Gary Fishman - IR Eric Langan - Chairman, President and CEO Phillip Marshall - CFO

John Rolfe - Argand Capital Steven Martin - Slater Capital Management

Greetings and welcome to RCI Hospitality Holdings' Fiscal 2015 First Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Gary Fishman who handles Investor Relations for RCI.

Please turn to Slide 2. Thank you. I just want to remind everybody that our Safe Harbor statement is posted at the beginning of our conference call presentation. It reminds you that you may hear or see forward-looking statements that involve a number of risks and uncertainties. I urge you to read it. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments which occur afterwards. Please turn to Slide 3. I also direct you to the explanation of our non-GAAP and adjusted EBITDA measurements that we use and that are included in our presentation and our news release. Finally I would like to invite everyone in the New York City area to join us at Rick’s Cabaret New York tonight at 6 O' Clock for a firsthand look at one of our flagship club. Rick’s Cabaret New York is located at 50 West 33rd St. between 5th and Broadway. If you have an RSVP’ed e-mail me now or ask for me at the door. Now here is Eric Langan, President and CEO of RCI Hospitality.

Thank you, Gary. Good afternoon, everyone. You turn to Slide 4. As we anticipated on our last call, fiscal 2005 (sic) [2015] is off to a strong start. First quarter results showed strong revenue growth. We generated a record $36.5 million, up 24% year-over-year. We saw even better earnings growth. GAAP EPS was $0.32, up 28%. This included an impairment charge related to an underperforming club offset by a small gain. Excluding that, non-GAAP EPS was $0.47, up more than 50%. The quarter saw improved core operating margins in our night club segment and our Bombshells restaurant/bar segment. We also saw sharp increase in adjusted EBITDA, which reflects our cash generating power. Continuing our buyback program, we used some cash to repurchase close to 110,000 shares of common stock in the open market in the first quarter. Turning to Slide 5, several factors drove revenue growth. One was heavier traffic. We also had four more units than in the year ago quarter. Nine of our properties generated more than $1 million each in the quarter compared to only four a year ago. New clubs and restaurants added $6 million. That includes a full quarter of Vivid Cabaret New York and Rick’s Cabaret Odessa. It also reflects four new Bombshells opened over the past years, [indiscernible] for all intents and purposes in the fiscal 2015 first quarter. There was only one Bombshells opened in the year ago quarter. Same store sales were up more than 4%. Turning to Slide 6, as I mentioned earlier, margins improved. For the purpose of this discussion, we're using our non-GAAP operating margin calculation. This excludes the impairment charges and some other items. Non-GAAP operating margin was 25% in the first quarter, up from 22.6% in the year-ago quarter. This reflects higher revenues, the elimination of three unprofitable adult clubs and the growing performance of Bombshells. In terms of our expenses, I would like to note a few items. Cost of goods was a little higher as a percentage of revenues, primarily due to more restaurant food sales. Insurance declined due to our new insurance contract and rent plus interest, which is now -- which is how we measure the cost of occupancy sale, [indiscernible] a significant reduction in debt in the fiscal 2014 fourth quarter. The year ago quarter also included temporary higher rent in Rick’s Cabaret in New York. There were two non-recurring items in this quarter. We had a $1.4 million non-cash impairment charge related to Temptations Cabaret in Lubbock, Texas, where we're reducing hours there as part of our margin improvement efforts. We also had a small non-cash gain related to our robust investment. Turning to Slide 7, in addition to higher earnings, our first quarter performance resulted in more than a 32% year-over-year increase in our adjusted EBITDA to $9.7 million. Turning to Slide 8, our balance sheet remains solid. Compared to the end of the last fiscal year, assets increased a little. That's related to our robust investment. Long term debt declined a little. The Tootsie's related notes will be paid off with the March 1 payment. At 14%, Tootsie's was our most expensive debt. This is pretty meaningful paying off the Tootsie's debt because it should free up approximately $4 million in cash on an annualized basis. During the quarter, we financed $2 million of real estate debt with new bank debt at a considerably lower rate. We also borrowed $2 million for short-term cash needs. Shareholder equity increased primarily due to the increase in retained earnings. Turning to Slide number 9, looking at our new location schedule in the first quarter we added one new Bombshells that was in part -- that was in the South part of Houston. We're continuing to identify and investigate additional locations. As I mentioned on the last call, we also opened the Union Square Night Club. In the second quarter to date, we acquired the Down in Texas Saloon adult club in Austin as we previously announced. Later in fiscal 2015 we'll be opening the fifth Bombshells. This will be in the Willowbrook area of Northwest Houston. We didn't put The Seville Club of Minneapolis on here yet because we just announced the signing of its definitive agreement, but we expect to close on this club once all licensing is approved. Turning to Slide 10, with this quarter, we have begun to report segment results. Our Nightclub segment consists of 37 adult clubs and two night clubs. We had a good quarter in the business. Revenues were up close to 10% to more than $31 million. Unit count was level. Reported operating income increased more than 8%. Including the impairment charge, adjusted operating income increased close to 31% and the margin expanded to 25.1% of revenues from 21%. After acquisitions, we recently announced the acquisition of the Down in Texas Saloon in Austin as I mentioned and this morning we announced the definitive agreement to acquire Seville Club in Minneapolis. These are good solid clubs that will expand our presence in existing markets. Down in Texas Saloon is along the same shopping retail highway in Austin as our Rick’s Cabaret is one of our Bombshells. The Seville Club expands our presence in the attractive Minneapolis market, enabling us to own three of the top locations. [Indiscernible] already owns the Rick’s Cabaret Minneapolis and the Downtown Cabaret, two of our top revenue generating clubs. We anticipate both Down in Texas and The Seville will be accretive to earnings when they become part of our results. I'll talk more about club acquisitions within the context of our capital allocation strategy in a few minutes. Turning to Slide 11, we're proud to report Bombshells' first quarter as a segment. Revenues were up seven fold to close to $5 million. That reflects the five units we have today versus the one in a year ago quarter. The two new Houston units did much better than we expected. During the first quarter, their revenues ran higher than others due to the typical [indiscernible] base after their opening. Overall, our target continues to be an average of about 50,000 per week per store, a little more than $3 million annually. Looking at operating margins that expanded to close to 9% compared to a negative 20% last year. As revenues continue to build and training costs subside, we intend to anticipate continued margin expansion. As I noted on the last call, August has created unsolicited interest in franchising. We are in the process of actually putting together necessary disclosure documents to pursue that possible expansion avenue. Turning to Slide 12, we're talking about confidence in the business as well as the significant undervaluation of our shares we've continued to buy back stock in the open market. During the first quarter we again spend more than $1 million to buy back more than 100,000 shares. At the current rate, we could this year exceed how much we spent during our last big buyback in fiscal 2011. With close to $8 million, the remaining Board authorization, we'll focus our cash flow on buyback -- buying back shares. At this point, we believe our own assets represent a highly accretive acquisition. At anything under $12 per share, our own assets are the best value for our cash. While we're pleased with the adding of the Austin and the Minneapolis market share, moving forward, we intend to invest in new club acquisitions only when we believe we can make as much -- make a much better risk adjusted return on the assets versus buying our own. With the Minneapolis announcement, this is the last location we're looking at, at this special time as our own assets have at least the value of -- I am sorry, until such time as our own assets have at least the value of the clubs we're purchasing. And this means, we do nothing but allocate our cash to buying back shares and so be it. This is the absolute best risk adjusted return we believe we can invest our capital in. As market continue -- as market conditions dictate however, we may deviate from this capital allocation plan as we deem appropriate. Please turn to Slide 13, as we anticipated in the last conference call, the first quarter was a record revenue generating quarter. We continue to expect the second quarter will be even better and we continue to have a favorable outlook for fiscal 2015 as a whole due to our improved portfolio with all clubs and Bombshells growth. Another key factor in fiscal 2015 will be the strong line-up of major sporting events and locations where we have clubs and restaurants. We had a good pick up related to the Professional Football Championship last week at club such as Rick’s and Vivid Cabaret New York and our Jaguars in Phoenix. Vivid Cabaret will celebrate its first anniversary this week and leading into the pro basketball all-star break in New York City. Rick Cabaret New York will celebrate its 10th anniversary later this year. And this year RCI is celebrating its 20th anniversary as a publicly traded company. We are very proud of our track record of two decades of innovation in the adult club segment of the hospitality industry. We can on behalf of all RCI’s management and that of our subsidiary I’d like to thank our loyal shareholders for their support. With that, let’s open the line for questions. Operator?

Thank you. At this we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from John Rolfe from Argand Capital Advisors.

Hi, guys, nice quarter. I was hoping to get updates on a couple of issues which you obviously talked about in the past. I looked at the disclosure in the Q on the Texas poll tax and I guess if I had the characterizers on a quick read it looks like, last quarter you talked about being in sort of preliminary discussions with the authorities there about possible [settlement] [ph] repayment plans, that sort of thing in it and the disclosure this quarter almost looked like it was maybe a little more favorable to the company in terms of taking a harder line and withholding payments that sort thing. Am I misreading that or has there been any material change in terms of how you guys are thinking about the poll tax, the potential liability there, potential repayment schedule that sort of thing.

Yeah, well actually our stance haven’t really changed. We haven’t paid since the [fifth] [ph] quarter that the tax was enacted over seven years ago. We filed with the US Supreme Court, the group did. So we'll keep that tied up. We have a legislative session in Texas going right now. So I think there’s some action there with our lobbyist as well as we continue to be in negotiations to try to work out something with the state that is favorable or I should say the controller [ph] that’s favorable to all of us, works out for everyone. Nothing’s really changed.

But, if you were able to reach some agreement that you believe was favorable with the controller, and would you do anything definitive prior to the legal process concluding? I know you had gotten the demand for repayment, I think as of last quarter or something like that which caused some of the change in language in the filings, but I guess I’m just trying to understand, is there - is there a deal you could cut with the authorities where you’d signed a definitive agreement for some sort of repayment and then the sort of legal process that's still ongoing become irrelevant or just everything sort of hinge on conclusion of the last remaining hope on the legal end of things.

I think it's kind of both. I think what we’re trying to negotiate with the State at this point is some kind of discount where we would agree to the back taxes and pay some type of discounted, discounted expense, fee on those back taxes and then start paying going forward under protest with waiting for the outcome of the Supreme Court case.

Okay. So even if you started paying - based on some agreement of a plan, if things went favorably for you from a legal standpoint then you would seek to kind of claw those amounts back I guess at some point.

Yeah, except for the past due amount, I think part of the past due settle -- part of the deal was settling at a discount with no penalties, no interest and some type of payment [planner] [ph] or a discount for cash with the State that would probably require us to say, that money is gone, no matter what.

Got it.

And then we pay the full amount going forward under protest with the rights to recoup that should we prevail in court. That’s the plan. Basically what we want to do is get this large number off our current liabilities on the balance sheet, that’s the real effect for us. We've expensed the tax all along. So any discount would be an immediate one time income on our P&L.

Okay. And then could you just give two quick updates in terms of the REIT, I know last call you guys had talked about possibly, beginning to circulate an investment memo some point in early calendar 2015, any progress on the REIT and on timing and that sort of thing? And then secondly if you could just give a quick update on how things are going with the robust, with the energy drink business and sort of whether anything’s changed there or if that’s going well, according to plan or if any updates on that.

Sure, the REIT has been formed, they're in the process of putting together the Board of Directors and the Management. We're forming up the management company that will manage the assets for the REIT. That will be Rick's owned subsidiary and working on that agreement. And they're [indiscernible] from offering memorandum together hopefully, hopefully be finished this quarter, but just remains a lot of legal work, so really kind of depends on the lawyers and of course us getting the right Board of Directors, well, I should say the REIT management putting the right Board of Directors and management together.

Okay. And then lastly…

There is really nothing reporting on Robust. We knew this quarter was going to be the quarter where we kind of see where it goes. We'll probably have more information for you and a much better idea of what’s going on as we get to the next conference call.

Okay. Thanks very much.

Thank you. [Operator Instructions] The next question comes from Steven Martin from Slater Capital Management.

Hi there, I know you were just saying that you'll give us more information on Robust next quarter, but can you comment on what you’re doing about distributors and why there was a gain in -- why you recorded a gain from your initial investment?

Sure, well we made initial investment a while back in 2013 and based on the purchase price, excuse me, GAAP accounting required us to take a step up basis on that 15% that we previously owned, we took controlling stake in the company.

So, that’s based on the value of the second tranche versus the value of the initial stake.

Yeah, and the fact that it's controlled stock, I think the control [stack] [ph] is really what plays the factor there.

And now robust is fully consolidated in these numbers?

Yes, it is. [Indiscernible] we owned it in the quarter, this will be the first quarter we actually own it for the whole quarter, the January, February, March quarter. [Indiscernible] question on the distributors, we're adding distributors almost on a weekly basis, some smaller, some larger. The real -- we believe that the real opportunity happens in March after the Monster payment is made to the Budweiser distributors, as the Budweiser distributor basically a lot of them have distributed Monster can’t really talk to us right now per their contract under the Coke and Monster deal where they're being -- basically being bought out in that transaction, will no longer be distributing Monster. After March 15, I believe is the date that that goes effective, but we believe we'll have a lot of Anheuser-Busch distributors to talk too.

If I looked at in the 10-Q Section 12, which is segment information, should I presume that Robust is included in what you call the other segments?

Yes, Robust is in other at this time. Until it becomes a large enough portion to be broken up, similar to the Bombshells that were just taken out on segment information in this quarter.

And the club -- the acquisition you announced today, how long do you expect that will take to get approvals and close and what does the financing look like?

It's taken about anywhere from 60 days to six months. It really depends on the Minneapolis City Counsel. We're not getting everything through the different approval processes in the city there. The financing -- semi partial bank financing, partial cash and some owner financing, similar to the Austin deal.

Okay. And you exploit I guess with that you won't really pay down any debt this quarter other than the Miami, the [test] [ph] region.

Well we're taking our normal debt payment of course. So we always I guess our current portion of long term debt is about $9 million for this year. So we'll pay off about $9 million in debt, but as we take up this new debt, we will kind of offset some of that, but our total debt level may go up, but we will have new assets, new revenue streams to offset that debt, new debt as well. Free cash to the company, free cash to open the company from the debt we're paying down, should continue in our overall what we consider occupancy cost, rent plus interest expense should continue to decline as a percentage of revenue going forward.

Okay. Thank you.

Thank you. [Operator Instructions] If there are no further questions, I'll turn the call back over to Gary Fishman for closing comments.

Thank you, operator and thank you, Eric. I want to remind everyday again that we do have a due diligence today at Rick’s Cabaret New York from 6 O' clock to 8 O' clock tonight. That's at 50 West 33rd, between 5th and Broadway. If you have an RSVP, you know me now or ask for me at the door and we look forward to reporting our fiscal 2015 second quarter sales and April and then our quarterly results in May. Thank you and good night. Best wishes for Happy Valentine's Day and please celebrate by going to one of our clubs or restaurants. Thank you, operator.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.