Well, we were hoping
to open in the October-November-December quarter originally. Basically you know
we have had a couple of inspections that have taken a little a longer to get
the city out to inspect or approval of plans or something, all permits are in,
all the liquor licences are in, basically we have got the final construction
stuff that is going in right now and then some final inspections. We don’t
foresee any problems, we have actually started advertising the Vee Lounge dates
as opening the 17th of January with the grand opening February 1st
and 2nd and we expect the Bombshells to open on the 24th
of January and something unforeseen happens between now and Christmas, we will
start marketing, we are going to market that location about two to three weeks
ahead of time, so we will probably pick the exact date for sure. Right now it is
scheduled for January 24th it could change a week earlier or a week
later. It depends on stuff, but we will start advertising and marketing in the
first week for January.
<Q>: Okay
right, thank you, good luck.
Operator
Once again
if you do have a question, please press *1 at this time. Our next question
comes from the line of David Mau from Montgomery Street Research. Please
proceed with your question.
<Q>: Good
afternoon guys, how are you? Very good thank you, I noticed in this press
release and the 10k that you were talking about non-GAAP earnings and I was
thinking or hoping that you could explain your thinking behind what you are
trying to show there in maybe relationship to future consistency of earnings?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
Yeah, what we want to
show is you know like a lot of companies, a lot of major companies now are
putting out non-GAAP numbers. So we are growth company and as we grow there is
going to be acquisition expenses, there is going to be one time expenses here
and there as we grow and as we develop, but what we want to be able to show
with the non-GAAP number is the consistency in earning strength. We tried to
that through cash-flow by saying look see our cash-flow is strong, our
cash-flow is growing, but it doesn’t seem to be the standard that the street
uses. The standard the street seems to be using is this non-GAAP number and so
we have decided to put this non-GAAP number in as well, we are carrying along
with our cash-flow because we have got certain groups that are following the growth
of the company and using that as their valuation of deals. We wanted to bring
in the non-GAAP number because that seems to be more of a standard that many,
many companies are using and so we want to kind of bring that in as well so
that we can be compared like other companies are compared.
<Q>: Okay,
very good, are you expecting to be publishing non-GAAP financial to point out
what the one time expenses were in the quarters coming up?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
Yeah, more than
likely this is something we are going to continue to go with on a go forward
basis.
<Q>: Well,
very good I applaud your transparency.
Operator
Thank
you. This is a final reminder if you do have a question please press *1 at
this time. We have no further questions at this time and I would like to turn
the call back over to our speakers for closing comments.
Allan Priaulx – Rick’s
Cabaret International Inc. – Investor Relations
Eric was there
anything you wanted to talk about with respect to transportation?
Eric Langan – Rick’s
Cabaret International Inc. – Chairman, CEO & President
Yeah, I do want to. We
have been getting a lot of questions, we get a lot of calls and a lot of
e-mails regarding our cooperate aircraft and I wanted to address that. The biggest
question is how much do we pay our pilots? We don’t pay pilots. I myself am a
pilot. Travis Reese is also a pilot. So typically we fly the planes, we fly
ourselves to places. We have a small single engineer craft that is the
majority of our flight time that I use to hop around in Texas because I can get
to any of our Texas locations in about an hour or so on about 16 gallons of av-gas
so basically around 80 bucks or 100 bucks for a flight. It is not only cheaper
than trying to jump on Southwest Airlines or one of the other airlines, it is
more convenient because I can travel at anytime of the night. Unlike most
operations, our operations run up ‘til two and five in the morning. There are
not too many commercial flights I can catch at those times. I just kind of
wanted to explain that and hopefully free up some of the questions. Our corporate
jet we use on longer-term flights when we are typically travelling with more
people. The other thing is that the tax benefits. Now after this year those
benefits may change and we may have to reevaluate on a go forward basis some of
the strategies, but the tax benefits are phenomenal as well on the purchase of
new corporate aircraft like the one we purchased in February. We get
accelerated and bonus appreciation and all types of other tax benefits. And being
a 35% or 34% tax payer this creates a lot of benefit for the company as well
and that is really all I have to say on that. If anyone has questions they are
always welcome to send an e-mail and we will try to answer and get back to you .
I would like to
invite everybody out to a Rick’s Cabaret no matter what city you are in tonight.
Obviously I am not going to be in New York this evening, but I will be back up
there in February again so I hope to see a lot of you in February at our
regular Due Diligence Ball. But stop by and visit any of our locations for
some of yourown due diligence and we would love to hear your feedback on it.
Thank you.
Allan Priaulx – Rick’s
Cabaret International Inc. – Investor Relations
Thanks Eric and thank
you everyone for being on our call and as always feel free to ask me any
questions you have regarding investor relations, I am available at ir@ricks.com. Or you can always visit
our website www.ricksinvestor.com.
And happy holidays to everyone. Shay it is over to you.
Operator
This concludes
today’s teleconference. You may disconnect your lines at this time. Thank you
for your participation.
