Q1 2020 Earnings Call

[music].

At this time all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to ensure introduce Gary Fishman, who handles investor relations for RCR.

Thank you.

So those of you listening to this call on the phone you can find our presentation on the RCR website click company in Investor information just under the Rcs logo that will take you to the Canadian investors for page scroll down a little and you'll find all the necessary links for this call or you can go to the webcast, where you'll see our slides.

Please turn to slide two I want to remind everybody of our safe Harbor statement.

It's posted at the beginning of our conference call presentation.

Lines here that you may hear receive forward looking statements involve risks and uncertainties I urge you to read it actual results may differ materially from those currently anticipated we disclaim any obligation to update information disclosed on this call as a result of developments that occur afterwards.

Please turn to slide three.

Hi, also direct you to the explanation on non-GAAP measurements that we use and are included in our presentation and news release.

And please turn to slide four here, our comparable GAAP versions of four charts and tables, we will be using in todays presentation now I'm pleased to introduce Eric Langan, President and CEO of RCR hospitality Eric.

Hi, Thanks for joining us today I'm here with our CFO, Phil Marshall and our controller probably share.

Before we start I'd like to thank our staff and our new auditors again for the last two weeks they work long hours to get our first quarter 10-Q filed and bring us current with our filings.

Please turn to slide five for today's news.

After the market closed we filed our 10-Q as we had expected to do during late February.

We reported $48.4 million in total revenues, that's up 9.9% year over year GAAP EPS was 60 cents compared to 65 cents.

A year ago quarter included $1.1 million in pre tax net gains on the sale of access assets.

On a non-GAAP basis, EPS was 62 cents compared to 61 cents.

The star of the show with our Bombshell segment quarterly revenues hit $10.4 million up more than 72% year over year, not only that but the segment margin rebounded to 15.2% based on that and other trends I'll discuss we expect performance to continue to grow.

Nightclubs maintained their strong contribution despite an unusual calendar we had one last holiday sales week during the important Thanksgiving to Christmas period.

As we previously reported.

Performance has also picked up due in part due a great second quarter sports calendar in markets, where we have some of our largest clubs.

Our northeast corridor acquisition continues on track.

Regarding our capital allocation strategy, we generated $9.3 million in free cash flow.

That's in line with our current 30 million dollar run rate.

We used to $6.4 million in excess cash to buy back 333000 shares in the first quarter that reduced the weighted average shares outstanding 4% year over year.

And we still ended the quarter with more than $13 million in cash.

During and subsequent to the first quarter, we eliminated $10.8 million in their near term balloon debt to retain cash and increase our financial flexibility.

This flexibility will be further enhance when we closed on approximately $6.7 million, an excess properties under contract to sell and when we sell or at least the remain access properties with approximately $9 million in market value.

After the first quarter, we also increased our buyback or the race authorization by $10 million, giving us a total of $13.8 million available and we increase our annual cash dividend 7.7%.

Please turn to slide six to review, our first quarter operating results.

[noise] nightclub segment sales were on a similar level of last year.

The first quarter of fiscal 20 included two new clubs Rick's cabaret in Chicago and Pittsburgh.

Which we acquired in November of 2018.

Two clubs were closed for part of the quarter and as I mentioned earlier, one last holiday weeks, our sales week.

Bombshells had a record performance. This reflected three units in the new sales account for the full quarter Bombshells, Kt, which opened in the second half of October to great numbers and more than 19% same store sales growth from our first five restaurants.

Nightclubs operating profit were down $1.6 million most of that was due to $1.2 million and gains on sale of noncore business assets in the year ago quarter.

[noise] bombshells operating profit jumped to $1.6 million from a relatively small amount and the year ago quarter.

That reflects both improved revenue and margin despite preopening costs for bombshells Kt for several weeks and bombshells 59 for the full quarter.

Corporate expenses were $1.2 million higher this was primarily due to higher audit legal and overtime expenses related to our 10-K filing as I had.

As I indicated they would be in our last call.

On a non-GAAP basis operating profit was off only $375000 from last year, which was made up.

For on a per share basis through our stock buybacks.

[noise], Please turn to slide seven to review, our sales and margin trends.

First quarter revenue hit a record hit a new record largely due to bombshells the segments higher contribution offset the increase in corporate expenses.

Looking ahead, you can see our total operating margin should begin to improve.

Bombshell segment margins are expected to continue to grow with all new units open and continued improvement in same store sales.

Nightclub segment margin should expand with all clubs opened and big sporting events near our larger clubs I'm talking about the pro football Championship in South, Florida, The pro basketball weekend in Chicago, both in February and the College basketball tournament in New York and Houston in March.

And as I've mentioned on previous calls corporate overhead as a percentage of revenues should decline in the second half with reduced auditing and related legal fees and overtime [noise].

Please turn to slide eight to review our Bombshell segment.

[noise] last call, we titled the Slide Bombshells turnaround taking shape.

This call Weve re title that bombshells turnaround is happening.

All the new units continue to do very well in the first quarter average revenue per unit totaled approximately $1.15 million.

Which was up more than 30% year over year that gives us increased confidence in all 10 locations. They generate annualized sales of $40 million to $50 million and as sales gross margin should expand especially with the elimination of all preopening cost as of February our internal target continues to be an 18 to 21 per.

That range.

As we sell or lease out the access property around some of our newer bombshell, we expect to generate additional increases in store traffic as those properties are developed.

We haven't currently selected any new bombshells locations and we are waiting to build up our management teams. After opening six doors is such a short amount of time and we want to evaluate our ROI on our new investment.

Please turn to slide the nightclub segment.

I've covered most of this already in this call and our call three weeks ago, but I'll be happy to answer any questions. You may have during the Q in a.

Have you please turn to slide 10 to review our cash generation.

Also.

I've also discuss most of whats on this slide the keeping I'd like to point out is that maintenance capital expenditures were significantly higher this quarter versus a year ago. This can have a noticeable effect on free cash flow. The reason why is that we stepped up our spending at our south Florida clubs in anticipation of the pro football Championship. This quarter as I mentioned in the last call.

And we also remodeled and expanded our bombshells in Dallas, We expect these investments to have significant pay off.

Please turn to slide 11 to review our capital allocation strategy.

We don't have any updates on this slide from two weeks ago, we just like to reiterate that based on where we are today, we continue to be comfortable buying back shares up to $32 per share.

Please turn to slide 12 to review the progress we have achieved with our capital allocation strategy. Since we started going in fiscal 16.

Revenues have grown about 34% based on a 7% increase in unit and a 25% increase in average revenue per unit.

That reflects our strategy of weeding out for performing locations organically growing better locations and acquiring our building in the case, a bombshells larger revenue generating locations.

With this base of business, we have generated a 124% increase in free cash flow.

As we've shown on a previous slide this reflects our ability to convert revenue dollars into more free cash flow dollars at the same time, we have reduced common shares outstanding close to 7% and total over the last five years, we've spent $13.6 million to acquire 1.2 million shares for an average price of about 11 43 for sure.

There.

Please turn to slide 13 to review our long term debt.

Long term debt net of loan costs fell $1.7 million from September thirtyth and $11.3 million from a year ago that reflects scheduled debt amortization debt pay down the result of certain asset sale and new debt associated with the development of our new bombshells.

We added a notation on this slide regarding our operating lease liabilities inline with the new accounting standard they totaled $28.3 million as of December 30, Onest. He's our liability is not that as I'd refer to them on our last call.

Please turn to slide 14 for a look at our debt Manageability, which continues to look good.

As I mentioned earlier during the during and subsequent to the first quarter, we limited eliminated $10.8 million of near term non reality balloon payments. We did this to increase our financial flexibility by eliminate any large cash needs for debt repayment.

During the quarter, we moved $3 million due in may of this year to fiscal 2003.

That is already incorporated in the Bar chart on this slide subsequent to the quarter, we converted to balloons totaling $7.8 million and a 10 year notes.

That's not reflected in our maturities bar chart yet so the next time you see this chart $4 million and non really balloon well come out of fiscal 21, and $3.8 million and non really blues will come out of fiscal 2002.

Looking at other debt matrix the ratio of long term debt to trailing 12 month adjusted EBITDA continued to fall that's largely due to our reduce debt and stable EBITDA and occupancy costs fell to 7.3% of revenues that largely reflects increased revenues from bombshells, including the Kt location, which opened during the first quarter.

To conclude please turn to slide 15.

Going forward, our focus remains the same running the business for maximum free cash flow.

Looking at night clubs, our priorities continue.

Our continuing to improve operations finalize and integrating our northeast corridor acquisition, and ensuring that any acquisition opportunities fit our parameters.

Regarding bombshells, our parties are guiding all new locations to ensure their success and continue to grow same store sales and margins at older units.

In terms of asset management, we would like to close all of our bidding opportunities.

We continue to be focus and we have the financial strength to grow free cash flow per share at least 10% to 15% through a combination of buying back shares buying the right clubs in the right markets and of course internal growth.

Now that we have filed our 10-Q, we're up to date with our filings and look forward to resuming our pre fiscal 17 track record of always filing on time.

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

Thank you we will now be conducting a question and answer session. If you'd like to ask your question you May Press star one on your telephone keypad a confirmation total indicate your line is in the question Q you May Press Star too if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing and starkey.

Our first question comes from the line of Marco Rodriguez with Stonegate Capital Partners. Please proceed with your question.

Hey, guys. Thanks for taking my questions.

Real quick just wanted to circle on the accounting costs. The extra costs you guys are expected in Q2.

Can you quantify how much.

You're expecting to to be excessive if you will.

Oh, I mean, I don't have the numbers, yet obviously, because we're still in the Q.

But you know several hundred thousand dollars Oh, the auditing fees will be paid in this quarter.

For that for the 19 audit.

And alliance overtime.

Right. So I think you identified about a half a million in in Q1 that was excessive so maybe two 300 in Q2.

Possibly could be a little higher I I get that it's just too early we don't have all the I mean, we just filed the KC weeks ago I don't think we've gotten all the bills in from the auditors from that period, yet from the January when the January read yet even.

Understood.

And then as it relates to Bombshells, just wondering if you might be able to help us understand in quantify some of the the preopening costs.

Associated with the ones you just hoping here in the last couple of quarters.

Sure It well I mean, we've had to carry management an average store has about 10 managers.

Our average manager go through a training process of four to six month. So we've been carrying for almost a year and a half now.

An excessive amount of additional managers because we knew we were opening all these stores.

So we've had manners and training we've had a cooks in training.

Excuse me kitchen managers and just other staff Rainer, Jeff we knew disorder openings, we run our staff a little higher.

Higher than average and of course Preopening, we have our training teams when our training things are actually opening stores, a there's a lot of additional costs.

In the first month at a stores open.

Associated with you know with actually opening the store.

Got it and last question kind of a difficult one here a big unknown. The current a virus and a lot of the news just kind of come to the forefront here in the U.S. and obviously with all your locations in some pretty major cities. Just wondering kind of how are you guys are thinking about that and then I know it's still very early days, what have you seen any sort of.

The.

Change in the traffic patterns I at your places.

Well, we've seen nothing right now our numbers are fantastic I mean, I guess people are going out more right now just in case, they get lockup for two weeks after a green about some of those cruise ship quarantined like I said, so far we haven't we haven't seen any effect.

Obviously, the virus isn't in any of our market.

At this time, so we will monitor it Anna and I basically follow the advice of a health officials at the time.

What we need to do.

Got it thanks, Mike I appreciate your time.

Okay.

As a reminder, it is star one to ask your question. Our next question comes from the line of Jason So were with Orchard well. Please proceed with your question.

Hi, guys.

Quick question for you just.

Reiterate a little bit more if we can't on the stock buybacks, so basically you're saying you've got $13 million available for the buybacks as of today.

And when can you commence doing that and it approximately how much of the average daily volume can you do.

Well I mean, we only we buy within safe Harbor, or we do block transactions, where Ics, which which exempt us.

Well you know so we follow those deals are basically right now.

Were current.

So as long as we don't have any material inside information, we can purchase stock within.

Three days from today.

Typically what the rules are for us.

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

Correct. Okay. So so if anything you know it could be looking at like a $6 million surprise at some point throughout the year.

Oh, well again remember that's not all profit on those on those sales. We do have we do have costs on those sales, but oh, yeah, there will definitely be some upside.

On the sales of of the assets as as we move through the as we move through the year.

When you're doing the pause when you're looking at the Bombshells properties do you find that actually just like putting your location. There you maybe at some point of come up with an average that it gets what every time, we buy a property. The subsequent property goes up by 30% or something because obviously, there's I love your idea about like making sure that the businesses that you're selling to work comp.

Entry to the to the club itself, where those restaurants.

I mean, if it's buried.

You know, we basically done three of these developments.

One is completely under contract hopefully we've closed.

I think were scheduled to close in the next three weeks a on the last piece of that property Oh, We originally bought the property for about a just under $9 a foot we put about $2 a foot into a developmental cost you know, bringing in a utilities and.

And and retention and those types of things. So we had just under $11 a foot a into the property. After we built our store we've contracted the property or the first lot I think we sold at 16 a foot in the second lot. We've got under contract at 18, a foot. So obviously, we add significant value as as more.

Our as more places are developed and build there of the other property we bought a considerable amount of property. We've got a one piece sold a for almost double what we paid for the property originally which the frontage piece, we've got a piece on the back under contract.

At about 40% over what we paid for the property.

We'll have but you will have an additional piece there for sale and we still have a the in apparently and we still have both of those.

Well those properties listed for sale, we do not have a contract are you there yet, but there's a lot of road construction going on right, they're down there and we knew it was going to be you bought the Atlanta really cheap and we knew was going to be a consumer amount of time.

That we'd probably have to hold the land that up to about 18 months. It's been about 12. So far so I think in the next six months is that construction starts to complete we'll we'll see activity on that property down there as well.

That's great all right well, thank you very much guys awesome.

Yes.

As a reminder, it is star one to ask your question. Our next question comes on line of Adam Wyden with ADW capital. Please proceed with your question.

This is just a follow up on on the last question here So I.

I guess you have.

Some real estate assets held for sale today that you expect to make a profit on on some capacity that will be in your your free cash flow and then some real estate is not it's kind of under development, but not quite held for sale. Let me can you try and quantify like you know over the next call. It 12 to 18 months, how much cash you can take out.

Real estate sales, maybe but not just crocket, but actual cash.

Yeah, I mean, it's really hard to say, because obviously I don't know when when things will close but if we saw everything if we sold all $16 million EUR 15 million $15.7 million with a property and we got you know.

What I consider are kind of minimum AFE price yep on it or probably an additional four to 6 million in cash and we to eliminate you know another 10 million in debt or so.

Okay. So you are saying is another $4 million above the carrying value.

Well above the debt value I don't know about carrying value yeah, but the level of that got remember we put after the province, we built some bombshells on some of this property. So what happened is let's say there is a loan on the property for for five and a half million dollars and we sell the access land, we the the way the nodes written.

We have to pay off 100% of the net proceeds to pay go against the alone even though the bombshells has worked $7 million by itself, we still the way the nose written we'd have to pay off now what we'll do is come December November December of this year as Chicago in Pittsburgh become two years old we will do a a a big refinance.

Again like we did in 2017, where we'll take all of our existing bombshells property the fee the the location in Pittsburgh location in Chicago.

And probably do have a refinance into a large long term 20 year real estate note, where we'll be able to pull out a pull out some of that equity probably on a 65 or 75% loan to value ratio or eliminate these other loans.

And then and then pay a payout from there.

Right the higher interest loans that you have outstanding Unsecure for 15 million unsecured you'll you'll be.

Replied that out and get more.

Turning into real estate that against the existing real estate kinda like we did in 2017 very similar.

Well, that's where we eliminate a whole bunch of note and come up with one turn it into one note.

That's a long.

Purpose.

Let me add something else. So you guys talking about $15 million authorize.

On the buyback you know your free cash flow I guess your run rate is about 30, but that probably on some level is burdened by your excess legal and accounting, which will kind of get through but I mean, when you think kind of forward in terms of closing for Boston and kind of.

Getting out of the kind of in the back half I mean, your your run rate free cash flow should be materially higher right. As you kind of pro forma for these accounting costs and kind of Boston I mean, how do you think about doing anything else with your money other than buying back stock I mean, you know that stock I mean, you know this corona virus on some level I guess.

Once again right I mean, the stock went almost 30 Bucks on you guys publishing your filings and now you're back at almost 20 and you know your your free cash flow run rate at the end of the year, we'll probably be closer to 40 than 30, I mean, I guess my kind of more philosophical question is how do you think about doing anything other than buying back stock here I mean, it seems like this is just a wonderful.

Opportunity I mean, do you think you can anymore like.

Well as you've seen in last quarter. That's all we did we bought back $6.4 million, where the stock.

You know with all the cash where we generated and all that we paid everything else.

You know we ended up with 1 million less than cash and we started the quarter within bought $6.4 million of the stock back.

As we move into this quarter that if the stock continues to sell off into next week, you know will will be out their buying it I'm sure.

So sure sure you know I mean, if they if the market wants to continue to discount.

Our assets.

We're going to continue to buying back.

So so is it fair to assume that you know next week the stocks in 18 Bucks. The you know you guys could I mean within the guidelines of you know safe Harbor and volume blocks. I mean, you could in theory execute against all 7% of that you know in whatever 14 million or 7% in the next you know kind of in this quarter all things being we have to have.

Obviously, we have to have about $8 million to $10 million and cash operate. So we were not going to we're not going to get ourselves into a situation, where we're short cash on hand, you know front for operations, but yeah, I mean, where would be we would be extremely aggressive it would depend on a blocks became available you on the last quarter, we had two major box come available.

That we bought from from a single Investor a if those blocks become available that we're definitely going to look at them. We've now eliminated a $10.8 million where the balloons.

Over the next few a few years a we've got a couple of smaller balloons out there's still work we're dealing with now we'll decide whether we're going to try to push those or pay those off as we move forward a the real estate balloons will be paid off with the property sale. So I'm not really worried about those.

[music].

I mean right now we're in a great position, where are you know we have the flexibility too.

Basically do whatever whatever we need to do or whatever we want to do depending on what the market allows us to do at fair market continues to allow us to by our own assets at these prices, where we will be very aggressive.

If they if they get more expensive, we if we get we will slow down and but unless they you know.

They get fully fully priced I don't see us doing a whole lot of stuff rather than buying back stock I mean, obviously, we're going to continue to grow the business at our 10% to 15% clip, but we're doing most of that through debt financing right now and I think we'll continue to do that I think after debt service or even with after debt service right now we're probably.

In the 300250 $300000, a week and free cash flow after debt service that we can put into the stock were setting on several million dollars of extra cash right now today and as we close on these other properties, we're going to pick up I.

I think the first two properties, we pick up about $2.8 million an additional cash.

So right now cashless isn't is not a problem for us so.

It's just going to be a matter of what whether we can find available shares for sale and and and you know what the prices continue to be.

Got it I.

I mean.

Can you talk a little bit about you know the last four openings of Bombshells and why you think they performed a lot better than than the previous ones.

Sure we've learned a lot.

You know opening 10 stores, you've got a cookie cutter you know a floor plan now so they're all almost identical we've learned our demographics, we've learned that traffic flows and what's important.

And the locations that that a that we bought we're you know very very good.

Good locations very high traffic location. So you know class a restaurant locations.

I think as we continue to look.

Think of it at a coffee the same amount to build a store whether I build it in a class eight location or class B locations. So we know before we were growing we weren't we weren't really is oh, let's say as wise as we are today, where we've really learned.

Which locations and what traffic flow patterns, we need to do the.

100000 dollar week 140000 dollar week store, so you're doing a you know five to 7 million dollar store.

I've looked at a lot of locations or that we passed on that are probably 4 million dollar you know 80000 90000 dollar weeks doors, so they're doing four four and a half million, but it cost me the same amount of money to go back towards the cost me to build one that does 7 million. So you know, we're trying to really hold out and find the right locations right now they'll these buildings.

Stores that will do these higher numbers.

Got it and in terms of I mean, you know you guys. I think you know more or less you publicly committed to you know not building any new bombshells. This year kind of showing people the kind of the true earnings power of a bombshells and kind of showing people kind of a clean year with less legal unless it.

Counting I mean, you know how looking forward I mean, you taking a step back I mean, you are grown. This thing you know from 2 million of EBITDA or whatever it was you know because only in years ago [laughter].

Maybe next year exiting this year, you'll be run rating close to 60.

So how do you think about the next you know move from 60 to 120 of EBITDA. I mean, you know you're you know there are lot of big strip club chains out there, but they're going to cost more than the smaller deals I mean, how do you think about kind of.

Getting your cost of capital to a level, where you're not just buying the stock, but you're able to use it to kind of do more transformational deals I mean, what what do you think the market needs to see to kind of get you to that next level. I mean, obviously you had to get your financials in order and all the rest and that was a prerequisite, but I mean do you think you have confidence that.

You'll be able to get back up I mean, no I think before all the financial.

I'll shenanigans, none because you guys were trading at 12, 13, 14, 15 times cash flow you I'm confidence that.

The numbers are in the order in the financial performance in there that you'll be able to get the stock back up to those types of levels, where you can use it to do more transformational deals.

I mean, the idea that's why put slide 13 in there.

To kind of show you our slide 12, I'm, sorry, slide 12 to kind of show the progress of the cap. Okay strategy, what we're gonna do there's going to keep taking it one you're at a time.

We're going to keep growing.

Growing at a 10% to 15%.

Compounding rate a free cash flow and eventually the market's gonna have to recognize that consistency I think once the market recognize that consistency they will get the multiple expansion.

Especially as we continue to prove ourselves over and over or what's going to average there's going to be a few shareholders left that won't sell their stock would have been with us for a long period of time that I've seen that consistency and so anybody else that wants to own part of this is gonna have to pay up for it I mean, that's kind of the reality of it.

Alright, well I look forward to the buyback alright, and I'll jump back down again.

Alright. Thanks.

Our next question comes from the line of Douglas Weiss with DSW investments. Please proceed with your question.

Thanks, Congrats on good quarter most of the questions ahead of us but.

The I guess on M&A, a little more.

Talk a little bit about how.

Much or how many deals you've seen in.

Well the pricing is interested in at this point.

Yeah, you know, we're seeing new ones every week pricing is not issue on most a lot of have to deal with whereas at.

In those types of things so some of its pricing.

We're just taking it easy right now or you know we've we've got this big acquisition, we're getting ready to close we want to get that done our accounting team needs a breather or at least for at least give them a couple of weeks you know or.

So what will let them, we'll let them relaxed for a couple of weeks or through spring break get them back to work in April.

Well I mean, we're looking at quite a bit of stop there. There's new stuff every every week I'm getting new emails new tax methods in cost from calls from people stuff all over the country right now.

So really it's just about finding what fits best for US next that's kind of what we're we've been discussing internally at some of these acquisitions that we have on our plate, which which one do we want to really move on next.

Mhm you think.

You think it's better or are you looking at expanding an existing markets or are they banners to are there other new markets you'd be interested in expanding into.

Oh, we're looking at ball or I mean, obviously existing markets are easier for us for the most part or something that's what we wanted to add new market, that's close to an existing market.

That works out best for Us that away we have in all support staff, that's close but we're also entering a new market picking up new market shares.

In another market I fight Pittsburgh in Chicago about very very good acquisitions for us. So those are that those are the types of acquisitions. We're looking at right now, it's something that price range as well, we'll try to stay in that you know probably $10 million to $15 million price range.

Mhm.

Right.

Oh.

It's easy.

Right right.

As far as.

Your accounting at Accountants, I know you brought it in outside consultant to help.

Remedy internal controls issues that were cited.

Would you say that work is is done at this point or have you kind of implemented their recommendations or is that still work process.

Well were three four or five of our material weaknesses.

I mean, if the constantly evolving right because the rules are constantly evolving.

And as we grow a you know we've got to make sure our systems grow the biggest problem. We had as we grew so fast and we were in the process of doing our ERP system, but it hasn't been put in place.

In 16, and 17 and we just grew so fast that a the accounting system couldn't keep up and as we converted from one accounting system to another Oh, you know while our numbers all check every time you know well there were there were no material changes do any of our financial or or anything material risk missed or re.

Statements of our financials, but we had to learn and you know the biggest problem you have one as you get larger and larger if you don't know what you don't know and so we had to go through that learning process or the new ERP system is incredible a it get I think it gets better every quarter, we find something new that it can do and and get better report.

And we're continuing to.

To grow within its very scalable.

So the nice thing is is if you know the go from.

You know.

Where we're at now to double in size or Triple in size. This software won't even though it will you won't even stretch it.

Right I don't know I don't know what numbers, how high would have to get to in revenues before this off or have any problems.

No.

Well, hopefully someday, we'll find out.

Right.

Oil prices have come down quite a or have you seen any impact in your Houston, either in the bombshells or no the clubs and as far as the attendance.

Nothing nothing in the since January and February for sure.

You know, we're watching to see through March.

We have any real effect the only we only have really two locations that are affected by oil prices that Odessa, and and Longview, Texas long He's a very small club anyway.

You wouldn't even know if it's affected we know <unk> I mean, the market would never know it's too small a there that's a market that big market for us to two very large clubs up there very profitable clubs for a and so we watch that and we're definitely seeing from slowdown.

In that market on a year over year basis, but you know oil was I think $70 last year. It's in the 50 this year.

What does watch and see I mean, it's still very profitable still very profitable club fourth.

Like Houston is not really affect affected by oil at all or premium or really any of our other markets. I think the real markets that are affected if anything there help because gas prices get cheaper so people have more disposable income.

Right.

And then I guess last questions you give any thoughts generally on comps are looking out for the rest of the year I guess it sounds like the sporting calendars might be hopeful but.

You'd say there.

Yeah. This quarter I mean January for remarks gonna be some really nice comps.

I think our comps were a little weaker last year superbowl with a in Atlanta. So we didn't get any big push from that we've got a huge push from that this year.

Dnbi all star game this year as big for Us, So a and I'm, hoping that the.

So the college basketball turn was going to be fantastic for us too. So we'll watch as a as we move forward.

And the big fighting.

The fight last last weekend was great we had a really big big weekend.

Okay, Okay, well, thanks talking score.

Alright, thank you.

Our next question comes from the line of Darn Mccammon, a private investor. Please proceed with your question.

Hi, guys feel who have already been answered.

Can I get it I think you already partially answered this but maybe I can hear it again on the you had about a 2.5 million increase in SGN a cost.

Could you detail out how much of that was.

Non recurring onetime.

[noise] <unk>, probably not I.

I mean.

To be honest with it we've been too busy getting everything done and not really looking at what everything costs.

I'm in the next quarter to yeah, we'll be able to break it out because you're gonna be able to see the differences, but as the cost come down.

But the reality of it isn't I'm <unk> I don't really now.

Oh, I know a lot of it as accounting a lot of its legal.

And a lot of it has been its overtime I mean are our accounting staff has been in this office for about eight am to Tenpm six days a week almost the entire month of January.

So.

Yeah.

Yeah, Okay, Bradley said that Brad Bradley said, the accounting legal is probably between 800000 a million of it.

Just by itself.

It's related okay. That's helpful. Okay I've done here.

Okay. Okay. So it adds up to about 27 cents a share so.

Yeah I.

[noise], maybe offline if I could get.

Well the more breakdown, we'd appreciate it but the.

The 800 to a million pretty helpful. All by itself actually.

Okay.

I'm going to asked the same thing I asked a couple of weeks ago, you're at a 9 million dollar run rate on your free cash flow, which way I am not up adds up to about 36 million.

Why are using 30 million for your stock buyback.

Well you got remember we did 9 million this quarter. So we know we don't we don't have those kinda numbers in the fourth quarter typically in the third quarter is usually a <unk> you know down a little bit.

Let's see how this January February March quarter goes it may well have some adjustment to it but I still think pretty much we're pretty close that 30 million actual run rate. So.

Well, we'll see I mean, the second half of the year will have a lot to tell it's hard it's just hard to tell with all these added expenses, where where for sure were at 30 millions if a number that we're most comparable with right now.

Fair enough, so you're going to look at it again in.

Well in your second quarter, which is after.

The March quarter domain.

Yeah, we should put our second quarter results out in May So we have a well have a better oh, we have a better idea of where we're at and how things are looking in may.

Okay. If we're going on we're gonna if we're going to be if if if our you know our run rate is increasing we will let you know.

At that point.

Okay.

I will just a comment I get confused every time you guys say Q1 Q2 Q3, you guys used December quarter March quarter September quarter December quarter. It would just easier to keep track of.

I know, but then I get confused [laughter], but yeah I understand what you're saying this is the December quarter. So in the March quarter, which will results will come out may Oh, well.

Well have a better idea of how these first six months have gone how the cost are starting to get in line.

And I think definitely they.

The June quarter will be the will be the real telltale, because I think will have no real outside cost other ordinary business cost I think in that quarter hopefully.

Okay, Okay actually be an exciting quarter for us, which will come out those results will be out in August.

Do you think.

You talked before about doing some or all of my modeling on bombshells.

You think you'll have no no no may August timeframe also.

As possible well see how these guys do that they're going to be sent around her twiddling their thumbs a lot compared to what they've had to do for the last two years, though.

Or maybe there was maybe they'll be able to model some of that for us. It gives a good idea of what's what is looking like I definitely want to see the you know the actual cash outlays on all these new stores, a with a property purchases and whatnot, especially as we start selling off. These are these added pieces. So we're getting a bunch of our cash back its going to be interesting to see the.

The cash on cash returns on these stores.

And you're going to share those kind of models listeners to some extent, both you know with the property sales and with though.

If we get them all done and put it out and all in a endo format that makes sense certain.

Well I mean is what it is right at the end of the day I mean, if it if it's it was a great you know that's even more read the showed it was good we can't be bad I can tell you because I I know I can see the returns I know what cash we spent I think because I think it's gonna be a lot better and weve, even anticipated as we as we thought these properties and the numbers.

Are coming in so strong from these new stores.

You know new stores are opening at about 150000 270000, a week in sales.

At that rate, even if even after the honeymoon periods over you know those stores or six six and a half 7 million dollar your stores.

And on what they hold out after that we started a 100 5000 70, and we you know back down to 121 10, and then and then climb and hold out you know steady hundred 3000 40000, a week, we're gonna be just under 7 million a unit on those new stores.

Which are very highly profitable.

I suspect kind of the same thing room, but.

The markets always get assume the worst unless you're giving them something concrete. So that's kind of why I would like to see it basically is to show the market that.

You know whatever's true I was what I want to see but I suspect would probably be true bone shoulder the better business when they think it is.

I mean, I think it's certainly starting to show that.

We just got bogged down with ER with accounting stuff and you know didn't have the time too.

Out here and evaluate every little nuances, we built these new stores, we're just more and lets get them built lets get them open.

And they will catch up catch up with its up later.

And I think Thats, where were going to see I guess as we get into this June quarter and get it may get into the end of this fiscal year.

In September you're you're going to start seeing those numbers.

I think we're in start hitting our margins were gonna air 15% to 21% margins. After our first go I mean, obviously, if these stores come into 15, 20% margins.

Or 18% to 21% margins.

And we do you know 45 million sales all of a sudden you've got bombshell.

Cranking up 45 million in revenues, a 9 million in earnings I think that's going to kind of show they pay for themselves pretty quick.

Yeah.

So on the M&A front, just an addendum to the previous question I've noticed that you tend to do most of your purchases towards the latter half of the calendar year.

Is there is that just coincidence or is there something built into it that that caught tends to happen.

No everybody wants to sell their clubs in August. This this is one of those businesses were in October the marching on this is the greatest business in the World then the summary slow down and then like Oh, then of course, you hit school start back up in August and we're all die and I got you see our fourth quarter I mean, even our numbers our fourth quarters. If you go back a history, our fourth quarter is our lowest revenue number.

Yeah.

And so that's one guy start thinking how I should get out of this business happens every year. So [laughter].

Nobody likes I wonder how to rewrite or what he wants to get out one yet. It's also guys got getting really serious about sounder clubs in the summer.

In August.

You know September starts coming around there really get serious about in the amount of time, we make a deal feed the due diligence you all the paperwork get it all close we close between you know November in February typically.

Okay.

That's interesting.

That's all I got thanks, guys alright, thanks, a lot.

Our next question comes on the line of Dan Boil with Sherwin Boyle. Please proceed with your question.

Hi, Eric first I want to complement you on on how how you handle just sell through this somewhat challenging period, we appreciate that.

Okay, Secondly, I'm a question on the on the acquisition, how how would actually works are there are there many.

Other bidders out there for for clubs of the short like Boston Miami or.

Is that.

Just.

How competitive are these sorts of.

Deals I mean I'm sure. There's other people out there that would love to be in these markets and and whatnot. They the trick is coming up with the cash.

I mean, if you look at an ex acquisition were an $11 million cash down.

To the buyer now we're borrowing that money from a bank, but the the seller still getting 11 million in cash so as far as the sellers concern is getting 11 million cash downey's carrying a $4 million note.

I don't think there's a lot of.

Other buyers out there that that have the wherewithal to pull up that you know 810 $11 million cash down payments.

Like our CIO has been able to do.

Second I think we have a great track record of closing transactions now.

Which I think that a you know the sellers are taken taking note of.

You know our reputation on actually not only making the deal but actually closing the transaction.

And and all of those all of the sellers or you know they get paid in their happy which you know definitely helps I think our reputation and helps us to be able to buy a.

Additional clubs.

Well when you do the you wish you net the EBITDA that you kind of put out.

For the acquisitions, you, you're sort of netting out as I understand it Oh rental expense, that's sort of net it for rental expense a is that am I correct on that.

Thought observation yeah. It we use it what's called adjusted EBITDA and what we do as we take that we take the.

The revenue that they're earning.

And let's say that the revenue, earning $3 million and then we buy the real estate for appraised value in the real estate seven point, some odd million, we would take an April 8% cap rate or about 630000, we take that sixthirty off at a 3 million, which will give us an adjusted EBITDA of about $2.4 million, we pay a three times multiple of that given.

It's a $7.2 million purchase price for the business. So we pay three times adjusted EBITDA for the business.

And then we buy the real estate in addition to that.

So if you want to do I've seen people out there, saying all you're paying six times or you're paying five times. If you want to if you want to look at an overall del sur we paid we bought we're buying $3 million and we're paying 15 million for it but we're getting a 7.8 mind our piece of real estate people want to forget that that real estate has real value and as we as we pay that real estate.

They down because we own it we pay those mortgages down we're able to go out and re borrow that money again at 5%, 5.5% and taken reinvest that money again in the next deal.

And so each deal I think gets a little bit better in a little bit better for us, especially as we're using you know, 100% basically 100% financing. So the reality of the company's not using a single dollar its own cash.

And are picking up 3 million in new dollars.

Got it and you got it right yeah.

Thanks for your hard work.

Thank you.

Our next question comes from the line of yarn named Mark with one main capital. Please proceed with your question.

Hey, guys congrats on another strong quarter.

I guess just looking your free cash flow minute, we look at the current run rate and look I think our previous or someone else asked on the call date. It looks like your run rate and closer to 36 million or free cash flow Guy I understand you're comfortable using 30 million as a starting point, there's a lot it.

Puts and takes this year, but just thinking about that 30 ish million starting point.

That number it sounds to me like is burdened by.

Basically a pre opening expenses from bombs to the new bombshells locations you have training costs associated with them with those are the pre opening expenses I guess, but you have the accounting charges. This year.

And the legal which sounds like that's a few million bucks.

Your maintenance Capex sounds like its elevated this year because you spent money on the Miami locations in anticipation of the strong Super Bowl, you're paying down debt associated with the asset sales that you remarks.

When you sell down so interest expense should go down and you have the north Eastern corridor acquisition as well as I guess next year, you're gonna have a full year benefit of the new bombshells locations that then open up and you know until midway through Q1 of this year. So just thinking right I mean, it if I if I look at a 30 million dollar run rate that you're talking about you're comfortable talk.

How about for this year is there any reason to saying that the run rate entering next year, assuming you don't do anymore.

Or don't open anymore, bombshells wont be higher than that you know decently higher than that thirtyish million or the 36 million that you're on reading.

Oh I agree if we were giving 21 run rate, yes. The 21 run rate was definitely be higher than the.

On the 30 million dollar 2020 run rate is.

All right, even going to be a lot a lot of there's a lot of there's a lot of onetime stuff in 20, that's that's should not carry over into 21. So our run rate going forward in a 21 is definitely going to be.

We'd be higher than 30 million.

And then and then any M&A on on top of that would would be incremental so you have that you're going to be a run rate about this year going into next year and then if you do.

Correct.

Correct any ideas that we grow that at a 10% to 15% clip right. So we need to do enough.

Nope acquisitions that.

We increased that that run rate of 10% to 15% annual growth rate.

Got it Okay and then if you guys were able to get back to I think in in 2018, you guys were trading at a double digit EBITDA multiple before all this stuff started if the stock price.

You guys got back I don't know 11, 12 times, EBITDA or where you were selling at.

18 months ago, I mean, do you think it's possible to accelerate.

And then and you potentially bigger deals if you're able to pay off what stock and if you're able to buy stuff that three to four times EBITDA.

Little bit of stock.

Instead of paying three to four times, you're willing to pay cyber six times, if you're selling for 11 or 12 times. When do you think that would help you accelerate M&A or if you're willing to pay a little more or wouldn't know well wouldn't hurt anytime we're willing to pay a little bit more we're going to have more deals on the table.

Number one what do we want to use equity or not I don't know, but if I didn't have to use my stock if I'd have to use my cash to buy back stock my cash will be building up so if I had bought back $6.4 million with the stock because the stock was trading it you know $34 right now and so my six or 7 million in cash was sitting on the books I could do a deal where are you know I can do.

A much larger deal where I use you know $10 million a company cash $10 million, where the bank that and you know there you know eight or $10 million worth of owner financing and I could be doing $30 million transaction.

Right and still not use any equity.

Yeah, Yeah, Yeah, Yeah, you get a much larger transaction.

So there's definitely benefit or to our to our equity trading at a you know what up at a fair market value.

Okay. Thanks.

[laughter].

They're out there Oh, yeah, you know we want to come up with the cash I mean like I said, there's deals out there, they're just going to require the some of the larger I call multi club operator, if they're going to want to considerable more amount of cash down you know there they're going to want they're gonna went 20 30 million in cash down on a $40 million $35 million acquisition.

Sure.

No, it's close to 50%, 60% cash down.

And so those things, we'll we're looking at.

And I think we're getting you know we'll get there.

In the meantime, we know we found some some nice.

Basically one off acquisitions were buying one club at a time.

And and we're continuing to hit our growth rate.

The only thing that you know the only concern for me right. Now is you know do I have the next.

Acquisitions lined up so I can continue to grow at that 10% to 15% growth rate I want to take slide 12, when I went to run it out you know five more years and I want to continue to see that compounded growth rate.

You know growing where free cash flow as you know you're doubling in five years every five years or so yeah. We can keep that go on where we're doubling free cash flow every five or six years.

You know then I think the market cannot continue to ignore.

The opportunity that we've created.

No have to start rewarding.

Already in the share price where it.

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

Oh, they want equity now yeah, I don't think we'd have a problem using or equity we use it for years.

It's just the problem is the map doesn't make sense because our equity at the most expensive.

Form of capital we have right now.

Yeah, especially you know now [laughter] well get back up there was gonna get down to down that you know that 32 with a 10% I'm borrow money at 5%.

Five in Africa, and I get to a you know get a 22% tax benefit on that so my true cost is 4% fourth quarter percent on the capital. So I would only use equity that's cost me 14, or 15% right now when I can use debt. This cost me 4%.

And that's really see with use an accurate with using equity so but if like you said, we're trading at 12 times cash flow now the sudden.

You know it might make more sense and when we will look that will do the math.

The beauty of it it's all fifth grade math.

You know, we just figure out the a the cost of capital and we use the cheapest capital we can't because that's what gives us the highest return.

All right.

All right. Thank you guys.

Right.

Our next question is a follow up question from the line of Adam Wyden with ADW ADW capital. Please proceed with your question.

Yeah. Its just a follow up on on your Ron's question, I think but I mean I totally get your math in terms of you know and it's like music to my ears. It's like you don't want to see you know says Hey, you know, 5% you know debt money a with a 22% you know tax shield that that's great.

I think what you are on might be getting out and perhaps what I'm getting at is it there's a balance in terms of optimal capital structure.

As it relates to you know if.

You know a investor like to see a certain amount of you know they don't like to see companies Accessibly Levered. So there is I mean, there even though you can borrow it.

A son or 4%, there's a limit to the amount of transactions you can do as it relates to the gross amount of debt or net debt to EBITDA. So I think I think maybe the question is maybe a question I have is that like you know if you could get your equity cost of capital, but I I haven't done the math on 12 times EBITDA, but I can I can probably do it you know its.

<unk> eight per se. It's do you have no capex, it's roughly an eight you know roughly an 8% pre tax yield and after tax it said [laughter] right. So if you could trade to 12 times EBITDA to 6% or equity old and you were able to buy assets out of 10 or no.

10, 12, 15% you know it would actually on the L. you the option to buy things faster because you wouldn't have to wait for the de leveraging so I guess my question is is you know you could access equity added you know and.

<unk>, 9% to 10% pretax and after tax whatever that will allow you to like you said not have to wait for the cash that you're kind of filling up on your books as it goes right you could buy something big and give equity the seller or more importantly, I don't know if you ever done. This go to a bank in say.

Hey, you know I want to raise $30 million to you know by X Y and Z Club I mean, I don't we didn't we didn't know seven in no way, we're very familiar with it.

You know when or whatever for equity get.

Our equity gets a the point, where it's cheaper us. These equity we will we can use equity were not if we're not adverse to issuing equity were only adverse to issuing equity at a high cost.

And if we can find the right acquisition of course, it would make a lot of sense I mean, if we're if we're getting 22% or 20, you know say were minor close to five times, we're getting a 20% yield and were able to do equity it even at 8% cost like you said, we're still going to 12% spread there and if we're doing it on a large scale transaction.

Oh, So you know 60 million dollar acquisition or $70 million acquisition, you know sudden yeah. It makes a whole lot of sense because.

No that's a lot of Ah.

A a pretty big number when you look at the when you look at the spreads.

Right and as you get and as you get larger presumably you know I'm sure. The multiple you know there's more diversity, you're more you're more diverse geographically I mean $60 million EBITDA business worth more than a 10 into 120 is worth more than a 60. So the bigger you got the the more the more justification you have for a better cost of capital and multiple.

So taking a step back how many how many large club chains are there in the United States I mean, it just how how fragmented do you think this whole thing is and you know how many no 10 plus million dollar you didn't change that you wouldn't be interested in I mean, how many of those existing United States right now.

There are several I I don't off top of my head, but I think there's you know.

Probably 500 clubs that we'd like to own out of those 500 clubs.

300 of them are owned by.

We left in 40 people.

So.

You know there's definitely some significant acquisition targets out there. We you know when we get serious about it.

They're doing it is what you're saying.

You got to have cash.

Yeah, we have that kind of cash available to us.

You know we go start knocking on different doors, we knock on the doors that we cannot that's the when you go to knock on doors, if I can't I cant consummated transaction.

With with the seller that I know that the seller that I know this out would be interested in.

So I haven't really they don't really talked to many very very large operators out there because we're just not in a position I think at this time to really close the transaction with [noise].

So we got to figure out how to get back to trading at 12 times EBITDA again not to answer.

Consistency, yeah, but that is the answer we've got to stay consistent.

That's all right well that's it that's what made thank you yeah. Thank you.

Are there any final questions. This is a last chance for questions.

[noise] [noise] there are no further questions in the Q.

This time I'd like to hand, it back to management for closing remarks.

Thank you operator, and thank you Eric.

Thank you everybody who called in with their questions Tonight.

We've included a few supplemental slides in our appendix.

I will also be meeting with investors and presenting on March 26 in New York that the Sidoti Spring Conference. If you are professional investor will like to say one on one with management. Please let me know just email me.

We might also hold to meet management that night, Rick's Cabaret, New York that hasn't been decided yet.

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

Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.