Q1 2021 RCI Hospitality Holdings Inc Earnings Call
Greetings and welcome to RCI Hospitality Holdings conference call and webcast.
At this time all participants are in a listen only mode. The question and exercise and 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 of this conference is being recorded it is now my pleasure to introduce Gary Fishman, who handles investor relations for RCI.
Thank you.
And for those of you listening to this call and the phone and you can find our presentation on the RCI website click company and Investor information and just under the RCI and logo that will take you to the company and Investor Info page scroll down a little and you'll find all of the necessary links for this call.
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 of and mind, you that you may hear or see forward looking statements and involve risks and uncertainties actual results may differ materially from those currently anticipated.
Disclaim any obligations to update the information disclosed in this call as a result of the developments that occur afterwards.
Please turn to slide three I also direct you to the explanation of non-GAAP measurements that we use.
And now I'm pleased to introduce Eric Langan, President and CEO of RCI hospitality alright.
And thank you for joining us today.
I'm here with our CFO of Bradley share.
After the market closed today, we reported our first quarter results for the period ended December 31.
The company and nightclubs generate of their best performance since the pandemic began and.
We also continue the Bruce and produce strong bombshells result.
This enabled us to keep our teams employed generate free cash flow build cash and achieved operating and net profitability on a GAAP and non-GAAP basis.
And once again, we thank our loyal customers and dedicated team members and steadfast investors look.
Looking ahead, and we're continuing to work on all fronts to grow free cash flow beginning with our nightclub segment, we are evaluating a number of potential acquisitions and looking for that right fit.
With Bombshell, the recently acquired of Great site, and the Dallas area and are conducting due diligence on three more locations.
We are also closely collaborating with our initial franchisee on their first location and San Antonio and talking to additional parties and search of potential franchisees for other areas.
We are awaiting results of appraisals as part of our effort to refinance the majority of our debt and to a long term real estate back loan and an effort to lower overall interest rate reduced principal reduction payments and eliminate all short term balloons.
Our outlook is more positive than on our last call state and local governments seem to be a little more comfortable with letting people go back to restaurants, and the holiday Covid wave of subsiding and vaccinations are increasing.
And we're happy to have opened our Chicago and other Illinois clubs. This past weekend and are excited about reopening and New York City on the 12th.
And while there are occupancy of time restrictions at many locations and it's nice to have our teams back to work.
And here's Bradley to review the financials, and then I'll return to wrap up one of the question and answer session.
Thanks, Eric and good afternoon to those who tuned in on the call. We reported total revenues of $38 $4 million for the first fiscal quarter that and up 33% sequentially from the prior quarter GAAP EPS was $1.07 and non-GAAP EPS was <unk> 39, and then the difference came from a gain on ex debt extinguishment.
And reversal of prior quarter's tax allowance.
Weighted average shares outstanding went down 3% year over year.
Looking at cash we had $70 million at December 31.
First quarter net cash from operating activities was $6 $3 million and free cash flow was $5 $7 million.
Please turn to page five.
And the nightclubs segment continued to rebound sequentially with more locations open on a more consistent basis revenue totaled $25 $2 million, that's down from a year ago, but more importantly, it is up 92% from the prior quarter 24 clubs were opened through the first quarter and 26 by quarter and to give you guys some color or.
Biggest two clubs, which are in the South Florida market. We're open the entire quarter for the first time since the pandemic started keep in mind. However that we still have clubs that are not operating at full capacity or normal operating hours.
Even though clubs that are open are doing well in this environment on.
On a year over year basis same store sales were only off by six 4%.
As a result of all of this operating margin of 33, 7% and operating income totaled $8 5 million.
Bombshells segment, please turn to page six the Bombshells segment turned in another strong performance and that's without the prior quarter's benefit of a strong sports lineup and warmer weather.
Total sales of $13 million were up 26% year over year and 12% on a same store sales basis. All 10 locations were opened during the quarter and continues to be open to date.
To give you some color all 10 performed well in particular, our newer locations meal delivery services also added $380000 and cells.
Operating margin was in line with expectations at 29%.
As a result operating profit totaled $2 $7 million up 73% year over year.
Margin and income benefited from a higher level of cells and more consistent traffic throughout the day as we continue to follow in the restrictions.
We believe that we have built a lot of momentum and the business and we expect bombshells will continue to be of strong performer for us, particularly now as the weather starts to get warmer.
And the page seven for a review of the few remaining items and our first quarter statement of operations.
Cost of goods sold as a percentage of revenues stayed in the 16%.
Of revenue range compared to the 14 per cent range last year. This was due to the change and sales mix, mainly more food and less service revenues salaries and wages were 29, 9% of revenue as compared to 27, 3%. This reflected the impact of fixed salaries compared to lower sales.
SG&A as a percentage of revenues at 31, 6% was lower than last year at 34, 2%. This was mainly due to the cost savings initiatives mentioned in previous calls and also lower variable expenses, partially offset by fixed cost.
And the nightclubs and bombshells segment, we've reduced advertising and marketing spend about $1 $2 million and the corporate segment, we've reduced audit and related legal fees of about $800000.
Depreciation and amortization were five 3% of revenue as compared to $4 six per cent due to lower revenues.
Interest expense was down two 1% due to the debt paid down prior to and during the first quarter.
There was a nonoperating gain of $4 $9 million pretax from debt extinguishment.
This reflected the forgiveness of 10 of our 12 SBA loans during the quarter as well as was as was discussed on the last call.
And there was also a tax benefit of $384000.
This was caused primarily by the reversal of the tax valuation allowance and Q4 2020 and the impact of the loan forgiveness.
Please turn to page eight.
We ended the quarter with $17 million of cash on hand of two year high during the first quarter free cash flow continued to rebound sequentially to $5 $7 million.
We have continued to stay free cash flow positive since the pandemic began.
As a percentage of revenues free cash flow also improved sequentially from 12% to 14, 8%.
We use our free cash flow of revenue as a measure of how well we're doing <unk>.
Converting revenue dollars to cash.
Our debt declined $6 $6 million from our September 30th year, and due to debt extinguishment and scheduled pay down.
We are now at our lowest debt level and almost two years and two years. We continue to be current on all of our debt current liabilities are also in good shape at $34 million. They are down about $3 million from September 30th and only up about 600000 from a year ago.
Please turn to page nine of our debt Pie chart.
We saw decreases in all categories of since September 30 of secured debt and now consist of.
The 63, 4% of debt secured by real estate.
The $18 five per cent list and a seller financing debt is secured by the respective clubs to which it applies.
The six 2% secured by other assets and <unk>.
Finally, the one 4% represented by the Texas Comptroller settlement. This is secured by business and assets of the clubs related to the settlement.
Now moving onto our unsecured debt consist of and what that consist of the 10, 1% that is listed as unsecured.
The 0.4% represented by our two remaining SBA loans as of December 31.
Last week, another one of the loans totaling $378000 was also forgiven.
Yeah.
Please turn to page 10 to review our debt Manageability.
As we reported on our last call, we moved and partially paid down of small non realty balloon during the first quarter.
And the second quarter, we added about $2 $107 million and real estate bank debt.
And Eric can elaborate more on that and a lot of little bit now.
Now, let me turn the call back over to Eric Thank you.
Alright, Thanks Pravin.
Turning to slide 11.
Last fall, we announced plans for bombshells and the next 10.
Our efforts to double the number of company owned locations over the next three years.
We believe the pandemic has created a unique and compelling opportunity and we have proved the viability of the concept of bombshells can easily self fund new units, we can access prime locations not previously available and in some cases, we can buy or lease them at significantly lower prices.
We are pleased to announce we have acquired a great site at a great price and Arlington, Texas, Arlington and the suburb of Dallas that is the home to AT&T Stadium and the Dallas Cowboys.
And just blocks from the Texas Rangers also we play we paid $2 9 million of which $726000 and cash and a $2 $175 million bank debt at 399% fixed for five years, where the 20 year amortization. This is the best rate on debt we have ever received.
We also are conducting due diligence on three other sites, one in Texas, and two and South Florida and.
In addition, we are actively working on bombshells the franchise and late December we announced our first franchisee.
And well established local private group that includes franchise restaurants and their holdings.
Terms call for the opening of three locations in San Antonio and and often the opened three more outside of the city. We are collaborating with them to ensure the success of their first location.
News that we have some of our first franchisee has generated a lot of new leads many of appear to be well qualified and we are and the process of building. These inquiries.
Please turn to page 12.
We have continued to talk to a lot of new investors. So I'd like to review our capital allocation strategy. Our goal is to drive shareholder value by increasing free cash flow per share at 10% to 15% on a compounded annual basis.
Our strategy of similar to those outlined in the book the outsiders. The author of William Thorndike studied companies the focus on generating cash flow per share and allocating that cash to generate more cash we have been applying the strategies since fiscal 2016 with three different actions subject of course, the whether there is other strategic rationale.
The first is mergers and acquisitions, specifically buying the right clubs in the right markets.
Look the by good solid cash line clubs at three to four times adjusted EBITDA using seller financing and acquiring the real estate at market value of our goal is to generate annual cash on cash returns of at least 25% to 33%.
Since we can't always by class and when we want our second strategy of using cash go organically, specifically expanding bombshells developed critical mass and market awareness the sell franchises and similar to acquiring clubs, we see we seek to earn at least 25% to 33% cash on cash returns.
The third is buying back shares when they get them on our free cash flow per share is more than 10%.
During the pandemic, our plans to acquire shares using the same formula, but only of cash on hand exceeds approximately $16 million to provide us with significant reserves.
That $2 million ex $2 million left and we send our last call, but we also are much more comfortable with our current locations open.
Under our buyback strategy during the first quarter, we purchased about 75000 shares of our common stock at an average price of $24 and <unk>.
For a total of about $1 8 million.
Please turn to page 13.
To sum up all of our accomplishments to date our business is recovering.
We have continued to achieve sequential rebound and nightclubs and produce strong year over year performance with bombshells and generating a growing amount of cash and we are increasingly optimistic as more clubs of reopening.
We are also executing on our capital out of creation strategy on all fronts. We have discussed we are planning discussions with a lot of club owners at our Expo in May.
We are developing the first of our new 10 of our next 10 bombshell with more on the way and bombshells and increasingly being recognized as the sport.
Strong sports bar restaurant franchise concept.
I'd also like the to let everybody know that I am very very per.
Route and the and excited for our teams.
Especially our operations teams nightclubs did unbelievable job and this quarter, thanks to our AD and a car and Dean Riordan and all of our regional managers really stepping up getting locations open and and capitalizing on every opportunity.
And to increase our business when we can and to control our cost and I really like to say, thanks to all of them for and I know a lot of extra effort went into to make and all of that happen and.
And with that let's open the call to questions operator.
Thank you, ladies and gentlemen at this time and we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue you.
You May press Star two if you would like to remove your question from the Q4 participants using speaker equipment and it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Greg <unk> with Sidoti. Please proceed with your question.
Hey, guys. Thanks for taking my questions just on New York reopening on the 12th any is that all three locations and New York and then are there any restrictions that are notable that youre aware of that we should be thinking about just in terms of how much juice and ramp up from the reopening.
Yeah, we're opening with the same restrictions reopened with last time of course last time of all of them for about three or four weeks.
Hopefully this time with the you know the current track record and that will stay open.
And still have to close it by midnight.
So we won't see full operations.
I'm going to give you an idea of around the country. We have some places where we have occupancy restrictions, but we don't have our restriction and some places have our restrictions, but not so much occupancy restrictions and social distancing restrictions somehow.
Somehow both.
And I believe we're starting to see.
Some of those.
The restrictions lesson and I think we'll continue to see that as we get through March April and I'm, hoping that by the end of May that the majority of the restrictions are.
Should be lifted.
It's hard to tell obviously, because it's very political steel and different politicians and different states have different people.
People advising them on when to open and how to open and and whatnot and Unfortunately, there's no.
And there's no straightforward science to it so everybody I think everybody just kind of of guessing and we will we just have to deal with that.
Got it and then last earnings call. When you mentioned the refinancing I believe you put out maybe a $5 million run rate. Once it took place rates have moved up a little so maybe should we be thinking a little bit lower than that or you guys still kind of comfortable with that number.
I mean, I think we're probably between five and and five 5% we haven't locked yet.
Because we don't have appraisals. So we don't have the full.
The full packages of two to present to the board yet I'm guessing I think they of appraisal or do the backed by the <unk>.
<unk> or the 16th I can't remember I can't remember off top my head here.
But basically by the middle of them by the Middle of February we'll have all of the appraisals in.
They've been waiting for our Q they had to have this quarters.
And financials.
To show that we're getting better and better each quarter, which of course, we have so that won't be an issue. So I believe that all.
All things all the things right now, we're probably looking at a closing on the loan between mid May and the and the Army mid March and the end of March and so therefore, we're going to have to see what rates are doing at that time.
Okay got it and the.
And I guess pre COVID-19.
And your expenses SG&A.
We're bracing I believe for some legal and audit expenses to roll off but I.
And I guess throughout the pandemic you did a good job rationalizing your expenses to the lower revenue run rate is there anything you think that could yet as we try and think of like what is the normalized.
Sort of SG&A run rate kind of be a little bit better than pre COVID-19 or.
Should we be thinking back to those levels.
I think we're going to be better than pre COVID-19.
And what we're definitely not going to pick up all of the the legal and accounting expenses that we had prior.
I think that a lot of other things, we've we've really gotten big on negotiating national contracts and lowering lowering costs every way we can.
We've cut marketing.
I think our marketing was down about 1 million to basically we've eliminated billboards we've eliminated radio advertising.
And really moved more towards social media.
I think that trend will continue with us and I think that will help keep our costs down.
At least for a while I mean at some point.
As competition opens and continues and and new places common stock.
Start reopening again.
And we will have to evaluate as we go but for the for the time being at least you know I think the next 12 to 18 months.
I think we're gonna be and a very great location of very great spot and we began the keep that between the 30 and 32%, which is where I think it's a you know and that's the low end of.
Over the last few years.
Great and then just one final one and you put out the bar for 10, new Bombshells locations and 36 months. If you can find the right location and then you gave us a little bit color on the Dallas site.
What is it what is your hurdle rate I know you guys look at real estate pretty closely.
We're on the I'm under the assumption that there's a lot of.
Places that might be attractively price, but as location, making a little bit scarce out there and kind of what are you seeing and the environment as you kind of.
Look at the real estate for these 10 locations.
What we're seeing is the the prime a locations that we are wanting arent for sale there for leaf.
And especially in the Florida market.
And Florida, we're working on one lease now.
And we've just turned in an LOI on another property.
And they've accepted the concept of we're waiting for them now to to counter our offer.
So hopefully that one may move a little quicker and then we have the other property.
We're waiting the developer bought $33 eight acres were buying two acres out of that site and we're just waiting for them to replenish the land right now that should be completed hopefully and the next three or four weeks and we will we've already got the bank financing lined up for that property.
So we will get that property close get our plans turned into the city get our billing permits and get started on that one as well. So basically we will have the right now with what we're looking at two lease locations and three owned locations, where we'll own the property the.
And the property in Dallas, we have.
Variance hearing coming up.
And the next couple of weeks and Florida, we have a variance hearing in March so everything is moving forward.
Average day will get quicker as we start getting building permits and building plans will start having a better idea of opening date.
Unfortunately, we can't control of that process, right, now, especially with Covid and the cities and how quickly they move to get our building permits issued but once these building permits are issued and then.
And then it becomes more of our control.
Through our general contractor to get everything moving pretty quickly.
Right.
Very helpful. Thanks, a lot guys.
Yep.
As a reminder, ladies and gentlemen, it is star one to ask the question. Our next question comes from the line of Adam Wyden with a D. W. Capital. Please proceed with your question.
Hey, guys can you hear me.
Yes, Sir how are you.
I'm doing well and I'm enjoying sunny, Florida, it's a the weather is beautiful and I've been fortunate enough to drive by churches, and Scarlets and its it looks like standing room only and.
Clearly getting New York back open is is critical although I never really underwrote that but I wanted to kind of build on Greg's. Greg's question. You know he was a little coy, but you know when we talked about kind of where you were on free cash flow right coming out of 'twenty called the calendar 2019.
<unk>, our first Q 'twenty and 'twenty pre Covid you guys were running you know call. It 60 million of EBITDA and call it $40 million of free cash right.
And bombshells was not doing whatever it was doing and I haven't looked at it 21% operating margin on 13, I know you did 30, and I and I don't know if you're allocating corporate against that but I mean, when I just kind of do back of the envelope math, you know and bombshells got hit a little bit this quarter I think because of.
Closures and and all of the rest off and on but I mean, when I kind of think about the business now I say, okay. You know of bombshells without the franchises and without the new locations, which you'll have I think you'll do about $60 million of sales and 30% margin and that's 18 of EBITDA and that didn't exist before and the old paradigm. So if I just kind of take the 60 you were doing before.
And five for kind of of the legal and accounting and all of the garbage from the FCC that isn't being duplicated and maybe give yourself credit for the marketing and the Billboards and I don't think that even does debt. So I get to like a number that looks more like 65, plus 18 at <unk> 83, and then when I kind of do of 10% stock comp and I mean, when you look and Australia and what they are.
In terms of restaurants, if you do call. It a 100 150 of sales and the nightclubs and the 10% stock comp I think I'm doing the math roughly the another $15 million of sales and that's all to the bottom line I mean, that's 90% margin. So youre looking at the business of doing close to 100 of EBITDA and when you adjust for the refinance.
And I don't have my model open, but I think my back of the envelope math is that's like about $8 a share of free cash of about $70 million right. Because you got the depreciation shield the at the corporate tax rate all the rest and so you know I guess my question to you is like Am I doing my math wrong. I mean is it conceivable that you doing 100 of EBITDA and.
And call. It 60, 70 of free cash and and more importantly, right like that does not give yourself credit for the allocation of the capital right and that's that's the second part of the stool or third part of the school right. You are franchising New Bombshells you are opening up new Bombshells you argue the.
And are buying more nightclubs.
Conceivably in 2022, if you guys get 100 on organic and you guys buy and another 25 of EBITDA and this could easily be of business that is you know call. It $125 50 of EBITDA and I mean look that that to me is a real public company I mean, it feels like we're on the precipice of being a real public company and I do the math 150.
The of EBITDA, all your debt property level debt I mean, if you I mean I look at del Frisco's and all of these other look at Chipotle 40 times EBITDA I mean, you know if you even trade at a modest multiple of <unk>.
10 times.
The 1 billion and the half dollar company I mean, Thats you know several multiples of where we're trading and that's on 'twenty and 'twenty two numbers I mean, what am I missing I mean, why are people shorting. The stock here I know you've had a run but I mean look you know at the end of the day, you can't acreage of stock price and you gotta anchored to numbers I mean am I doing my math wrong. I mean are we about to become the multibillion dollar company.
I mean, I think we're on the price of that of the leg there so to speak.
Sure.
I think as we open everything up and we're fully open and we have no restrictions, which I'm hoping to see.
And hopefully June definitely and our July 1st we get July July August September maybe our first.
Our first real quarter of of.
Of everything open everything and and being able to operate.
And what I call pre Covid normal.
Maybe we'll still have mass of them, but I think well you know.
Well at least the over 25% and 50% Occupancies will be opened two of four in the morning like we're supposed to be her or six in the morning like we're supposed to be they will do the things that we do.
I think we're probably.
On a on a run rate of $50 million to $55 million of quarter to be 200 $220 million and revenues.
And so you know you can do the math on the margins from there which is basically what you've done.
And youre not if if you're ahead of us youre not far ahead of us.
And if if we see the increase and.
And.
The other locations like we are seeing and Texas like we're seeing and Florida right now.
You you might be being conservative. It's just really it's hard to know for sure. So yes, I'm as optimistic as you are if that's what you're asking me well I look at the street number and Bloomberg and not yet if there's one analyst here, but why is the only one analyst why is this thing is of $100 million EBITDA company.
And you know Dana Telsey from Telsey Advisor group why don't we have you know the who.
Who is who of consumers I mean people say nightclubs and none of them because we're not looking to raise money at them and they don't want to do or they don't want to do and we're not giving and banking business. They don't want to write reports on us well, that's fine and I appreciate that we shouldn't raise any money I mean of $46 a share or whatever it is we shouldn't be raising money, especially if we're going to do $8 a share of free cash flow, we should be buying back share.
I mean, the irony is that and we have been well. This is the $160 stock. So I guess my question to you is like here you are sweating in the desert delivering.
Delivering God's work and people are spending and your face and that's 600000 of share short right like how do you see us converging to the right cost of capital because when I see us at the right cost of capital and we're trading at the yields that are substantially lower than what we're buying and the flywheel salaries. I mean, you know there are big assets out there.
Everybody who follows this industry knows that Toni Lowery at V. C. G. H. He went and he took a dip of private and away. There was another guy I found out about and Canada, whose huge there's another guy that we've talked about and Minnesota.
The big players out there and the reality is that the private equity isn't buying them and you have the right cost of capital and the base of the 150 right. Let's say you get the 100 150 of EBITDA, right and and you're trading at the right at the right multiple I mean, you can be buying companies that are doing 2030, 40 50 of EBITDA and then this becomes a real company I mean, I see a path.
And to hundreds of millions of dollars of EBITDA I think the only thing that is getting it all the way right and that was cost of capital and I'm, just curious how you're thinking about that.
I mean, I think we're and we're on the verge of where the casinos were and where we're and the final phase right, where I caught the the acceptance space.
And we're pushing into that phase right now, but we're still at the very beginning of it.
You know if you look at the what what do they say you know the first 10 per cent takes the longest time and then the next 40 happens.
Happens and about half of that time, and then that last 50 per cent happens overnight. So.
Right now we're on the verge of Oh of I think reached the right towards the end of that 10% and and hope we can go from 10 to the 50% acceptance level.
The much much quicker.
Just got a mood of farming, we just got to keep performing I'm Adam that's the name of the game, we gotta keep performing and they've got to keep putting out. These numbers, we've got to keep generating and the cash because no matter what at the end of the day no matter what everybody thinks of what anybody says about the the the business out of the company.
Does the cash can't be denied and if we're generating that type of cash.
And we're putting that cash back to work at 25% to 33% returns and then our 10% to 15% annual growth rate is going to be.
Dwarfs. The right are we worried of because we're just going to call a lot of water.
And most of your Bombshell, if you look at your Bombshells returns you're doing much better on a ROIC basis, and 25 to 30 I mean look if you just start doing bombshells that lease locations. The return on invested capital is 60 per cent and remember if you do of franchise Bombshell Youre not out of any capital. That's you know infinite return on invested capital. So when I look at your metrics I agree that's why we.
Moving those directions, yeah, yeah, and when I look at the metrics of your of your kind of incremental capital opportunities are fucking and incredible. So I mean look I I am so excited about what you have built you should really be proud of and I'm not part of you on the back and you should be putting on your back but it's just it.
The performance is so good it shouldn't be ignored anymore. So look I am I am happy to be the largest shareholder and this company. I think you are building a multibillion dollar company and you know look I I I really look forward to.
To see and the growth and well obviously you know you don't want to go out and raise capital and we live them and we're not going to do that again, but I would say you know on the margin I think you know more exposure through additional research analysts and all of the rest I mean look I think the.
This is an opportunity that is still very much misunderstood by the public markets and I will say that the sooner you get your cost of capital and line the sooner we start.
And enjoying the vicious cycle that is the public capital markets I mean, you know the <unk>.
The reason why the company like this would be public as to have access to capital and you've never had access to capital. So I. You know look called me a blind optimist, but I believe that if your turnover and our flocks and get in front of the right sell side guys of the buy side and you will get that cost of capital and this will not just the $1 billion company. It will be a multibillion dollar company.
You know.
From your mouth, the God's ears I hope so.
We're pushing for it we just got our cheapest loan ever of 399%.
And once we get our appraisals back we'll we'll close this loan with with the Centennial and our refi, which will free up $4 9 million and cash saving us over $1 8 million and interest expense of year I mean that.
That does that is bigger and bigger than when we did it when we did our $80 million loans and and have the savings in 2017 and that really started this run.
The.
It's just everything is coming together everything everything just reinforces the previous move and then and then the next move and so it's actually getting easier and easier.
To make to make the maneuvers, we need to make the find the properties we need.
Close the transactions, we've got the prototype store down.
So, there's it's they're getting easier to build and cheaper to build for us.
And I think as we continue to move forward.
And the returns are going to be better and better.
Great well look I, you know and I'm very very pleased with the performance and I look forward to fight and the good fight.
Yeah me too thanks, Adam.
And as a reminder, ladies and gentlemen, it is star one to ask the question.
Yeah.
Okay.
Yes.
Yeah.
Eric This is Gary I have received the question of you Eamonn.
Nobody was it in lung.
Among people that the franchise.
Franchise, and multi unit franchise operators.
And what parts of the country are they interested is that the.
Southern area or is it all over.
I mean, we've talked to people and all over.
The the country right now is just finding the right qualified people is our biggest concern right now.
So I mean and there were not.
Haven't been very it's been geographically, it's been very scattered as to where people are calling about.
Our next question comes from the line of Peter Siris, a private Investor. Please. Please proceed with your question.
Eric how are you.
A pretty good come a long way since the first day I met you and your office and got all of that for three hours per being 30 minutes late.
And how are you sir.
[laughter] that [laughter] I've never been late to of Friday appointment sense, and New York City, I would tell you that [laughter] and I and and what the world The soccer girls around the loop club.
And the.
And so funny.
I wanted.
And of I'd, just say I'm glad the stocks all of the 160. Thank you Adam.
And was about the.
And the club business.
And with all of the clubs that had been closed and such a long period of time.
Or are you seeing really motivated sellers at lower prices than you've seen before or not.
No not really.
All the big guys you know how are surviving and their way they know what their business is worth they know what their licenses worth.
A lot of the big his own their real estate. So they are not in those situations. We have seen we have gotten calls from I would call small to midsized clubs, where theyre very behind on the rent and the landlord is trying to throw them out and stuff like that and we've you know we've been talking with them and.
And you know trying to figure out if something makes sense.
But we're looking for.
Right now I mean, we're still being a little picky.
We are clean and for the fences, we want the quantity we want to be the big type of acquisitions like regardless of the Miami and Chicago, Rich Ricks and Pittsburgh.
You know the Boston type of transactions those are attractive and those of the transactions. We're looking for those of the clubs we love. The other clubs, we noticed I call them ATM machines. All we do is plug them in and and and just collect our cash.
So a lot of things.
And he was the kind of of anymore.
Okay. So it's not the small places that you could pick up all of the cheap it's the.
Big places, let's generate cash quickly.
And those are the ones, we're looking for and the owners that are just tired of it you're right you're tired of the hassle of you're tired of the you're tired of the cause of three o'clock in the morning, and you're tired of those type of things that was the owner of those owners are 60 70 years old.
The problem is they love they love the cash flow and Theyre, not so much and level of the business anymore and those of the transactions that we're looking for and we're trying to convince them to do it.
If they take paper they basically create an annuity for themselves they can collect and collect payments from us for five years 10 years 20 years.
We can structure of deal. However, they want they can to further tax break and further taxes Bacon and there's just a lot of options that we offer them as a public as a publicly traded company what's crazy as we're starting to get a lot of requests per for equity Hey, let's do a stock per stock, let's do a stock per stock deal you know forgive me, some stock and and and and and and take my club.
Because the stock or stock deals arent taxable they can make and sell the stock and and but I'm just not comparable even and even at 46 $48 I think the stokvel cheap I guess.
And I, just don't see with what we're seeing and our numbers with what is open I mean.
Without getting too much detail, but I mean.
What pieces.
Incredible right now, 50% occupancy and.
And killing the numbers from previous years.
You know, it's like how do you and Scarlett Scarlett and and Miami, Oh, My God I can't even of the 70% year over year numbers.
And with 50% occupancy.
Give me, let me open it up and pack it out again, and let me see what I can do.
And that's why I said, you know and Adam starts talking about Hey, Youre going to do this are you going to do that day.
It's not Crazy, if New York opened and so those types of free Chicago's opening.
As we promised we don't know and Chicago, We don't know and New York, because we're not open at night and we're only going to work and we're closing at 10 o'clock. We're closing at 11 o'clock, we're closer to 12 o'clock at night when we're open our normal hours I think those clubs are gonna do unbelievable numbers.
So I just want all of that.
Thanks.
One second of all the one of our Baltimore and the smoking that cost of capital.
All of them are you ruling out and it will.
And if you and that would include some equity.
In other words, we're not ruling it out now and we're definitely not really net out.
And.
What we would value that what we would value our paper at and that acquisition.
It would have to be negotiated.
So in other words, the if you took paper and.
Youre going to roll your club and or whatever and you said look I know your stock's trading for for 46, a day, but.
I'll give you some of the upside because I'm going to roll in and acquisition and I'll take stock at $54 a share of $56 here and and we'll just have to Christ the whole deal and I don't know what the number is at this point.
Because we're not that far along on any of these transactions, yet, but there will be.
And we are getting people who are asking for equity now so we will look at it and we will consider it.
But it's just it's kind of makes sense, we're not going to we're not going to make the mistakes for 2008, you know, we're not going to make those mistakes again.
And we're going to make sure that everything will have leak up lockout of our lockup and leak out agreement will have I mean, if we give up equity it's going to be a very tight control and.
The way that theyre going to orderly put that back into the market at some day in the future.
The cause for us it's about long term shareholder value and we're not going to do anything that could possibly jeopardize that.
And what price and and congratulations for managing through this.
And we'll make more of your lab. Thanks, and thank you our team has been unbelievable and I really appreciate them all have been great.
Yeah.
And as a reminder of the star one to ask a question. Our next question comes from the line of Alex Hardman, a private Investor. Please proceed with your question.
Eric.
I think two questions Don about round, the our capital allocation strategy of one.
First off and then it's been a while since I've ever had the thing about this but I mean finally that the stock price at the up there and above your free cash flow of 10.
And 10% level I was wondering of the once the bottom side I mean have you guys looked at possibly your current you pretty much the assuming a 10% to 15% growth rate have you thought about you know pumping that threshold of up to like a lot and you know assuming of 5% growth rate over five years at three.
And for buybacks instead of just using current free cash flow and then all of them. The top side you guys have like a hard and fast like we're definitely not going to do equity deals below a certain threshold, maybe like the cost of after tax.
Debt or something like that for sure I mean, if we can broaden and we just brought money and $3, 99% are our cash flow yield on our equity of and nowhere near $3 nine 9% yet.
So I mean, we're not we definitely of cheaper capital and equity at this point.
And even with the big loan if it's 555%.
The after tax yield on that still pretty low the stock would have to be another $20 higher to even be anywhere near that.
And that's kind of basing on.
2019 numbers I think going into we're going to get through 'twenty and 'twenty, one, but I think we're going and we're going to exit 'twenty and 'twenty one.
At a much much higher free cash flow run rate than we were in 2019, that's the definite.
And maybe we have more bombshells opened.
I think the clubs are going to be performing better and.
And the bombshells are performing better.
A lot of a lot of places are not reopening of SaaS, but COVID-19 put a lot of businesses out of.
We also have the benefit of the tax deductibility of.
And of meals and entertainment now.
At 100%, so that's going to make a big difference and spending.
And we go forward for the next few years.
There's just a lot of a lot of a lot of pluses there.
Make me say and I'm going to hold this equity really really close to the best non in a hurry to go out and.
I mean.
And I've had two investment bankers and I've already called me trying to get me to do convert to $60 trying to get me, the hey, what I sell equity.
And at an 8% discount to the current price market price no I won't I don't.
It's not going to happen.
Yeah, it's definitely not sure of that again.
And we've been there done that you now got the bloody T shirt.
And I'm not.
We're kind of continue with the plan, it's been working very very well for five years for us.
Are we excited about stock price share we get excited just like everybody else, but I always tell him of my friends and now because I got friends coming a lot of man and you go you made so much money of amazing was when he said hey, its monopoly money, Okay I can't do anything with it it just looks good stack of under my side of the board.
But it's.
It's really kind of an app and thought to the business. We really are focused on on the business side of things, we're focused on generating more and more free cash flow every year and doing the right deals just finding the right deals doing radios, we're not in a hurry forum. If we had 10 of them tomorrow and they were all right. Yes, we would do 10 deals tomorrow.
And if we don't find the deal and the next six months, that's right, we won't do a deal and Mexican month.
I mean, that's just the reality of it where we're not start for deals.
And we're not scared of them either at the rights of comes along we're going to make moves.
And there is stuff coming up I mean, there's we're kicking a lot of tires right now looking through a lot of windows.
And I'm seeing a lot of stuff that I like.
And now we're the work that they.
Used car lot, we're digging out of the Hood right, we're doing the inspections, where we're checking things out and we're going to work.
I think we're gonna start having quite a few.
And quite a few possibilities as we are as we progress through the next few months and it's going to be very exciting very exciting summer for us.
Sounds good I mean, and I'm looking forward to it.
Okay. Thanks.
Thanks, Alex.
And.
Our next question comes is a follow up question from the line of Greg <unk> with Sidoti. Please proceed with your question.
Hey, guys just flipping.
Flipping on to slide five can you just give us a little bit of color on just the operating margins of the nightclubs segment and how you got them kind of.
At $33 seven of it looks like a pretty big jump and then also.
Should that come down.
And <unk>.
Given the New York re openings at reduced capacity will that actually weigh on it.
And it'll be positive for the top line. Thanks.
Well I'll say, one thing and won't weigh on anything because you get them and we're paying all the expenses now we've kept our general managers on payroll through all of this.
And other key other key personnel and certain locations, we've kept on payroll and continue to pay them some of them since March of last year.
We have paid our rent we have paid our property taxes.
Our insurance, our electric bills and gas bills and water bills and so when a location and reopens.
I don't believe I have to of Bradley verify for me, but I don't believe we've had locations that are open.
And that we've kept open for more than three weeks, if theyre not generating.
More cash and they were costing closed.
So basically everything that open and everything its closes our anchor and as soon as it opens its when its wind and the sales.
So it's all of the floor, but I think the Atlas helps keep the margins of hot and just keeping our costs down I mean, our guys are watching cost like they've never watch costs before.
And they've always watch cost.
Very well.
We're questioning every dollar spent.
Through this through this whole COVID-19 process, we were forced to and the beauty of it. It was a it takes the of really really good lesson and the when you have the struggle and and and.
And scrutinize everything as you as the cash flow starts coming back in.
Once you once you create a bad habits of heart happy to break so we keep questioning there.
And.
And if this bill goes up of that they'll goes up or this item of charging us more and more why why are you why are you raising our prices why are you doing these things.
Everything is question now and I think that.
I think that's just going to be part of our internal culture at this point.
Uh huh.
So I don't think it will I don't think we'll get a lot of creep and obviously.
As things get better and better.
Every business has to have a creep, but if it's one of its one thing, but I don't think youre going to see that on the going to see us back on those high high numbers.
Of course, we're going to keep those down and every time something else opens I think we're just going to do better.
At this point on it.
Got it and then just just any color of how does the attendance looking for the XL.
I don't know yet I haven't talked to.
I haven't talked of dawn of who's the president of of 80 publications and.
And manages the Expo and runs everything I haven't talked to him about the occupancy I know that.
It was it was not looking good for the Vegas, which is why we ended up canceling and moving it to Miami and Mei.
And so we've.
And I've talked to the club owners. So I know a lot of guys are coming I don't know what kind of I don't think theyre going to come themselves that they're going to bring a bunch of people with them.
That I, just don't know yet, we'll probably won't have more color on that.
It will be I think this year most people plan Expo I think this year, but he's going to do it last minute.
Everybody is kind of in a wait and see mode. Okay. What's it going to be like how COVID-19 is going to be effect and what are the numbers looked like am I going to be vaccinated by then.
Those types of things are going to of a lot of effect on an expo turn out but I do have several.
And several meetings.
And may.
And with some groups that.
And that I've been looking to talk to you. So.
And we've all agreed the will meet we will meet at Expo and May so.
But that the that'll be a and I know those people will be there. So I think we're gonna get them I think we're going to get about AR and average or above average turn out.
I think will happen.
Got it thanks.
Yep.
As a reminder, it is star one to ask a question. Our next question is a follow up question from the line of Adam Wyden with a D. W. Capital. Please proceed with your question.
Yeah, Eric do me a favor can you stop taking questions from from your Guy Alex Hardman I mean, I think the guys got COVID-19 or he's got on hallucinogens, because I don't know what math he's doing to have of free cash flow yield lower than 10% I just bridge you to $8 a share of free cash flow that doesn't include <unk>.
Any new bombshells openings or any incremental M&A.
I think it's highly likely that your free cash flow was higher than the Bucks a share and last time I checked the stock was $46 last so you know if I open up my Ti 83, and I do eight divided by 46, it's about 17% of free cash flow yield. So I don't know what he's smoking you know look I think what you said, which was right is that there's a high probability that that number is actually of <unk>.
Other than that because what will happen is that everybody will come out of their house and you're seeing what tutsis and all of these guys are doing with 50% of occupancy I mean, how do we know that EBITDA is about $150 million you know organically because all of these things are comping up 60, and remember you have of 100% incremental margin on the nightclubs and once you get over one day.
Cost because remember you can just take the Aki you can just take the the cover of fee from 50 Bucks per 100, Bucks and discharge and make people do $2000 minimums, and New York I mean, remember I mean, I think you've talked about and I mean remember what they are and forgive.
We made the movie about it with J Lo and O seven pre Lehman brothers, and there were strippers and New York, making a million dollars of year I mean look they made of freaking movie about this I mean I believe the when we get out of this thing youre going to see.
What's the capacity restraints, taking down youre going out and you can see the whole $900 million of EBITDA is predicated on 10 per cent and stock comp one of its 51 of its 100 I mean the problem with this is you got people idiots on the conference call basically, saying you're trading at and at lower than the 10% free cash flow yield I mean, I literally want to hang up the phone and jump out my window.
And in 2019 I mean.
And you're looking at 2019.
And I think he is just looking at 2019 and he's looking trailing where looking forward.
And I think we got a line last.
Last time, I would never and stock market as the stock market looks forward remember you had bombshells, making no profit. Okay. We know the bombshells were making a ton of profit guess what share count is lower interest expenses lower G&A and marketing is lower and you know you don't have the said you don't have the accounting I mean, how do you I mean, it's like saying, Google Google made of <unk>.
Share two years ago, and now it's making debt do you want to do the dollar share you want the Ted I mean, it's literally I want to hang up the phone I'm, So angry and maybe that's the opportunity and maybe that's why the stocks still trading of 47, but I think the better answer is that we need to get people to actually Peel back the onion and do math I mean, I went to work and in Columbia business School, but this is the fifth.
Okay. You don't have to go the board and Columbia business School and do the math right you got the fixed cost you own the real estate you range.
Really really high incrementals on the nightclubs right.
Franchises are 100% margin right like rock.
We just kind of can we just got to keep the and any help and keep doing it keep showing it and we're going to get there.
And each quarter, it seems to be getting better and better I don't think this quarter is going to be any different I think January February March and.
And it's going to be better than October and November December.
And I for the first time and I think and.
And I look I can only go back seven years, when I went and went look and I didn't find one single January that ever beat of December this.
This was the first time ever that of January December and.
And our total revenue in January of higher than our total revenue in December.
Well, it's not.
And I talked a lot of the logical Eric I mean, the reality is I know I understand the magic.
And more things up and more people are getting comfortable and the spend is going up that's what we're really staying true.
And our service revenue slowed down our service revenues are still down 40%. So one of those service revenue has come back that that late night VIP spend that were not getting because of a clothing that 10 o'clock for clothing and 11 o'clock. That's the that's 95% margin money.
And that one of our 92% margin money that we're missing and I imagine doing 40% more revenue with 92% margins on it that's when we're going to that's one of the nightclubs, we're gonna be really cranking and I think we are thereby may I am not 100% positive today that may that day, but if I project out and.
And what I've seen and how I've watched things over the last you know Peter.
Covid crisis or what are we know we've suffered through and.
And that's when I see the I see the restrictions.
And the majority of these restrictions being lifted as we get through the end of May and if it's the end of July of this at the end of the July I mean, it's another 60 days of isn't going to be the end of the world.
And and and I mean, what's the right thing.
And they're slowly being.
Lifted right so.
And we're getting incremental growth and incremental growth of incremental growth sequential quarter over quarter growth through Covid and I think we're looking at and 812.
12 to 18 month run of this.
Well.
And then I'll have to judge and I just.
And I can't see three years out right now because I don't know what the world and I look like then right I mean.
And it's too hard to gauge exactly going to be but.
Even if we even if we grow like that for 18 months and then we have a 12 months or 18 months the decline of three or four of 5%.
And we're gonna be of astronomical numbers compared to where we are good day and our stock price is dirt cheap and.
Our free cash flow like you said the free cash flow you're looking at for 2019.
And it is chump change compared to where we're going to be by the by the end of 2022.
We're gonna be double line and the reality is once before at least and we talked about we talked about and we talked about Forrest Gump right. Like you know all of the other ships or crashed into the dock you staying alive and you know look I I'm, just telling you like your state of lives and the reality is is that win win.
The reality is when everybody else is there both crash and you got your boat, where you're going to catch all of the shrimp and so my point is everybody's going to want everybody wants shrimp and youre going to have it because remember.
And you look and listen to scan drunk and mellow, he's saying, it's going to be like the war and twenties theres going to be in place and people are and to spend money. So youre going into an environment that could identify like the war and twenties and youre, the and you're the only and you're the only.
Of our open and everybody else of alcohol.
And so like I don't know.
100, 120, <unk> hundred 58, you are going to be doing numbers that you've never seen before and all of them, saying is the sooner you are able to get people to recognize that the sooner you will be able to hit your cost of capital right take out your competition and make any money.
Of course, the vintage of that and make it even quicker.
And it is many of the stuff.
So we're feeling right.
And self were feeling and if we do better doing better gets easier.
Right.
The capital goes down it gets easier and easier to do better.
And you take advantage of the opportunity right I mean, a guy that you would normally pay six times EBITDA for if you're starting out there you'll tell me and my stock is cheap on page three five times EBITDA is the same thing as saying Hey, I'll pay you lower on your EBITDA right. If you want the equity.
And we pay use ex I'll pay you for all paid three and a half of me. It doesn't mean you have there's.
And there's all of these different ways around it is my point exactly at the end of the day at the end of the day of kind of boil down to the free cash flow per share generation and and and then making sure of the deal is accretive to that and as long as every deal is accretive to our free cash flow per share.
The the structures of secondary to that to that principle of generating additional free cash flow per share from every day.
So let me ask US why do you think that we have these bonehead investors on this conference call like you know like the Sky, Alex Hardman I mean, the guy shouldn't be allowed on the call I mean.
And some point I can't be the only person on the conference call doing math, we have seen out of other people doing math and we will stay here forever I mean, that's the reality of everybody and thank everybody everybody values their way I mean I understand that you. Just we just have to would you have to keep educating and and keeps showing and and and and keep increasing the free cash flow. That's the name of the game.
Eventually their map of catch up with ours.
And the meantime, you've got and at the right time, right I mean Oh.
Yeah.
And if you think.
Interest and other people, where we're not doing the math right. It's a better investment of 48 coming out of Covid than it was when I was buying and at 20 and 10 and 15 and are certainly a lot less risk yeah, Theres a lot less thing there's a lot less things that can go wrong today than there were you know and May and June and July when you were buying and that's for sure.
And we are on the back by the way I would argue that like in May June and July it wasn't clear on how and how the economy was going to rebound now I think it's a bundle of hardware to me that we're gonna be the already twenties blah.
Bubblegum shrimp is open for business, you've got all your votes, everybody else's crash into the into the shore and you know you got your net is open and hopefully you get your cost of capital. So youre, not just catching shrimp and you're like you're buying other people's vote right. You Gotta catch you on shrimp and then you've got the by other People's votes right. That's what we've got the yep.
Sure so they get they're both working.
The hardest part right now there's a lot of other boats of aren't working.
And we get there both work and again.
Good Alright, I'm done alright, Buddy how many other I hope we have no more Alex Hardman us on the call I Hope. The just you know everybody should go to sleep.
Alright, well I Gotta go soon so I appreciate the call. Thanks al.
Thanks, Adam.
Our next question comes from the line of Steve Martin with Slater. Please proceed with your question.
Hey, guys congratulations.
Okay. Thank you.
And I have some more of them when the game question.
Okay.
What do you think the timing is on the next couple of Bombshells getting open.
I think we're looking at sometime between August and November.
It's really hard to tell the cities or the.
And you would think they would be that would not very many people doing.
Growth and building right now that they would be very quick on turning stuff, but the.
And with Covid, I think theyre not in the offices and they're working from home there yeah. So I think the building permit process is a slow as it's ever been.
Even though there's even though there's not as many people trying to get the permits I think theres just the.
Slow turning them.
But I think we've got the permits and Arlington, we they've been filed last week.
And I believe the San Antonio our franchisees filing of permits and the next two weeks.
So basically.
It's really going to depend on how quickly theyre turned how could we get the building permit.
Both of our basic remodel so both of our I believe the construction time on bulk of being three to three to five months.
And so if we get the permits turning and the next 60 days instead of 90 days of 120 days I mean, that's.
And that's the real unknown is are we going and we're gonna start doing the two months, we can start billing and formats.
And we'll be up and four to five months after we start building.
The good news is by the net call I should know what permits have been issued where we're at and the construction phase and I've got to give you.
A better time line in August and November I mean, that's a form of timeline I understand that and so hopefully I'll be able to get you a much better oh.
Much better window.
Another of our dating question you had some properties for sale.
Both real estate and buildings, where do you stand on those.
Well we have.
A couple of contracts and I'm expecting and we've been negotiating on.
And hopefully we'll get some some earnest money contracts signed soon and get those processes started.
I do got it I've got a group that's looking at two properties in Dallas that we are.
That we have leased to third parties that they are now thinking about buying from us. So we may go ahead and sell those.
They were looking for a 10 31 tax free exchange.
And I mean, we'd rather have the capital right now.
To do other things with them and then the return we're making all of those leases.
We have a property debt.
And just bought and option on a group of an option on to close the <unk>.
Sometime between August and November.
So we will see what they do they're paying of 10000 of Mark.
And to basically keep the property off the market.
They are while they decide if theyre going to buy it or not.
We've got.
And like I say, a lot of talk and we just find the lease.
And I find today the tenants sign.
Tomorrow, we should have the tenants on at least on the.
Property up behind the Bombshells and 59, and we got a group of take has taken the entire building all of the 12000 corners of corporate shopping center, we built there they're going to rent the entire entire center.
That's a very a favorite of at least for US we're excited about that and they're and operator that only operates till seven PM at night.
And so that'll leave all of the parking for the entire shopping center per bombshells at night like we wanted.
So that's a win win for us.
And I'm excited and we're getting I think that the business world is waking up again.
The political climate.
Changed.
The uncertainties gone and we know we know.
What did you say that as I say the Devil we know.
And the.
We will know that level for the next four years and work business.
Businesses are planning accordingly, and.
People are growing up again, especially in Texas and Florida.
I'm, hoping that as the northern markets awaken.
And they'll see very similar.
Growth patterns that we're seeing here.
Alright, alright ex <unk>.
Yes.
You talked a little bit about <unk>.
Some of the northern markets one is the cost.
What are you seeing the competition in terms of our of lot of you're going to never rope and again, you know when New York as an example.
I'm hearing I mean, obviously, we don't know.
And Theres a couple of clubs and New York, there are not going to reopen their repurposing the properties.
And so hopefully we'll.
And what we'll see.
And most of our market and it doesn't we don't have a lot of competition and a lot of our markets.
Some of our Texas markets, we of competition I have seen some smaller clubs but of a.
Gone away I noticed that the like the the bombshells on $2 90 of the Hooters right down the street and I notice. The Hooters was all boarded up and had for sales sign on the building so.
And that that location has gone for Hooters.
Whether they're going to build of new one someplace else or what they're doing.
I don't have any clue, but.
That's the kind of stuff, we're seeing a lot of a lot of small restaurants of.
Gone out of business.
And especially.
You know the the mom and pop a little mom and pop restaurants, but just arent reopening.
The most of the restaurants and are reopening or the or the big chain restaurant.
But I think that are the only last for a brief period of time and.
And I think I'm guessing 12 to 18 months, we have a nice 12 to 18 month run.
And then I think you will see new entrepreneurs, awaken and and new plays and start to open and.
And competition.
We will start returning to a more normalized.
Deal, but I do think we are of very nice.
Window of opportunity here over the next 12 to 18 months.
Thanks, a lot.
And I appreciate the stock at this price, although I don't quite have the targets you guys.
And as a reminder, ladies and gentlemen, and it is star one to ask a question.
Are there any final questions. This is the last chance for questions.
Yes.
I'd like to hand, the call back to Gary Fishman for closing remarks.
Thank you everybody.
Eric and Bradley.
And on behalf of the company. The juries. Thank you for listening and Tonight and stay safe stay healthy and as always please visit one of our clubs and restaurants. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Yeah.