Greetings and welcome to the RCI Hospitality Holding's Fiscal 2017 First Quarter Conference Call and Webcast. At this time, all participants are in a listen-only-mode. A Question-and-Answer Session will follow the format 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 go ahead sir.

Thank you. Please everyone turn to Slide 2. Thank you. I wanted to remind everybody of our Safe Harbor statement posted at the beginning of our conference call presentation, reminding you that you may hear or see forward-looking statements that involve a number of risks and uncertainties and that do read. Actual results may differ materially from those currently anticipated and we disclaim any obligation to update information disclosed this call as a result of developments which occurs afterwards. Please turn to Slide 3. I also direct you to the explanation on the non-GAAP measurements that we use and that are included in our presentation and news release. Finally, I'd like to invite everyone in the New York City area to join us at Rick's Cabaret New York tonight at 6 PM to meet management at Rick's Cabaret, which is Manhattan's number one gentleman's club and we'll also have another tour of the new sister club, Hoops Cabaret and Sports Bar next door. Rick's Cabaret New York is located at 50 West 33rd Street between 5th and Broadway, around the corner from the Empire State building. If you haven't RSVPed already, ask for me at the door and the little snow we had in New York is not going to stop us. Now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality.

Thank you, Gary. Good afternoon everyone. Please turn to Slide 4. After the market, close, we announced our first quarter results for fiscal '17. We had a good solid quarter. The GAAP EPS increased 20% to $0.30 per, and non-GAAP EPS increased 3.2% to $0.03. I'm sorry $0.31. Free cash flow did very well. They came in at $5.1 million, up 33% year-over-year and that keeps us on track for our initial $18 million fiscal '17 target. Although we have already partially reported revenues, the details tell an even better story. Total revenues were up less than 1% year-over-year, due to the disposition of the number of underperformers in the fourth quarter of 2016. However as we indicated, same store sales were up 3.6%. But what's noteworthy is our high margin service revenues were up 6.6%. We also continued our share buyback program. During the quarter, we repurchased about 90,000 shares in the open market for than $1 million at an average of $12.28 per share. As a result, the basic and diluted share counts are now down 5.1% and 7.7% respectively from the first quarter of 2016. Please turn to Slide 5. Our focus at RCI continues to be growing free cash flow. Thus, our capital allocation strategy is critical. For those of you new to RCI, I'd like to take a minute to review the capital allocation strategy we put in place going into fiscal 2016. We have updated this slide for our lower share count due to buybacks and the pay-down of convertible debt. We have two major uses for our free cash flow. One is buying back shares. At $16 to $17 where the stock has traded recently, buying back shares generate an after-tax yield on free cash flow of 11% to 11.6%. We consider this…

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions]. Our first quarter comes from Frank Camma with Sidoti. Please proceed with your question.

Good. Couple of questions here. So the proceeds on the sales, which are pretty significant, I’m just wondering, so you have $10 million more left on that. So what’s the plan for that $10 million that’s coming in door, because you mentioned, you're kind of -- you’re not likely to pay down debt at this level and stock is going to up there. So what would be sort of -- for that excess cash if you will that's coming in the door near-term?

Sure. Well some of it will pay down debt. There's a couple of properties that have some small mortgages on them. So we'd probably just pay those off as part of the sale. But most of this property is own, free and clear and that cash will just go into our banks and be applied based on our capital allocation strategy. Obviously, it will depend on what our stock price is at the time and what other opportunities we have available to us out there.

Okay. That’s kind of fits into my second question, which is, you mentioned maintenance CapEx is about $2.5 million. But how much CapEx will you need for the three facilities, the three Bombshells that are coming on later this year, that you haven't spent already.

Okay. That we haven’t spent already. Probably an additional $3 million to $3.5 million. We're about halfway through the spending on the 290 location right now. So we'll have about other $1.5 million there. Other two locations are bank financed locations where we're going to be getting construction loans to do the buildings with. And so our out of pocket on both those locations will probably be closer to $1 million each.

Okay. And going back to the clubs, obviously nice pickup on the VIP spend as you pointed out. And I understand you've been making improvements to those clubs, but just wondering if you could speak to sort of the macro environment. Do you perhaps see a term there, just a general mood that might account for maybe a little pickup in the spending there, or do you think it's more what you've done to the properties?

I think it's little bit of both. Our Minnesota property is obviously the spin king. A lot of it is attributable settle to the Vikings coming back. But we did do about $300,000 upgrade to one of the clubs there. We're in the process of getting bids and we're going to -- we have a whole third floor of the building is not being used right now. We're going to move operations like the dressing room and other management office and stuff to that third floor and build a whole another section of VIP rooms on that second floor. A lot of this investment in Minnesota is in preparation for Super Bowl. We'll make our money back in a couple of days for all these investments in the clubs. And you can get long-term same store sales growth out of it as well of that in Minnesota market. And we're looking at some of our other locations, where we feel that we can make some small capital improvements and get higher same store sales returns.

Okay. And I guess the last one from me is just, can you talk a little bit more of the -- I think you mentioned that -- I was writing it real quick, but that actual dollar investments that you made in some of these investments during the quarter, like the computer system et cetera. Did you say 800,000 or was that -- okay, I thought you said…

On top of my head, because some of it's -- like the equipment was ordered in previous quarters. Now you're seeing expense, hitting expense lines to the tune of a few hundred thousand dollars. We have to bring in some consultants. We're redoing a lot of our tax work. We switched our taxing over to BDO, who's doing all our tax prep and tax work now. And so we're going through some processes with them and some reviews that are costing some money to some of our assets we're reformulating the depreciation schedules on. We obviously learned about the FICA credits which were a big hit for us and say that's a lot of money. There's a couple of other tax credit programs that we're working on with them right now that we're going to start working as well, hopefully reduce some of our tax liability going forward.

Thank you. our next question comes from Evan Tindell with Bireme Capital. Please proceed with your question.

I just had question on the capital expenditures. I thought that there was about $1 million that was corporate. What was that related to? And my second question is, as far as the franchising of Bombshell, if you guys just looked at sort of the -- looks like the maximum number of units that you guys are thinking you might be able to open in the next couple of years. If you just looked at like the people who are interested, and the capital that they have and how many they're talking about maybe being interested in, that sort of thing.

Sure. The corporate is really -- we built a new corporate headquarters. That was the final expense on that. And then part of that is, part of the ERP system as well. So that’s what that $1 million is. Most of it is obviously the final construction of our building as we move into, in October. As far as the Bombshells franchising, our plan is to open three to four company stores a year, for the next few years. I think what we'd like to see the first year in 2018, maybe open three franchise units, the following year maybe five to six franchising units, and then the following year six to nine franchising units as we bring people on. The way we do these units are multi-unit territories where they agree to build five locations over five years or three locations over three years something like that. So we will get one open one year and then the next year, we sign-up a new franchising, we'd open in a different area and then the second store would open in the previous area. So we get that much from the effect as we sign up more and more franchisees.

Okay. Great. One more question. Does you guys' assumption for maintenance CapEx vary a lot between the Strip Clubs and Bombshells?

It’s all pretty much -- from what I’m seeing, pretty much the same. When you do maintenance CapEx and you talk about it, you’re talking about carpet, chairs, paint, air conditioning maintenance, stuff like that. Most of Bombshells are brand new. So their air conditioning is very, very low right now. We do see some outdoor furniture stuff. So that’s why, there is really not -- even if I did full remodel -- I go in and gut a club and redo it, the total cost is about $300,000 for the equipment and chairs, carpet, some light and sound equipment, stuff like that, maybe some lockers, and then painting and minor carpentry stuff. So it’s not really expensive when you get an ongoing club, keeping it open and going. It’s a pretty inexpensive to keep those going. We don’t really have to spend a lot on new carpet in every three to five years, new chairs every three to five years and we launched all these clubs at different times. So obviously it would be a lot more if we did all of them at one-time, but you do few one year, and a few the next year and so on.

[Operator Instructions]. We have a question coming from Michael [indiscernible] with Sidoti. Please proceed with your question.

Okay. Yes. So we’re on same-store sales improvement this quarter, felt great to see. My question -- part of it was answered there around the expectations for the Bombshells franchise unit. More on the economic side, where expectations for the economics look like once you start signing these franchise sales in terms of franchising fees, initial cost, so on and so forth?

Well most of -- the franchise fee will cover most of the company's initial cost for us, help them to set the location up. Obviously the franchising agreement, it gives them about two weeks of training, they pay for that training. So we’ll put a team together, but we’ll be reimbursed for the majority of those costs. And then of course on an ongoing basis, about 5.5% of their gross revenues with an average store $4 million should mean each franchise store that opens up, should start generating about $200,000 a year in annual income for us.

Our next question comes from Peter [indiscernible], a Private Investor. Please proceed.

I actually had a bunch of questions. First question is just on Bombshells. Is -- because it's a new business. do you have a feeling as the units mature what kind of profitability you can see out of these things? I mean they look like even in the inventory stages they're making good money, but do you have any view as to sort of what the long-term unit-by-unit profitability would be?

Sure. To give you an example, while the overall concept may seem new, the actual first store opened almost four years ago. Actually, four years this April. And that location is now our most profitable location. So we're seeing as these things are -- as they're longer, we're actually doing better and better business. As we're building up, people get used to coming to our place to watch the games, and they get used to the afternoon happy hour. The changes in our menu last February made a big difference. We'll update our menu again here, real soon, get rid of some items that aren't selling as much, and bring some new items in just to keep it fresh. But from what we're -- and why I'm so excited about it is that the units, they have a really big honeymoon period and they shape up for about six to eight months and then they start building back up and then surpass even the numbers when we first opened. And so we're really excited about it. I think as we continue to move forward, I think we're going to get better and better numbers in the beginning and hold on to that. So hopefully we will have less of a slowdown period from the honeymoon period, as we're able to bring in better trained staff. As we have more and more stores, we’ve got rockstars in each location, we're going to move some of those rockstars into these new locations where before we're having a few trainers and then having a lot of brand new staff operating the unit, where now I think we’ll be able to bring in more staff longer term. That's why we really focused on opening in the Huston area, because we bring the new weight staff in, train them in our existing stores so that really when the new store opened everyone there is already trained. They're not learning on the fly. And in the beginning as we've opened these stores.

So Eric, in the first unit, in that mature unit what kind of four wall profitability do you have?

We don't normally discuss individual units. But that unit is generating about $1.5 million free cash flow a year right now.

Okay great. The second question is actually a two-part question, which is you sold -- you've got rid of a lot problem businesses. You've made your business easier okay. Theoretically that should free up trying to focus on making existing operations better, and maybe I don't know making more acquisitions. Can you -- as -- if we're going to look at this, first I guess how is your business better now from getting rid of the problems. And the second thing is if we were to look three years down the road, what are some of the things we might expect to see?

I think we freed up some management time when we sold the MD club. Of course, now Minnesota manger is there, after market we're seeing 40% to 60% year-over-year growth in. So we're very excited about that. We're also -- like I said we're going around and visiting our existing locations saying gee, this club is doing great, the VIP room is so small. What if we added another 800 square feet of VIP room spaces here? Could we generate more income? And so we're starting to see those. So you're starting to see these little investments. The big thing what the Minnesota club is we added a huge VIP section, then we redid the main floor entrance into the old VIP and made it much more visible, bottle service area. And so we see nice increases in revenues from that. Plus, I think, the other thing is, we get a location that's making us a lot of money and still going and going and going, and should we replace the chairs and carpet every now and then, but we don’t do like a big refresh. And so some of those locations we're reenergizing the employees, employee morale is way up where we're going in and its trivial cost. I mean we're spending $50,000 to $80,000 on a unit. And the nice thing is when you add that supplemental income, you had another 6% sales, 70% to 80% of that goes straight to the bottom-line. And so we’re seeing some nice increases that I think as we move forward we'll continue to see nice increases on the club level basis, on those clubs from that spend, which gives us cash on cash return in the 100% range or more.

And would you be expecting in the future to be making acquisitions of more clubs or is Bombshells generating free cash flow and buying back stock or both?

I think you’re going to see both. We’re actively looking at acquisitions again. With the stock in the range it's at we didn’t really, we weren’t in the market in January. So we’re letting our cash build-up. As that cash builds up, we’re going to start looking for place, but it was really easy before. We just put it into our stock. But the key is we’re not looking at top-line growth. We’re looking at growth in free cash flow. We want to see our free cash flow grow at 10% to 15% clip annually. And so we’re being very picky on acquisitions. There's plenty of stuff out there I can run out and buy right now. But all that doesn’t necessarily -- at least the standard I want of basically a three to four-year cash on cash pay back.

So your goal in making acquisitions is, if you can get to a three to four-year cash pay back, you will do it. If not, then you find others buying back stock or other things. That would be your hurdle rate?

Right. I'll just keep looking. I’m going to find, we’ve proven in the past, we’re going to find those opportunities. So we’ll just keep looking till we find those opportunities.

And the final question is, I’m curious how Hoops doing and if it's been hurt by the fact that there is no professional basketball team in New York City?

Well, as the Nicks were winning last night-- I didn’t see the final score, but they were winning when I looked

Eric, if they were in New York City, trust me, they did not win.

Well, one can hope. We’re doing pretty well at hoops. We’re starting to get really nice Happy Hour business built over there. It’s following in the trends of Vivid where, we’re following -- we have those expectations. We are hitting those expectations and we expect it to continue to build.

Great.

Vivid just had one of the best quarters it's had since it opened. And so we’re very excited that Hoops will follow and it is following and will continue to follow in the order that Rick's did and Vivid has done now and I think this new club will do the same.

Well, I just want to say as a long-term shareholder, it’s great to see the level of consistency that you’ve been building. And when I’m about to say, I don’t mean it in a funny way, but the management team from over -- the management team of this company has improved dramatically over the years, in the way that you operate the business. And you guys should be congratulated for that. So thank you.

Thank you. I appreciate it. Our next question comes from Darren McCammon with Proactive Financial. Please proceed with your question.

Hey, is there any reason -- Now that stock's gone up, is there any reason why you couldn't paydown the higher interest rate collateralized debt?

There is no reason we can't, other than the return isn't -- sure it's 12% debt, but as a 35% taxpayer, it's still a better return on our cash flow to buyback our own stock, even at $18.

I understand. I just wanted to know if there was some sort of agreement with the people you're paying the debt off to, that they didn’t want it back for any reason?

Only debt that we cannot pay off early without penalty is the Jaguar's debt and it's a full penalty for the first five years, which I believe ends in August of this year, or maybe May this year. That's 9.5% debt. And then after that I believe it's a 5% penalty if we pay it off early. So at some point I guess we could. Or maybe 10% penalty. I have to look and see. It's been long -- it's been almost five years since I really paid much attention. I know we did pay it off. So haven’t really revisited it much. But we haven't said hey, can we refinance this at 5% or 6% down the road and will it make sense when this time comes up. So it is on my calendar. Whenever it is, I have a calendar reminder the month before to talk some banks and do some math and see if that would make sense to refinance that debt. I think it's down to about $11 million. So it's not a huge amount, and it's being paid off pretty rapidly. I think we pay about $400,000 a month on that. And we also took the $9.9 million that was -- the $8 million balloon, we brought a little bit more, lowered the interest rate down as part of condition to get them to take an amortizing note and give us -- nearly made us take more money from him, because I guess he had cash around he could place anywhere. But we were happy to take it and put that on amortizing notes, so that that note is actually -- we're saving interest on that every month too as we start paying off. So we actually are making about $8 million in principal payments a year right now on all of our debt. So we have no interest only debt right now. All of our debt is amortizing now.

Fantastic okay good. Okay. So I have a little bit of an off-base question here. I also would like to congratulate you on your focus and management's focus on capital allocation and free cash flow. You've been doing a great job. I wonder -- I heard that to book the Outsiders, had something to do with your -- I don't know change in views. Is that true?

Certainly. I've read the books a couple of times. I even have an audio -- an audio book in my phone. I guess the big thing was -- I'm from the strip club business. I'll be honest. I started out as a manager of strip clubs, and we went public and we built into this company and we've kind of grown and grown. And so we have financial advisors that were telling us you have to have the growth, you need to get the top-line growing keep this going. And so we are focused on those things. And I think we did well with what our focus was. And the difference in that book has really taught us that the top-line is really not important. What's important as how much cash can we generate? And how are we reallocating that cash? How are we either returning to shareholders or creating more value for the shareholders with that cash? And what it really taught it me, we were always told, our paper is cheap, you can write stock checks all day long. Well of course, the investment banks love that, because they’re making fees. And we were learning as I start looking at it -- wait a minute, this is the most expensive money and outsiders look really taught me how expensive those stock checks were. And so now we use the formula and it really turned every decision into simple math. We know what our return is buying our own assets. So why would we pay more and I looked at some of deal we’ve done. Some of them were great deals. In 2008 we were making some fantastic deals. And some of the deals in 2011 and 2012 weren't so great, because our stock was so low, but we had gotten caught up in that write those paper checks, write those paper checks, the market will catch-up, the market will catch-up. And that book really kind of brought the thinking around to figuring out, okay, this is why -- that and -- another shareholder out of California, who got involved in the company, that really helped with that a lot, and got us to read the book. So it really helped. It’s made a big difference and basically all of our decision making.

Thanks for that color there. That actually helps quite a bit from a long-term point of view?

I mean, we’ve always been consistent with our philosophy. We just had to change the philosophy. That was the problem. We had our own philosophy I think there for a long time when we were just looking for that top-line growth. I mean, if you look -- I laugh you know, [indiscernible] I said this is the first year that we had top-line growth was negative $500,000, and our stock's performing better than it’s ever performed. So it’s like okay hold on a second. Just don’t approve that focus on the cash and as they say, cash is king. And I think it's going to open up a lot of opportunities for us. There is a lot of acquisitions out there, that are available to us right now, and we’re negotiating and slowly and surely, we're teaching owners that this is what the market's going to pay you. You can either keep operating your club, or you can sell to us.

So in my writing, in your trailing free cash flow is $22 million. I think you had a slide that says that. $21.8 million?

Yes. I believe so. Some of that was from the tax benefits from the FICA credit, offset by the New York state taxes a little bit. So I’m sticking right now with my $18 million. Let’s see how this next quarter is. If this next quarter is extremely strong, we may have to adjust that. If there's some things that pop-up in the next quarter on a cash flow basis, then we’ll look at that as well. But I’m very confident that $18 million is our reachable number. We’re going to do $18 million barring some unforeseen event. But I think that, we’re going to continue to base our capital allocation on $18 million free cash flow at this point. As things change and develop, as we open up the new Bombshells, if we make an acquisition and cash flow starts to increase, we’ll adjust the capital allocation model. And the beauty of it is, it all boils down to simple math and stock. If the cash flow gets ahead of the stock price, then we'll be buying back and stock and vice versa. The stock price gets way ahead of the model, then maybe there's a point where we can use some paper and reduce some debt. Because the paper will be cheaper than the debt. But right now, I really like where we're at. Our debt is very manageable based on the cash flow we have. I mean, we could sit here and do nothing for the next five years and have more cash in the bank and our debt -- to pay up all of debt in full. So I think we have lot of options, and like I said, it's all just simple math. I love it because it makes my job really easy. All I have to do is breakout the calculator, okay this deal makes sense; oh, this deal doesn't make sense.

Okay, well you read my mind on where I was going. So that was my last question.

[Operator Instructions]. There are no questions in queue. I would like to turn the call back over to management for closing comments.

Thank you, operator, and thank you Eric. If everybody could just turn to Slide 16, here is our reported calendar for the balance of the year. For those of you who might have joined us late, you can meet management at Rick's Cabaret New York from 6 to 8 clock at 50 West 33rd Street between 5th and Broadway. If you haven’t RSVPed, ask for me at the door. We'll also be providing tours of our new sister Club, Hoops Cabaret and Sports Bar next door. Looking further ahead on the calendar we'll be at the Sidoti Spring Investor Conference in New York City on March 29. This is an open conference for 13F and non-13F investors. Please email me and I'll arrange for you to attend and for one-on-one meeting with Eric. And I guess you could visit some other companies if you wanted to at that time. We currently plan to announce second quarter club on restaurant sales on April 11 and second quarter results on May 9. And on behalf of Eric, and Company and our subsidiaries thank you and good night. We'd also like to say a special thanks to our growing number of retail and institutional investors. And as always, please visit one of our clubs or restaurant. Thank you everybody.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.