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 Transcript
December 15, 2014 - 4:30 PM Eastern
Fourth Quarter 2014 Earnings Call and Webcast
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                  Trading Under the Symbol: ISDR

 

 

 

Transcript of

RCI Hospitality Holdings, Inc.

Fourth Quarter 2014 Earnings Call and Webcast

December 15, 2014

 

 

 

 

 


Participants

Eric Langan – Chief Executive Officer

Phillip Marshall – Chief Financial Officer

Gary Fishman – Investor Relations

 

Analysts

            John Rolfe – Argand Capital

            Steve Martin – Slater Capital

            Nate Rusbosin – DePrince, Race & Zollo

 

Presentation

 

Operator

Greetings, and welcome to RCI Hospitality Holdings’ Fiscal Fourth Quarter and 2014 Year-End 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.  (Operator instructions.)  As a reminder, this conference is being recorded.

 

It is now my pleasure to introduce Mr. Gary Fishman, who handles Investor Relations for RCI.  Thank you, Mr. Fishman; you may now begin.

 

Gary Fishman – Investor Relations

Thank you.  For those of you online or have a copy of the slides, please turn to slide 2.  Thank you. 

 

I just want to remind everybody that our Safe Harbor statement is posted at the beginning of our conference call presentation.  It reminds you that you may hear or see forward-looking statements that involve a number of risks and uncertainties, and I urge you to read it.  The 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 which occur afterward.

 

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

 

Finally, I’d like to invite everyone in the New York City area to join us at Rick’s Cabaret New York tonight at 6:00 for a firsthand look at one of our flagship clubs.  Rick’s Cabaret New York is located at 50 West 33rd Street between Fifth and Broadway.  If you haven’t RSVP’d, ask for me at the door.

 

Now here is Eric Langan, President and CEO of RCI Hospitality.  Eric.

 

Eric Langan – President and Chief Executive Officer

Thank you for joining us today.  We have a lot to discuss, so please turn to slide 4.  We’ll go through our fourth quarter and fiscal year income statements and balance sheet; we’ll update you on the status of our capital allocation strategies; then we’ll provide you with a more detailed update on two major legal issues and our Robust Energy® drink business; and we’ll also update you on the status of the REIT, new locations, and acquisitions and the growing success of our Bombshells sports bars and restaurants; then will wrap up with our bullish outlook for fiscal 2015.

 

Please turn to slide 5 for a summary of the fourth quarter and year-end results.  We continue to make solid progress, generally in line with our expectations, for both the fourth quarter and fiscal 2014.  Total revenues were up close to 20% in the fourth quarter year-over-year and up 15% for the year. 

 

GAAP EPS was $0.42 for the quarter, a significant increase over last year.  For the year it was $1.14, an increase of close to 19%.  GAAP EPS for the quarter and year included a gain from a contractual debt reduction that was partially offset by an asset impairment charge related to the sale of one club and the closing of another.  For the year, GAAP EPS also included several major legal settlements in the third quarter.  It was these nonrecurring items that largely affected GAAP operating margin in both periods.  Excluding them, GAAP operating margin would have been about level for both periods.

 

As you know, we provide non-GAAP calculations for better comparability of our core operations.  On a non-GAAP basis, we earned $0.28 for the quarter, similar to a year ago, $1.44 for the year, which is a little bit better than last year. 

 

The key thing to look at in both periods was the non-GAAP operating margin.  This fell approximately two percentage points.  This was largely due to significantly increased costs in insurance coverage.  We have signed new contracts with a major carrier that should result in a meaningful reduction of these costs in fiscal 2015. 

 

Our adjusted EBITDA calculations reflect RCI’s cash generating power, and I’m pleased to report that adjusted EBITDA increased more than 14% year-over-year in the fourth quarter and also increased close to 14% for the year to $32.5 million.

 

Please turn to slide 6 for an update of our capital allocation strategies.  During and subsequent to the quarter we took steps to expand operating margins, generate more cash, and return capital to shareholders.  We decided to sell an underperforming adult club. That was Vivid Cabaret Los Angeles.  We also decided to close another one. That was the Jaguars in Houston. And we had to close a low-performing club. That was XTC Fort Worth, because of an eminent domain issue.  As a result, we had a $2.3 million impairment charge related to the Vivid Los Angeles and XTC Fort Worth clubs. 

 

Regarding the stock buyback, we have purchased more than 100,000 shares in the open market, ranging from price of $10.45 to $12.00 per share.  That’s left us with $8.8 million remaining in the authorization.  Share repurchases have continued in the first quarter of fiscal 2015. 

 

Subsequent to the quarter, we formed a new subsidiary that purchased the exclusive distribution rights to Robust brand energy drinks in North America.  We own 51%, and we paid $200,000 in cash and issued 200,000 shares of common stock.  We think this will be a terrific business, and I’ll discuss more about that later in the call.

 

Please turn to slide 7 to review our total revenues.  For the quarter, total revenues were a record $33.5 million, up 19.6% year-over-year.  There were 45 operating units in the fourth quarter of fiscal ’14 versus 39 operating units in fourth quarter of 2013. 

 

Sales of units open less than a year added $4.8 million in revenue.  This reflects the new adult clubs, such as Vivid Cabaret New York and the Rick’s Cabaret in Odessa, and the new Bombshells sports bar and restaurants in Austin and Webster, Texas.

 

Same store sales for the quarter increased 6.7%.  Nearly all major brands increased sales, including Club Onyx, which was in a turnaround.  For the year, total revenues were a record $129.2 million, up 15.1%. New clubs and restaurants played a big role, but we also turned around same-store sales growth. That’s gone to a positive 2.8% for the year compared to a negative 1.2% in fiscal 2013.

 

Please turn to slide 8 to review adjusted EBITDA.  I’ve already talked about the quarter and the year, so for this slide I’d like to point out the trend.  Over the last five years adjusted EBITDA has grown at a compounded annual rate of 15.5% versus 14.9% for total revenue growth over the same period.

 

Turning to slide 9, under the terms of the 2012 Jaguars acquisition agreement, if any regulatory authority attempts to enforce or collect the Texas Patron Tax, we could reduce our debt to the seller.  As a result, we recorded a gain of $5.6 million and equal reduction in debt in the fourth quarter of 2014.  We also continue to reduce our Tootsie related notes.  At 14% this is our most expensive interest cost, and we expect to have this completely paid off in the second quarter of fiscal 2015.

 

We ended the year with assets of $239 million, up 7% from a year ago; long-term debt of $70 million, down 11%; and stockholders’ equity of $113 million, up 17%.

 

Please turn to slide 10 for an update on some legal issues.  Currently we have two major legal issues, the New York State Fair Labor Standard Act case and the Texas Patron Tax case. 

 

Regarding the latter, attempts to reduce the Patron Tax have been slowly moving their way through the courts since 2008.  In November the Texas Supreme Court decided not to hear an appeal by the Texas Entertainment Association.  Subsequently, the TEA appealed to the US Supreme Court.  There is some time before this could be fully resolved in the courts.  We have been expensing this tax, so no matter what happens it isn’t going to impact our previous years’ income statements.  If the tax becomes due we would expect to enter into a payment plan for the past amounts due.  That would move the balance from current liabilities to long-term debt.

 

Turning to the New York Fair Labor Standard Act case, the issue raised by the plaintiffs is that entertainers at Rick’s Cabaret New York should have been classified as employees and paid at least a minimum wage on W-2s from 2006 to 2012.  This is opposed to our established practice, in which entertainers are classified as independent contractors with a 1099 for their income.  Last month the court ruled on a partial summary judgment that the entertainers as a class were owed $10.9 million in W-2 wages and other items, on top of the substantial sums they’ve already made.

 

Most serious entertainers at our clubs earn substantial six figure amounts as independent contractors.  With few exceptions, the media covered this story as if we were nickel and diming our entertainers.  Nothing could be further from the truth.  We work very hard to attract the best entertainers and to make sure they earn top dollars in our clubs.

 

This case is ongoing.  There is no current or near-term obligation to pay any sums as a result of this decision, and it will be appealed once final judgment is reached after trial.  We believe we already have numerous points on which to base an appeal.  Other than periodic legal costs, we have been advised that any final judgment after appeals is still years away.

 

I’d like to point out that the case involves only one club, and the class closed at 2012.  Since 2010 all entertainers and employees of all of our subsidiaries have signed an arbitration non-class participation agreement with us.  These agreements have been found to validate every instance that they’ve been challenged to date and we believe that will continue to be the case based on current federal and Supreme Court rulings.

 

Please turn to slide 11 for an update on the Robust Energy Drink business.  We don’t see this as a consumer energy drink business.  This is a bar business, which we know very well.  Most bars stock one brand of energy drink, and that is Red Bull.  This is because bars have never been presented with an alternative.  However, bars regard Red Bull as significantly more expensive compared to other liquor brands and mixers that they use, so we believe this is a big market opportunity.  Our clubs have been using Robust since June of 2013.  We’ve had virtually no pushback, but it has yielded us much higher profitability. 

 

Recently, there have been some major changes in the industry.  Coke bought Monster and took the distribution rights from Anheuser-Busch and Red Bull began to develop its own distribution. So the distributors have been very interested in a replacement.

 

Robust is already tried and tested.  We are not reinventing the wheel.  It was developed and manufactured by Sun Mark, Ltd of the UK, a well-established beverage company.   The US distribution was independently established in 2012 in Dallas, one of our biggest club markets.  It has been very successful in the on premise market through Miller Coors distribution in eight southern states.  Robust costs 30% to 40% less than Red Bull.  Customer retention has been more than 90%.

 

As part of this transaction we used shares with a one-year lockup.  We wanted to create a very strong incentive for the founders to stay with us and make this successful.  We believe shares rather than cash or a contract, per se, were the best way to do this.

 

The plan is straightforward.  We are not going after grocery stores and vending machines; we are using our existing extensive relationship with major liquor and beer distributors to expand distribution to the on premise bar and restaurant market around the country.  Since the acquisition we have helped open many distribution doors and look forward to announcing some new agreements in the New Year. 

 

Please turn to slide 12 for an update on our REIT.  The company has been moving forward expeditiously with this.  The REIT is expected to launch in the beginning of calendar year 2015 and we are in the process of recruiting board members and the management team.  Whenever possible, we like to own the real estate of our adult clubs, and that’s because the local ordinance often requires the license to be physically tied to the location.  Owning so much real estate, however, makes our income statement and balance sheet look very different from other restaurant and bar chains. 

 

To solve this problem, we have worked at developing an independent private REIT.  The plan is for RCI to sell and lease back the real estate holdings to the private REIT to which a subsidiary of RCI will provide real estate management and administrative services.  This could result in us unlocking $40 million to $50 million in real estate equity that we believe that we currently have.  That would give us a large amount of cash to make acquisitions, pay down non-real estate-related debt, or buy back shares of the company.  It is also anticipated that the REIT would acquire from club owners not affiliated with RCI and help increase our management fees.

 

Please turn to slide 13.  In the fourth quarter we had two new locations come online.  That was the Rick’s Cabaret in Odessa in August and the Bombshells in Spring, a suburb north of Houston, that opened in late September.  In the first quarter of fiscal 2015 we’ve had two new locations added, and that is the Bombshells on the south side of Houston which opened at the end of October, and a bar and nightclub called Union Square, which opened in December in Fort Worth.  We have another Bombshells in the works that will be in the Willowbrook area of North Houston.

 

Regarding acquisition of adult clubs, we continue to buy promising opportunities on a highly selective basis. 

 

If you turn to slide 14, we now have five Bombshells units open with a sixth in the works.  We have a cluster of three in the Houston area and soon to be our fourth.  With each successive opening we are getting better and better at honing the concept, and performance has noticeably increased.  Recently, we received rave reviews in the Houston Chronicle and a major restaurant design trade publication.  We’ve also received a lot of inquiries from around the country for franchising, and as a result I’m pleased to announce we have begun the legal process that will enable us to do just that. 

 

Turning to slide 15, looking back on fiscal 2014 we came through the recession as a much stronger company and we have successfully turned around same store sales.  Now, with an improved portfolio of clubs and our Bombshells concept starting to cook, we have a very favorable outlook for fiscal 2015 and expect to see good growth in revenues, profit and cash generation. 

 

Other key factors in fiscal 2015 will be the strong lineup of major sporting events in locations where we have clubs and restaurants and cheaper gas that will enrich our customer base with more disposable income.  As a result, we believe the first quarter of 2015 should be another record revenue-generating quarter and the second quarter should be even better.

 

Speaking on behalf of all of RCI’s management and that of our subsidiaries, I’d like to thank all of our loyal shareholders for their support. 

 

With that, let’s open the line for questions.  Operator?

 

Operator

Thank you.  (Operator instructions.)  Thank you.  The first question is from John Rolfe of Argand Capital.  Please go ahead.

 

John Rolfe – Argand Capital

Hello, guys.  A few questions for you.  One, the gain on the debt write-off in the quarter looked like, I think your disclosure was that was tied to enforcement of the pole tax.  What changed this quarter that triggered that debt write-down?  Was it the fact that the Texas Supreme Court elected not to hear the argument or what?  Why this quarter as opposed to past quarters?

 

Eric Langan – President and Chief Executive Officer

Sure.  Technically, the answer to that question is the state comptroller sent out a letter demanding all reports be filed and all payments be made.  Currently, we’ve hired a law firm out of Austin, Texas, to represent us who is in negotiations with the state on those past taxes at this time. We have not paid them at this point.  We’re negotiating some type of payment plan or discount to get caught up.  Really, their goal is to start collecting the tax on a go-forward basis is what we’re being told, but they have to do something with all the past amounts owed as well, so we have our lawyer negotiating that for us right now.  He’s going to have updates.  I’m expecting probably maybe by the end of the year if not definitely in the next quarter on how that’s going to be handled.

 

John Rolfe – Argand Capital

So that is proceeding on a parallel track with the application to the Supreme Court?

 

Eric Langan – President and Chief Executive Officer

Yes. 

 

John Rolfe – Argand Capital

Okay.  In terms of the insurance savings, what was sort of the quid pro quo there?  Did you guys decide to take a larger first loss or deductible or was the market just more competitive from the last time you had been out bidding for the business or having the business bid for?  What was the driver there?

 

Eric Langan – President and Chief Executive Officer

Yes, well, what happened to us last year, the insurance company went bankrupt, and so the market – and everybody kind of knew.  We actually got away from Indemnity and started with our insurance provider before they announced that they were insolvent once they went insolvent.  A lot of insurers kind of knew that was coming and they didn’t know what the market was going to be, so last year rates jumped through the roof.  There were only a couple of people actually even writing new policies. 

 

By this year with the insolvency happening and a lot of people deciding to enter the market, so rates have come down somewhat.  We actually lowered our self-insured risk with this new policy as well as lowered our rates about 40%.  It’s actually a really good benefit for us.  We’re buying more coverage.  We’ve increased our rider as well and clarified that our rider is per unit, so it’s very significant both with the $3 billion-plus A graded companies with very well-known names, so we’re very happy with what we’re able to achieve this year versus last year.  We’re kind of in a hurry to protect ourselves, so to speak.

 

This time we had a little more time.  We were able to shop it a little bit better.  We actually stayed with the company that wrote us the previous year, just at very significant discount.

 

John Rolfe – Argand Capital

Okay, okay.  And my last question for you, I think you mentioned that you thought there might be $40 million to $50 million of equity value in the real estate that you would drop down into the REIT. I just want to be clear.  I’m presuming as well that there would be some club level debt that would be dropped down into that REIT as well.  I mean, I think you guys have talked in the past about sort of total value of the real estate being dropped down there as sort of $80 million-plus.

 

I mean, has anything changed or are we just talking about –

 

Eric Langan – President and Chief Executive Officer

But we would lose – not only would we bring in $40 million to $50 million in cash, $40 million to $50 million, probably about $40 million in debt.  I think the real estate debt’s right around $40 million.

 

John Rolfe – Argand Capital

Okay, okay.  So we’re still talking about a total real estate value of $80 million-plus.

 

Eric Langan – President and Chief Executive Officer

Eighty to one hundred million.  Ninety to one hundred, probably, really, the real value of the real estate.  We’ve gotten a couple of appraisals that have come in a lot higher on two pieces of property.  Kind of the first two we kind of want to move into the REIT, and both appraisals came back much higher than we estimated the property was worth.  It looks like the commercial real estate market’s recovering a little bit right now.

 

John Rolfe – Argand Capital

Okay.  Any issues – I mean, obviously with what’s been going on at ARCP, the company that does all the private REITS, has that impacted in terms of what your advisors are telling you, your ability to potentially get this done, or is that just sort of –

 

Eric Langan – President and Chief Executive Officer

No, we waited until January when we probably could have filed everything in November, but then we would have had to have – we had to make all of the qualifications by January of 2015.  By waiting until filing in January of 2015 with everything we have until January of ’16 to come in full compliance, so it gives us basically 12 full months to do everything instead of two.  That was part of the reason that we waited.

 

John Rolfe – Argand Capital

Okay, but the blow up at American Realty Capital has not really impacted –

 

Eric Langan – President and Chief Executive Officer

No, it hasn’t changed anything on our stuff at all at this point.  Now, we don’t know – I mean, obviously we don’t know what kind of funding we’re going to be able to take in in the REIT.  We know what we want to take in and where we want to be a year from now, but that part we’ve got to get it started and see what happens.  We have a couple of pieces of property.  Rather than going to have all 30 pieces of our property appraised and spend all that money we’ve done a couple and we’ll say look, as we raise the money we’ll put these in and as more money comes available we’ll use it.  Of course, for acquisition purposes we want the REIT to be purchasing our future real estate and our future acquisitions.  That’s the big thing for us right now.

 

John Rolfe – Argand Capital

Okay, great.  Thanks very much.

 

Operator

Thank you.  The next question is from Steven Martin of Slater.  Please go ahead.  Excuse me, Mr. Martin, your line is live.

 

Steven Martin – Slater Capital

I’m sorry.  I had mute on.  Can you give us an idea on the clubs that you have closed or sold, what the revenue and loss was for 2014? 

 

Eric Langan – President and Chief Executive Officer

I don’t have them off the top of my head.  I could probably get the revenues pretty quickly.  Revenues at those clubs were $2.6 million maybe in revenues.  They have losses, so there was no income.

 

Steven Martin – Slater Capital

Proceeds from the sale of those clubs when you eventually sell them?

 

Eric Langan – President and Chief Executive Officer

Well, they’re sold.  We have the property for sale.  We own the property in Houston.  The other two were both lease locations.  We own the property in Houston.  That property is for sale.  We’ve owned that property since ’97.  We paid about $600,000 for it.  We depreciated it all this time, so it’s probably on our books for next to nothing.  Our ask price is $2.2 million.  I don’t know the market.  We haven’t gotten a formal written offer, but I’ve heard there’s an offer coming in at $1.88 million.  I don’t know if we’ll take it or not.  I’ll have to do a little research on it, but it’ll probably sell for between $1.8 million and the $2.2 million ask price.

 

Steven Martin – Slater Capital

Okay.  Can you talk a little more about Robust?  You issued 200,000 shares.  What are the restrictions on those shares?

 

Eric Langan – President and Chief Executive Officer

They’re fully restricted for one year and then they’re in a leak out agreement for the next year.  Technically, it’ll take them two full years to realize.  If they started selling the first day they could they could actually have all their money in about two years.

 

Both of the founders seem to be very interested in the growth potential of the company.  The problem they have is they couldn’t add distributors fast enough because they didn’t have enough inventory and they were basically cash poor on inventory, so we’re able to provide, with our huge cash flow and a line of credit with the manufacturer, a much better product flow for them so they can add distributors as fast as they want now.  I think you’ll see as we move in after the holidays it’s very hard for distributors to pick up new products during the holidays because they’re very busy times, but as we move into January and February you’re going to see a lot of new distributors that we’ve been negotiating with that their contracts will probably start in January, February, March.  That’s going to expand our distribution to a lot of new states and new territories.

 

Steven Martin – Slater Capital

Can you give us some idea of what – and recognizing that you’ve just taken over the business – Robust’s revenues might have been in the most recent 12 months and some idea of what you expect them to be in the next 12 months?

 

Eric Langan – President and Chief Executive Officer

Yes.  Basically, without giving out – we don’t want all our competitors to know exactly what’s going on there, either – but basically in the $2 million to $3 million range for last year and we estimate revenues this year will be in the $6 million to $8 million range for the first year that we are in control of the company.

 

Steven Martin – Slater Capital

And would you expect it to be profitable?

 

Eric Langan – President and Chief Executive Officer

Yes.  Yes, it will be profitable in this fiscal year.  I don’t see how they can –

 

Steven Martin – Slater Capital

One last question and then I’ll let somebody else.  Looking at your 10-K and the debt schedule, and maybe you can’t but maybe somebody can get back to me, can you tell me which line item of debt the write-off occurred on?  Was the gross amount of the write-off the same as the gain? 

 

Eric Langan – President and Chief Executive Officer

Technically no because there was a piece of property that we owed.  The note was kind of a weird note.  It’s actually in the club.  It’s actually in the Jaguars debt on a club level, not on a real estate level.  Basically, what we did is it was a $6 million write-down, but because one of the properties that we put in there we paid $660,000 for in a lump sum cash payment, at the end of the 12 years and as a favor to the owner we agreed to write that off first, but that was on our books because we had to do calculated interest and, you know, stuff for GAAP purposes.  That’s why it ended up being $5.6 million instead of $6 million, because about $400,000 and some of that would have been interest that would have accrued over the 12 years on that piece of property in Odessa. 

 

Steven Martin – Slater Capital

Maybe Phil can send me an e-mail or get back to me on because you have 20 line items of debt in your 10-K, which line item that would have been in.

 

Phillip Marshall – Chief Financial Officer

 

Yes.  Steve, call me about that.

 

Steven Martin – Slater Capital

Okay, that’d be great.  Thanks.

 

Eric Langan – President and Chief Executive Officer

You bet.

 

Operator

Thank you.  (Operator instructions.)  The next question is from Bob Brown, a private investor.  Please go ahead.

 

Bob Brown – Private investor

Thanks.  Just a few questions.  First of all, I know on the Texas you said it sound like parallel tracks with the litigation, the appeal to the Supreme Court but at the same time trying to negotiate something on the past payments. 

 

In terms of a potential third option, based on the elections in terms of the new Texas legislative session, any chance of getting any political relief going backwards, anyway?

 

Eric Langan – President and Chief Executive Officer

Well, we’re certainly trying.  The legislative session will start in January and run through May.  Who knows?  They’re going to be so busy this year.  There’s so much going on in Texas.  We don’t know what we’ll be able to do, but yes, we’re certainly going to try again.

 

We passed the bill in the past and had to pull it off the governor’s desk because he threatened to veto it.  If we could get that bill passed again that’d be great.  We just don’t know in this legislative session if that’s going to be possible or not, but we’d definitely love to see it happen and we’ll definitely be trying.

 

Bob Brown – Private investor

Okay.  On the REIT, in terms of a confidence level, and we’ve been talking about this for close to about a year now, so confidence level in terms of launching in January and at the same time in terms of where are we in terms of facilitating raising money for a lease starting with a couple clubs?  I mean, has there been an investment advisor retained or banker retained?

 

Eric Langan – President and Chief Executive Officer

Well, we’ve been talking with a couple different people.  We haven’t retained anyone at this point.  Of course, our current financial advisor is interested in doing some of the raising as well plus people that we know and have dealt with in the past have shown interest once we get an offering memorandum put together that they’d like to see it.

 

I just don’t know.  I’m pretty confident that we’ll get it started, we’ll get it going.  How fast it will fund is unknown at this point.  That’s the unknown.  I think it’s going to go pretty rapidly based on the people I’ve talked to and people we’ve discussed things with on how some of these other REITs are functioning and operating and how they’re able to raise capital.  There are a lot of people looking for fixed income.  Our target is to guarantee 5% and to target an 8% yield, which should be pretty easy to do because we already know what properties we’re putting in, at least for the first $100 million in properties, and we know what interest rates, we know what interest expense and rent we’re currently paying.  It’s pretty easy to line that up.

 

Bob Brown – Private investor

In terms of confidence level about lease at least starting getting an offering memorandum out in January.

 

Eric Langan – President and Chief Executive Officer

I don’t see why we won’t.  In the first quarter for sure.  I don’t want to pin myself to January just in case something comes up, but as of right now everything’s ready to go.  We’ve had it ready.  We could have pulled the trigger in November.  On advice of counsel we waited until January, until after the first of the year, just to make sure that we have more time in case we run into any issues with the capital raising and getting the 100 shareholders.  You have to have 100 shareholders and some other legal requirements to be considered a REIT, so we want to make sure we meet all those.  It gives us a year to do so that way.

 

Bob Brown – Private investor

Okay.  On your ’15 outlook, both first quarter and second quarter talked about in terms of looking at continued record revenues.  Any thoughts on profitability?

 

Eric Langan – President and Chief Executive Officer

Well, I mean, we continue to, on an adjusted EBITDA, grow.  I think we’ll continue to see those spreads.  By losing the three locations that were costing us significant money I think we’ll see our margins increase definitely in those quarters year-over-year. 

 

Bob Brown – Private investor

Last is to come back to Robust.  In terms of your expectation for this year, and you commented already in terms of revenue and it will be profitable, are we assuming that for ’15 that that will be accretive?

 

Eric Langan – President and Chief Executive Officer

You know, I don’t know.  I’ll have to really kind of look.  I mean, we only gave a few hundred thousand shares, so I would assume it will be.  If we do the $6 million to $8 million in revenue we should come in $1 million plus on the bottom line, which would definitely be accretive.  I’ll have better information probably in the February quarter and definitely in the May quarter on that.  It’s just too new for me. 

 

I mean, I can sit here and guess, but I want to be able to tell you look, these are the contracts we’ve signed, these are the distributions we’re picking up, this is the amount of new cases a month that are going out, which we’ll be able to really do starting in February and definitely in the May conference call we’ll have all of that laid out because we’ll have six months solid information under our belt.  Right now I have to go on what I’m being told by the people we purchase from versus being able to see it with my own eyes and being in there myself and kind of seeing what’s going on.  They definitely believe that they’re going to hit the mark, and of course they’re incentivized to do $8 million in revenue and net $1 million because there’s additional earn-out and bonuses for them if they can hit those numbers in I think its calendar 2015.  They’re very motivated to do it.

 

Bob Brown – Private investor

I appreciate those comments.  I’d like to ask a last question on Robust, which is maybe a little bit more philosophical and I’d like to hear from you on this.  I’ve been a very long-term shareholder and one of the things that was, I don’t know, it took me aback when the announcement came out, and I think it was shared by people because the stock started to decline even before the New York judgment issue. 

 

In other words, the issue has been in terms of our capital allocation.  For a long time we’ve been very disciplined about being adult clubs and that was the niche, then we branched out into the Bombshells, which seems to be a very good complement, and yet when this came out it just seemed like where did this come from?  (A) What do we know about this business?  Why are we in another business when we finally got to a point where you guys did such a good job over the last five years of getting our revenues back on track, being much more disciplined in terms of profitability, generating cash? 

 

If anything, the issues seem to be revolving around either whether we’re going to grow faster or we’re going to just start returning more cash to shareholders, and then this announcement of just going into a new business – what do we know about this business? – I think was a bit of a shock to a large number of long-term shareholders. 

 

Eric Langan – President and Chief Executive Officer

Yes, I agree.  We could have done a much better rollout and explanation of the Robust Energy purchase.  I think a lot of people misunderstood it.

 

We value it two different ways.  Our downside is we have a ten-year contract for this product which we sell thousands and thousands and thousands of cases for.  Just in product discount, worst case is we prepaid for our product for ten years.  Actually, probably more like four or five, but based on how much product we use.  So there was really not a lot of downside for us in that regard because, like I said, we use the product and now we’re paying – instead of paying retail for it we get it for cost for our locations.  That was the worst case scenario for us.

 

We really believe with what we were seeing happening in the energy drink market with the beer distributors that Red Bull was going to private distribution and cancelling contracts with lots of distributors, so they had the space on their trucks.  They already had the customer base because they were already delivering to all these bars and nightclubs.  Then when Monster took Anheuser-Busch out of the energy drink business with Monster we said well, wait, now we have Miller-Coors distributors, we have Budweiser distributors as well, and that was before we talked to – which was our original deal, was to get with the liquor distributors because if they’re going there to deliver the liquor they can take energy drink product with them.

 

We’re negotiating with one of the major liquor distributors and we’ll start distribution in Florida in the January, February, March quarter.  That one contact alone could turn around and launch the product in 42 states when we’re successful in the Florida market.

 

It can grow very rapidly.  That was the real upside for the Robust, is just how rapid it could grow by creating distribution for it.  The product is already proven.  It sells in the clubs.  Dallas, Fort Worth, where the company started, it’s a hot product.  You can go into a lot of bars and a lot of nightclubs and you’re getting Robust there.  As we push into these other markets with distribution I think we’re going to see the same type of growth rate for it, which is just a phenomenal growth rate. 

 

Bob Brown – Private investor

But the bottom line is, from what I’m happy to hear is that (a) we have very limited downside because of the discounts we’re getting on the cost side of what we’re buying anyway; and (b) we’re not looking to become a conglomerate here, right?  The philosophy is to stay where we know what we’re doing and what we’re good at.

 

Eric Langan – President and Chief Executive Officer

You get up to $100 million in sales and everybody and their brother in the bottling business, in distribution, beverage business will want to buy it from us.  There’s going to be a lot of opportunity with this product as we continue to grow and push into the market, and it has very limited competition because Red Bull is really the only product that mixes well with liquor, which is when you get your Jägerbombs or your energy drink and vodka.  With a very similar flavor profile, our product will do just as well and cost the bar owner 30% to 40% less. 

 

Bob Brown – Private investor

Right, but I’m just saying in terms of philosophically, I understand potential upside.  In other words, we’re not looking to get into other businesses, right, if we have capital –

 

Eric Langan – President and Chief Executive Officer

No, no.  This is just complementary.  I mean, we already bought, we were familiar with it.  There was very little downside for us and we had the connections with some of the liquor distributors and some of the beer distributors to immediately increase product distribution, which basically we’ve done overnight.  Since we took over we already added eight distributors.  We’ll probably add somewhere between 14 and 16 in the next quarter.  When you start adding distributors like that – say we had 50 distributors this year, you go from $2 million to $3 million in sales to $6 million to $8 million, maybe $10 million to $12 million.  It was an easy setup for us to do with very limited potential downside. 

 

We’re not looking to do other business. You’re going to see us do some more acquisitions in the adult club market probably in the next quarter.  We have some deals we’ve been working on and we’ll get them announced.  We want to get back to our roots a little bit.  We had to get rid of some locations that were underperforming, so now we’re ready to pick up some new ones.

 

Bob Brown – Private investor

Last, I guess, given where the stock is, are we looking to accelerate some of that money that’s already been allocated towards the issuances?

 

Eric Langan – President and Chief Executive Officer

I’m sorry, for?

 

Phillip Marshall – Chief Financial Officer

The stock buyback.

 

Eric Langan – President and Chief Executive Officer

The stock buyback?  Yes, we’re buying back stock.  We’re aggressively buying back stocks under $10. 

 

Bob Brown – Private Investor

Great. 

 

Operator

Thank you.  The next question is from Gerald Catarino [ph], a private investor.  Please go ahead.

 

Gerald Catarino – Private investor

Yes, how do you view the impending job cuts in the oil drilling areas?  How will that affect financial results?

 

Eric Langan – President and Chief Executive Officer

Yes, well, you know, Odessa may be affected, but that’s really the only real market where we’re really energy dependent, so to speak.  However, the $2.50 gas or even – I bought gas the other day for $2.09 a gallon.  I had to check to make sure the line wasn’t burned out and it was an eight because I couldn’t believe the price.  I think that’s going to put a lot of cash, disposable income in our customers’ pockets. 

 

The $50 customers.  I call them the $50 customers.  Guys come in and come spend $50.  Now maybe he’s going to come in twice a week or he’s going to spend $60 on his visit.  There are a lot of those guys.  Say 15,000 visits a week, all of the sudden those 15,000 visits a week, an extra $10, that’s another $150,000 a week in sales.  It can add up quick.

 

I think you’ll see that as we move into the next two quarters, which is why I think record revenues the next few quarters is very easy to say and very believable.  This is one of the reasons why.

 

Whatever effect we have from job cuts in the oil industry we’re going to make up ten-fold with the cheaper gas. 

 

Gerald Catarino – Private investor

Thank you.

 

Eric Langan – President and Chief Executive Officer

Yes.

 

Operator

Thank you.  The next question is from Peter Rogai [ph], a private investor.  Please go ahead.

 

Peter Rogai – Private investor

Hello.  Thank you.  I’m encouraged to hear that there seems to be interest in franchising the Bombshells.  I was wondering if you could talk a little bit more about that, how much interest there is and how aggressively you –

 

Eric Langan – President and Chief Executive Officer

Unfortunately, we can’t talk to anybody.  Under the federal law, until we have our franchising documents done we can’t.  All we can say is yes, we’re looking to franchise.  We’ll take your name and number, we’ll let you know when we can talk to you.  We don’t know.  We can’t gauge the true interest because we’re not allowed, under federal law, to talk to people about it.

 

Hopefully, we’ll have that all done in the next quarter and by February, by the February conference call I can give you a better idea of how that’s looking, but I know we’re getting a lot of calls, a lot of people talking to our restaurant managers and brought me several phone numbers and contacts.  I just really can’t call them and talk to them about it at this point, but the lawyers are working for us.  Once we get everything filed then we’ll be able to get a better idea. 

 

Peter Rogai – Private investor

Okay.  Another question in terms of the Robust.  You don’t actually own the product, correct?  It’s only distribution.

 

Eric Langan – President and Chief Executive Officer

It’s a distribution contact, right.

 

Peter Rogai – Private investor

If this ends up becoming a big thing and someone wants to buy the product, it really doesn’t do much for us, right?

 

Eric Langan – President and Chief Executive Officer

Well, they don’t need to make the product; they need the distribution rights.  I mean, the product’s going to sell what the product sells for; it’s the contract.  It’s a ten-year contract, auto-renewing as long as we meet case minimums, which I don’t think we’ll have any problem meeting the minimums.  That won’t be an issue.  In fact, we’ve already negotiated with actually manufacturing the product in the US at some point in the future so we can avoid some of the shipping costs.

 

Peter Rogai – Private investor

Got it.  Okay, thank you.

 

Eric Langan – President and Chief Executive Officer

And the time.  If we grow, it starts to take too much time to get the product here.  We want to build to basically bottle it here in the US.

 

Peter Rogai – Private investor

Okay, thanks.

 

Eric Langan – President and Chief Executive Officer

Thank you.

 

Gary Fishman – Investor Relations

Operator?

 

Operator

We have no questions in the phone queue at this time.

 

Gary Fishman – Investor Relations

Right.  I’ve received – this is Gary Fishman – last week and today after the earnings have come out a few e-mails from people asking questions.  Some of them have been answered, but I’d like to get through them and have Eric answer them.  Let me just ask a couple of these questions.

 

“Who’s the new insurance company?”

 

Eric Langan – President and Chief Executive Officer

The new insurance company is Aspen.  They tend to insure a little over I think $3 billion in assets.  They tend to insure best in class insurance.  We’ve had a great relationship with them in working through them the first year.  Then our policy with Berkshire Hathaway for our umbrella policy, for our override.

 

Gary Fishman – Investor Relations

Another question is “How come you don’t have any class action labor lawsuits in other big states like Texas or Florida?”

 

Eric Langan – President and Chief Executive Officer

Well, actually we’ve been filed on in both Texas and in Florida and there’s a current pending case in Minneapolis, in Minnesota.  The Texas case was dismissed and forced to arbitration.  The Florida case was also dismissed and forced to arbitration.  As an individual, both individual cases, no classes, and that’s because our contracts have been upheld and that’s why we believe on a go forward basis that we’re good in those states, and actually everywhere we operate in the US, that these arbitration agreements and the non-class participation agreements will protect us going forward.

 

Gary Fishman – Investor Relations

On a legal subject, “What will be the trend in legal bills over the next several years?”

 

Eric Langan – President and Chief Executive Officer

I think we’ll probably remain fairly steady this year. We’re going to have a trial in the New York case, which will be a few hundred thousand dollars, and then of course we’re dealing with the defunct insurance company, so we’re going to be making claims against them, so there will be a little bit of legal bills there, of course, dealing with some of those cases.

 

I’d say we’re probably going to be around the same this year as we were last year, so that will remain steady.  We’ll start to decline a little bit the following year.  Three years out, significant reductions in legal costs.

 

Gary Fishman – Investor Relations

Operator, we see that you have somebody else that wants to ask a question.

 

Operator

Yes, we have a question from the line of Nate Rusbosin of DePrince, Race & Zollo.  Please go ahead.

 

Nate Rusbosin

Hello, Eric.  How’s it going?

 

Eric Langan – President and Chief Executive Officer

Hello, Nate.  How are you?

 

Nate Rusbosin

I’m doing pretty well, thanks.  I wanted to kind of talk about the New York case and the Texas case.  What could be the worst case scenario for these trials?

 

Eric Langan – President and Chief Executive Officer

Well, Texas isn’t really a trial.  I mean, I guess it is with the TEA.  The Supreme Court doesn’t hear the case, the tax is upheld, and we have to pay the back taxes.  I mean, that’s probably the worst case scenario.  I guess they can demand all the money today, which of course we have certain subsidiaries that aren’t extremely profitable and may go into bankruptcy.  It’s a subsidiary-by-subsidiary collection.  The parent company doesn’t own or operate any clubs; it’s only a holding company, so it’s all the individual subsidiaries that actually owe all these taxes.  Basically, we go on a subsidiary-by-subsidiary basis and kind of figure out what we want to do on a worst case basis.

 

The lawyers are working on a settlement for us.  I think that’s not going to be an issue there.  They’re going to come up with some type of payment plan.  Whether it’s discounted or not discounted remains to be seen.  The terms remain to be seen.  I’m guessing a three- to seven-year payout or something along those lines.

 

The New York case worst case scenario is we go to trial, we lose again, which we lose on every claim so all of the sudden the claims are $18 million, $19 million or $20 million instead of $10.9 million.  We appeal.  The appeals court basically either upholds all the rulings or only overturns certain things, forces the back end of the trial.  Of course, we’ve got more court costs and more expenses there. 

 

It just remains to be seen, but I think those are kind of worst case.  You put a worst case dollar amount on the whole thing over seven years, maybe $40 million for everything, for both cases over the next five to seven years, worst case.  I think more realistic – and then you have to remember it’s all going to be based on claims made as well.  How many of the 1,900 entertainers actually make a claim for the stuff?  This could affect it, whether we do a blanket mail out of checks?  There are so many ways these cases go and hopefully we settle before we ever get down that road.  If you get that far down the road, three years from now I don’t want to still be dealing with this case.

 

Nate Rusbosin

Yes, exactly.  Can you talk about is there anything in particular holding up settling before this happens right now?

 

Eric Langan – President and Chief Executive Officer

Yes, the other side.  They don’t really – I think that, in my opinion, the plaintiffs are using this case.  They have a great judge for them and they’re using this case to create law and to create cases to settle other cases.  Until we can come up with some type of deal that works for everyone, we’ll just have to wait and see, but it’s years down the road and we can win an appeal and then the whole thing gets thrown out.  Who knows?  It’s just so hard to say.  The ongoing litigation, I probably shouldn’t even be discussing it, but I just want everybody to understand that yes, this ruling was bad for the industry, it’s bad for Rick’s, but it’s not the end of the world that our stock price reflects that yes, my gosh, all of the sudden we’re out of business because of it.  We’ve taken actions to protect ourselves.  We’ve been protected since 2010.  We haven’t seen any other class actions.  Any ones that we’ve seen class actions in, the cases have been dismissed.  They’ve been sent to arbitration. 

 

These arbitrations, we’re settling these things for thousands of dollars, not even hundreds of thousands of dollars.  I mean, basically, cost of defense settlements just to make them go away.  It’s pretty insignificant to the overall picture versus what this New York case has done.

 

Nate Rusbosin

Do you have any idea on the timeframe for most of these rulings?

 

Eric Langan – President and Chief Executive Officer

For the Fair Labor Standards case?

 

Nate Rusbosin

For the New York case.

 

Eric Langan – President and Chief Executive Officer

Who knows?  We’re going to go to trial this spring.  The trial’s set for this spring.  I assume we’re going to go to trial.  In federal court you can’t appeal anything until the whole thing is over.  Even though we have points of appeal, we can’t make any of those appeals until after the whole case is settled.  That’s what we’re waiting for and then we’ll go to the appeals.  The appeals process is probably another two years or so.  At least another three years would be my guess.

 

Nate Rusbosin

Okay.  Just lastly, talking about the buyback.  I know past quarters you’ve kind of indicated below $13, below $12 that you guys would buy back stock.  You said $10 here.  Did anything change there?

 

Eric Langan – President and Chief Executive Officer

Nope. We’re buying back stock.  You can see we’ve bought back stock in the last quarter, 100,000 shares, actually a little over 100,000 shares.  We’ll probably end up with more stocks this quarter, bought back this quarter than last quarter because the prices are so – under $10 and we’ve been pretty aggressive, as aggressive as we can be.  I mean, we are limited to certain Safe Harbor amounts of times we can buy, prices we can pay, and amounts we can buy in a day. 

 

Nate Rusbosin

Certainly.  Okay.  Thank you.

 

Eric Langan – President and Chief Executive Officer

Yes.

 

Operator

Thank you.  The next question is from Mort Cohen, a private investor.  Please go ahead.

 

Mort Cohen – Private investor

Hello, Eric.  I was wondering if you had any guidance or projected sales in earnings per share for the coming year.

 

Eric Langan – President and Chief Executive Officer

No, we’re not issuing any guidance at this time other than to say that we do believe that the next two quarters will both be record quarters, so we’ll exceed $33.5 million this quarter and then whatever we do in the next quarter, we’ll exceed that in the January, February, March quarter.  That’s about the only guidance I have at this time.

 

Mort Cohen – Private investor

Do you know when you’ll have better guidance than that at this point or is this something—there was guidance last year on that.

 

Eric Langan – President and Chief Executive Officer

Yes, we’ve discussed it and really, we want to pick up some analysts and get some analyst coverage and then we can kind of work with them to kind of come up with some guidance maybe.  At this time, with the growth and some of the things that are going on with the legal issues and everything, I think we’re better off just sticking to a revenue number, what we do in revenues, and we’ve been generating certain amounts of cash based on revenues.  You can kind of do the math yourself and kind of figure out where you think we’re going to come in at.  We just think that’s the better guide at this time.

 

Mort Cohen – Private investor

Thank you.

 

Eric Langan – President and Chief Executive Officer

Yes.

 

Gary Fishman – Investor Relations

Thank you, operator.  Operator?

 

Operator

Yes, I’m here.  We have no further phone questions at this time. 

 

Gary Fishman – Investor Relations

Okay.  Why don’t we wrap up?  We’ve had about an hour-long call here.  Thank you, Eric, and thank you, everybody, for listening.  I want to remind everybody again we do have that due diligence event at Rick’s Cabaret New York from 6:00 to 8:00 tonight; 50 West 33rd Street between Fifth and Broadway.  If you haven’t RSVP’d yet, ask for me at the door.  We look forward to reporting our 2015 first quarter sales in January and then our quarterly results in February.  Thank you and good night.  On behalf of Eric, the company and all our subsidiaries, best wishes for a happy holiday season.  Please celebrate by going to one of our clubs or restaurants.  Thank you, everybody.



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