Greetings everyone, and welcome to RCI Hospitality Holdings Fiscal 2018 Third Quarter Conference Call and Webcast. [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.

Thank you. For those of you listening to this call on the phone, you can find our conference call presentation on the RCI website, click the company and Investor Information just under the RCI logo, that will take you to the company and investor information page, scroll down a little and you'll find all the necessary links for the third quarter. Please turn to Slide 2; I want to remind everybody of our Safe Harbor statement, it's posted at the beginning of our conference call presentation, 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 on this call as a result of developments that occur afterwards. Please turn to Slide 3; I also direct you to the explanation on non-GAAP measurements that we use and are included in our presentation and news release. Finally, I'd like to invite everyone in the New York City area to join us tonight at 6 o'clock to meet management at Rick's Cabaret in New York, Manhattan's #1 gentleman's club. You can also tour it's sister club, Hoops Cabaret and Sports Bar, next door. Rick's is located at 50 West 33rd Street between Fifth Avenue and Broadway, around the corner from the Empire State Building. If you haven't RSVP-ed, ask for me at the door. Now, I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric?

Thanks, Gary. Good afternoon everyone. Please turn to Slide 4. After the market closed, we issued our third quarter earnings news release and filed our 10-Q. We reported another great quarter of strong core results. We are in active negotiations with club managers in multiple markets to purchase their clubs. Our newest Bombshells in Pearland, a Houston suburb, continues to do very well and all four of our Bombshells units in development are moving ahead on schedule. Turning to our results; we achieved record quarterly revenues a $42.6 million, up 14% year-over-year. GAAP EPS for the third quarter was $0.55, up 38% from a year ago. During the quarter one of our subsidiaries had approximately $500,000 lawsuit settlement, excluding that and other smaller items, non-GAAP EPS came in at $0.58, up 24% from a year ago. Free cash flow increased 17% year-over-year to almost $8 million. Favorable trends are continuing, we believe we'll exceed our fiscal 2018 free cash flow target of $23 million and we'll announce our fiscal 2019 target in December when we report year-end results. Please turn to Slide 5 for an analysis of third quarter operating performance. Compared to the year ago quarter, total revenues reflect increases of 12% from new units and 5% from same-store sales. New units included a full quarter of the bombshell 290 in Houston which opened in the fourth quarter of '17, nearly a full quarter of the new bombshell in Pearland which opened in early April, and a small contribution from the renamed Kappa Men's Club. Last year's two major acquisitions, Carlos Cabaret in Miami and St.Louis transitioned in the same-store sales over the course of the third quarter. All of these translated into segment sales increases of 8% for nightclubs and 54% for Bombshells. In addition, all core revenue…

[Operator Instructions] Our first question today comes from Frank Camma from Sidoti.

I was obviously pretty surprised pleasantly with the margins here, so couple of questions on that. First of all, are you seeing any creep -- I thought you might in commodity costs on the food side, let's talk about that first on how you might be handling it?

Actually anything that we've seen in cost increase we've more than offset with the drop in chicken prices. I was actually just talking with David Simmons the other day about how much chicken has come down, I've read an article, I get a lot of -- I've signed up to a lot of restaurant newsletters these days and I read an article about how chicken prices come down. So I called to ask him how it's going and he said, man, it's been fantastic because wing prices have dropped so much that -- the makes -- it's being offset by that.

That makes sense because your menu is tilted towards things like chicken wings and stuff. So I guess that's a big component of your costs, that does make sense. Now how about the salaries though, I thought that we'd creep up given the higher component of bombshells; are you seeing anything there?

We've kept our costs in line, we've given some significant raise, I think the taxes are really helping offset some of that -- the lower tax rates have made that much much easier on us. I think that you're seeing that -- the nightclub segment has been fantastic for us, we're still seeing increases in service revenues. If we can continue those trends, I don't think salary and wages are an issue that we're going to look at. On the corporate side we are having to -- we're still watching that very closely, as the labor market tightens -- corporate staffing, we're having to watch corporate staffing, pricing and make it sure that we're paying our corporate staff employees, especially in counting and one night competitive rates. But overall, I mean I think we're keeping it in line with where we've always been.

Obviously [indiscernible], earlier, you were thinking there would be like the typical seasonal slowdown, so is it basically just the stronger economy and your ability to bring in those people in the clubs and can you talk about sort of -- the summer because that typically is also like a seasonal slowdown?

Yes, I mean typically we've slowed down in this quarter and slow down literally more in this quarter but we didn't see it in the last quarter, I think partly because the Eastern Rockets -- so the bombshells did very very well, especially the eastern locations while the rockets were in the playoffs. We're seeing definitely the oil patch areas, that's a long view, having very nice bounce backs right now. But overall, I mean sales have been strong everywhere; Minnesota, Florida, New York, all have been pretty steady and pretty good for us. We can see that in our service revenue, any time service revenue is up, profits are up because there is really no real associated cost with those service revenues.

Our next question comes from Marco Rodriguez from Stonegate Capital Partners.

Just wondering to kind of piggyback on that last question on the same-store sales and kind of your expectations; I know last quarter -- again, you were expecting kind of the seasonal slowdown that didn't seem to happen, and so I'm kind of wondering what your thoughts are here for Q4 and same-store sales?

I mean it's really hard to say on a quarter-to-quarter basis. I'm hoping that we can continue with the trend of at least 3% same-store sales, that's kind of our internal targets, that's -- we're watching the year-over-year units and talking with our regional and general managers and having them target -- beating their last year by at least 3%. Some are doing a little better, some are skating along but we're excited about the potential. As long as the economy stays strong, I think we follow the trends until the trend doesn't work anymore, we're waiting for a trigger, something triggers in the economy or something happens that slows people spending down we will have to adjust the model. But I think right now -- I think we know we shoot for that 3% sales growth.

Then in terms of the night club segment and your comments on the kind of the M&A landscape; can you maybe talk a little bit more from a high level just as far as how full that pipeline might be as far as potential targets, and maybe if you can talk a little bit as far as how close you might be with any potentials?

Sure. I mean putting it in simple terms, the lawyers are working on a couple of deals. As far as the pipeline itself, there is several behind the ones that the lawyers are working on that we're still off a little bit negotiating certain terms or negotiating price or maybe we've come to terms on price but not necessarily down payment and payouts, things like that. We can probably be about as active as we want to be over the next six months -- I'm really waiting -- at the end of this month we're actually -- the 20th through the 22nd will be at the gentlemen's club owners expo where all the club owners come and meet every year in Vegas, we'll be out there for three days, I have lots of meetings set up, talking with several people out there, I expect several people that I'm not scheduled to talk to to approach me because that's typically how it works, and so we'll look at the pipeline we have in place right now and then look at anything new that's out there that's available that we didn't really know about and kind of get a better strategy in the early part of September as to where we want to focus our time and where we want to move forward. The nice thing is we have four bombshells lined up right now, so we are looking at properties in Miami but we've got plenty of time left on that; so our main focus I would say through the end of this calendar year, through December is going to be very focused on club acquisitions, I think that's where we're -- A) where our time is going to be best spent, and I think that's really -- we're to that point, we've got enough bombshells, like I said lined up and ready to go, and it's time to grow the club side again, we've absorbed Scarlett's and St.Louis, both are doing very very well for us, we wind up management and have been training some management to move into some new markets; so we're looking at new markets, not just markets we're already in and I think that as we -- the lawyers work out the details on the ones that we've got active and then we'll -- the pipeline will remain robust going forward.

And then kind of moving out of the bombshell and your comments on Miami, can you maybe just talk a little bit as far as the landscape there that you're seeing, what sort of opportunities might be available and maybe kind of where you are in terms of what ending as far as getting close to finding some targets down there for areas to expand?

Sure. In Miami we're having a little more trouble finding properties to actually buy so we're looking at some lease deals which will raise our cash cost upfront and our cash-on-cash returns will be tighter into that 25% to 33% range versus the range when we're only have to put up 25% cash on these things and owning the real estate. We do have a property or two that we're looking at we can buy, the realty is much more expensive down there as we look at the larger developments like we've done in Texas were buying multiple acres, building our property and then selling off the additional property after we've increased the value by bringing the traffic close up. So it's a little different market for us but we'll learn it in time like so -- the good news is we have plenty of time and we have some great operations in Florida currently with [indiscernible] and Scarlett. So we'll find what we're looking for there. The nice thing is the competitors that we're looking at there and the things that we're seeing in that market -- the numbers are much higher, the sales are much higher at most of the sports bar, theme-type restaurants than they are in Texas. So that's a big plus for us.

And last quick question, just kind of a housekeeping item; just kind of noticed here on your balance sheet if I'm not mistaken; assets held for sale increased a couple of million dollars sequentially. Did something else get pushed over to be sold or was there a revaluation of some items that were already in there?

I believe those are the properties we now have under contract. When we have raw land we don't put it in assets to help ourselves until we have a contract on it, I think is what we're doing with our policy. So we did get a couple of contracts on some of the raw land next to the bombshells properties, and so as those properties go into contracts, they are being moved into assets held for sale.

[Operator Instructions] Our next question comes from Darren [ph] from Cashflow Kingdom [ph].

So on operating margin, you guys did quite a beat on operating margin. Should I be expecting something in the 22% range going forward or is this nice to see but is it a onetime or should I be budgeting for this going forward?

I was looking at the trend and it's on Florida…

It's on Slide 17.

I mean if you look out of the last six quarters -- or actually last seven quarters, you've had two of them at 19%, the rest have been over 20%. I guess it's just going to pin on this as the service revenue stay as strong as they are, the bombshells will drag it down a little bit as more of the revenue comes from bombshells but the bombshells are continuing to increase as well, so as they move up into the plus 19%, I mean -- it's hard to say, we're just going to have to watch it over the next few quarters and see how it develops. But as of right now, I mean -- I think we're pretty much in line with where we've been through the last three quarters in a row now, it would -- I guess we have 25, 23, 22 -- so I hope we see -- we're definitely where we want to be.

I keep budgeting look forward to drop a little bit as you open bombshell but it's just not happening. So, good to see.

Well, the nice thing about the Pearland bombshells is it was very big opening for us, highest gross revenues that a bombshells has ever done.

What is the run rate on Pearland now?

I don't know where we're currently at, July has been a very very rough month for us, I don't know if you're probably aware but -- at 100 degrees plus for 20-some days out of the 30-some days, so our patios [ph] having a lot of slowdown but we're looking very forward to football season starting -- I think some of the first pre-season games are tonight, so that's going to be a pick up for bombshells. And one of the others we're doing is, since we have several new stores opening, we've just done some negotiations and landed some sponsorship spots for -- on all the sports radio stations in Houston and a couple of the other larger rock stations and whatnot and one of the hip-hop stations but we're buying sponsorship for the Astros, the Techsans, the Rockets and lining those up, and I think we're even doing some stuff with the soccer team. So we're going to start doing some marketing, especially in the Houston market where we haven't really done much marketing, so I think that we'll see a nice increase in the sales trends and bombshells from that. It's new, we'll see, let's see how this next quarter comes out and then as we open up the new store in September, that's going to help give us an idea where those bombshells are going. As we open up 8 stores in the same market we're going to get to see what kind of market saturation and crossover we get with the branding. I think we're going to see some nice increases in margins because of that. So, I'm hoping to push those bombshells, I know our top stores are running margins in the 26%, 28% range. So if we can continue to push that up I think the bombshells can average in the 20's, if the bombshells average in the 20's and the club stay where they are at, especially as we close these underperforming clubs like Philadelphia, a small club in Houston -- as those margins -- I call those margins as anchors pulling the margins down, as those margin numbers go away, we're going to see a higher increase in the margins for the clubs as well. So I think -- maybe we'll stand these operating margins in the mid-20's or lower 20's.

Just bit of irony calling 20% plus margins anchors, but okay.

Well, no, those were the ones -- I'm saying they are being anchored down to 20%, right. We have a club that has 4% margin, that's pulling the other ones down.

I know a lot of restaurants that would love to be anywhere near that. So how are you going to measure the effect of the advertisers, sports ratings when it's done?

We've got offs in Houston, some of the stores have been open for three or four years in Houston market now, and so we're going to be able to see where they're at and what their trends have been, and kind of watch. The nice thing is when you -- it wasn't extremely expensive for us, and when you divide it by four stores it's a little more expensive but by June we'll be dividing it over eight stores, so it gets really really inexpensive on a per store basis to do these things.

So you think you've got to buy store data by day to be able to tell whether or not radio spots help or not?

I don't think we're going to tell it by day but I think we'll build it by month, by quarter, and especially on the year-over-year and just seeing new faces, right. If we're obviously seeing new faces then the radio is working for us, because that's the idea to help build the brand to bring in new faces into the business. And I think we'll build it to see if that's working for us. Along with the radio we're getting internet spots with them, we're getting live remotes and it's actually a very nice buy package that we've been able to negotiate on this.

So you did almost $8 million in free cash flow but your actual cash went up less than $1 million; where did the difference go?

Well, a lot of it's going to the bombshells properties, we have to put 25% down -- we have to put the first 25% of construction down with actually three construction sites going right now, that's a considerable amount of cash that's gone out for that. So I think that's where the majority of it's going.

Did you have to payback any Scarlett's or pay down any loans or anything?

I think we -- was that $2 million pay down in Scarlett's this quarter or last quarter? Phil, do you know when that was paid down?

It was the last quarter.

That was the last quarter, that's what I thought.

I'll see it when the Q comes out. Some comments on your slides; the rollout slide that you added, I think that's new this quarter; that's really helpful, I like that, might be the first time I've seen it. And then also -- well, I've always loved the capital allocation slide but I just wanted to comment, you can't make it any plainer within -- below 25 we buy shares and above that we do this.

By this time it's just to simplify that we -- it was getting a little quitter with all the little boxes and all the little target things on it, so I decided to let's talk with Gary, so let's simplify that out, just put it in plain English. If the stock blows this, we're going to buy stock and if the stock's above this, we're going to keep growing.

Well, when you make it that plain I don't think you're ever going to be buying stocks. So before upcoming bombshell, in other words, people will buy in front of you but that's not the best thing.

We're going to keep buying clubs, I mean that's -- the nice thing is we're in that position today and that's -- we've worked hard to get here. And the discipline I think is really paying off, for us and for the shareholders.

Agreed. The four bombshells that are coming up, I know you're from Miami, you're looking to lease; so are the rest of them going to be purchases?

These are all for purchases, we'll own the real estate and build the building on all four of these. In fact, we're -- a couple of them are -- the I-10 site is the development site, we bought a little over eight acres and put in the sewage and retention, we bought the land extremely cheap and we've already sold off one of the bill -- we've turned it into three path site, we've built on the middle path site, we sold the east pad site and the west pad site, we have -- it's listed with brokers and we have several interested parties looking at that now. We hope to have that under contract before the end of the fourth quarter, so that will end up that pad [ph]. The Pearland pad sites, the business is open now, I'm talking with a couple of different developers right now on what we want to do with those two pad sites or whether we just want to list them and just anybody move on them, we're trying to control who is next to us and put in businesses that compliment or add business to our bombshells. The 249 site we've already sold -- we've already sold a 1.59 acre site there, that will be a Corhe's [ph] barbecue out of Memphis, that will be one of their first Houston locations to open as they move into Texas. We think that will be a complimentary restaurant that will help our business. And we are currently looking -- we're talking with several other concepts on the remaining -- I think we have about 7.3 acres left there that we're going to sell off.

So that's how like it's becoming another strategy of yours, buying larger chunks of land and almost having a real estate aspect more and more to the company, real estate development.

It's only because it made so much sense for us. To do it in other markets, we're not really looking to -- the pad sites we're looking at -- and in Miami, for example, are 2.2, 2.4 acre already build pad sites, the KT pad site was a super lot ready-to-build pad site where somebody else did all the development. We pay a little bit more from those that way but I think we've proven the concept enough now that we're -- this was really a way to limit risk for us, I think we've -- we're proving the concept out, we kind of know our demographics, we know what we're doing when we open these things. And so I'm not looking to do that as much, and we just kind of got into these 3 to 59 location, we had to buy four acres, we're building a 20,000 square foot shopping center on it, once it's built and leased out, we'll probably sell the shopping center off with a parking easement.

So what I heard, that's not really a long-term strategy, it's just how it worked out in Houston, is that correct?

Yes.

Our next question comes from Steven Martin from Slater [ph].

Eric, you did $20.6 million of free cash flow for nine months, your guidance was 23 for the full year and you said you were going to exceed it but frankly, that would -- you had a great fourth quarter last year and now to get to your guidance you only have to do $2.4 million of free cash flow…

Well, we don't want to call it guidance, it's our target. We targeted at the beginning of the year to $23 million in free cash flow and to think we'd only do $2.4 million would be extremely low for us. So that's why we said we will exceed that target, we're not raising the target or doing anything with that target, we'll issue our new target for '19 and in the December year-end.

The Scarlett's -- the acquisition you did last year in Florida, can you comment on how that has done since you bought it?

It's doing very well for us. We're in line with the projections that we thought we would be able to -- the increases that we thought we'd be able to increase it. It is moving in the same-store sales on a go-forward basis so our -- I think that will definitely help with our same-store sales percentages which is why I say we're targeting 3%. And we're very happy with it, if we can find two or three more of them we're ready to buy them.

Within the corporate expense you've had a whole bunch of onetime items the last couple of quarters; when should we see those stock to diminish, the lawsuit settlements and some of the other items?

We've moved through most of those, in fact, I was just looking at what we have left from uninsured, it's only a two or three cases left I think of the uninsured cases. Unfortunately we see new stuff from time to time but overall it's got there, part of that one time stuff was the New York State sales tax audit that we're going through, that's all settled now; so we know those numbers, those are expensed out. There is not a lot left out there, I hope -- I mean, you know, the problem is it's unforeseen so I could predict it all would be great because then we could just plan for it but overall, I mean I think we're -- it's lower and lower each year, I think that's the good news, it's getting lower and lower each year, there is still some of them popping up but it's getting lower and lower.

Our next question comes from Bob Brown [ph], private investor.

Now that you -- I think you made a comment likely the last quarter in the -- one of the releases saying how you feel like you really gotten a good handle on all aspects of opening up the bombshells in terms of picking the real estate, the legal, the business side; and given that we're going to be -- we're looking at 10 and not too long way, not too far away, what do you think are we getting close to where we think franchising is going to be a more realistic target here?

Yes, we are getting people, we are getting calls again which is -- we hadn't in a long time, we're not even marketing for calls; so it is -- we're getting some calls, we're talking to some people -- same as always, we're looking for -- our first franchisee is going to have to be a larger operator, someone who knows what they are doing, we don't want to have a location opened and closed somewhere or anything like that. So it is a major investment, they're not -- it's not a $300,000 investment, it's a $3 million plus investment to open one. I'm hoping so -- I think when we get to that $50 million mark, I was looking -- I've kind of looked up some of the past -- smaller chain restaurants that opened up some company stores and seeing when they're franchising really blew up and most of them -- most of them we started seeing at 10 to 15 locations and $50 million plus in revenue. So I think we've reached out by the end of this year -- I'm sorry, '19 actually into the year -- in fiscal '19. And I think at that point maybe we will look at hiring a franchise sales person again in marketing and advertising franchises; again, I just don't think in the next 12 months it's going to make a lot of sense for us. I think the next 12 months we -- first of all, we and management focused on the club acquisitions because there is several amount there, we're working hard on them, we've got the bombshells openings lined up. I know the bombshell team is going to be very busy opening these four locations, I mean technically we're opening four locations between September 30 of this year and June 30; so really while we keep saying here that's really only a nine month period or actually about a seven month period that we're going to be opening these next four stores, so they're going to be very busy with that. So if something -- if the right person comes along, we'll take the time and energy to make it happen but it's not something we're actually actively out -- searching for franchisees right now.

And second question, I just happen to see this on the news items today, I assume you guys do this well with Buffalo Wild Wings; are anything in terms of possibilities of doing some sports betting now and now that it's legal and [indiscernible] anyway in terms of some of the bombshells location?

I mean, I think sports betting isn't legal in any of our markets, if it became legal in our markets, we'd look at it. We are looking at some EA sports stuff and we're also looking at some of the fantasy team stuff which again, is kind of sports betting but not necessarily direct sports betting. We have been talking with some -- with a couple of different groups to start like the bombshells fantasy sports league or something along those lines where we do a revenue share with someone else's platforms. That is something we could be looking at for additional revenue at some point in the future.

[Operator Instructions] Our next question comes from Isfaq Farooq [ph] from West Park Capital.

Somebody already asked regarding your M&A targets, do you have a sense for the size of the M&A target, is it going to be like Scarlett's Cabaret or is it going to be like some of the smaller ones like the $1 million or $2 million one you did recently? And the geographical extent?

The active ones we're looking at now are in the $10 million to $20 million.

And which geographies are you're looking at, primarily?

Not disclosing that at this time. Thank you though. Because they're such markets, if I talk about which markets it's too easy to figure out which acquisitions we're looking at.

Okay, I understand. Another one was your long-term debt; are you comfortable with your debt creeping up, I know you've commented and also mentioned it on your slides that your debt grew to almost $133 million or so; and there is like -- there is a lot of high interest rate debt in there too, are you comfortable with that even though the company's margins are growing as well?

We've got a lot of high interest rate in there. I mean most of that is associated with the acquisition of Scarlett's, and so we're not worried about that at all. Scarlett is performing as expected, it was a 100% financed acquisition, which if you will remember, we basically let none of the company's money we borrowed the down payment, we financed the rest of the owners. We slowly started taking out some of that with a $2 million payment to owners, the $5.4 million balloons in 2020, we'll have to decide how we're going to move that debt. $90 million of our debt is associated real estate which is financed at very very low rate, average rate is 5.62%; so we're not worried about the real estate debt. As we sell-off some of the non-income producing properties and the land around the bombshells, that's going to drop our debt significantly. So, I mean there is -- as we know, no worry, and -- of course, the biggest thing in 14 months our debt service level goes down by $3 million a year when we don't have to continue to make the extra $250,000 monthly principal payment on the centennial bank refinance of most of our property. So no, there is no worries at all on the debt level, it's well below our 3x EBITDA and as our EBITDA is expanding as well -- can't remember, when the four bombshells open, that's going to grow or EBITDA considerably and the debt associated with those bombshells is mainly on -- is included in here already.

And sticking to bombshells; the margins of bombshells went up a lot this quarter, is it just scale of operating leverage, is there anything more to read into that?

Well, you've got to figure -- your oversight management is being divided by more and more revenue, right, so as the percentage of revenue the oversight management costs are going down. We're buying -- we're getting more buying power, so we're able to negotiate better pricing, that's helping. And the stores we're opening are doing larger volume and the same-store sales of the bombshell is increasing as well, so that's all helping expand the margin. So as we open up the next four stores, I'm hoping that we'll see those margins that close to -- running around 20%. There is not a lot more margin increase but obviously a little, I think we're still about 19% I think on bombshells, so we'll get another point or two out of it, we'll be very happy.

And ladies and gentlemen, at this point we'll take any final questions. Once again, this will be the last chance for questions. And ladies and gentlemen, at this time I'm showing no additional questions. I'd like to turn the floor back over to Gary Fishman for any closing remarks.

Thank you, operator. We've included a couple of supplemental slides in our appendix. We have our calendar in there, a few things coming up. So if you joined the call late, we're having a management at Rick's Cabaret in New York tonight from 6 to 8 o'clock. Rick's Cabaret is at 50 West 33rd Street between Fifth and Broadway, if you haven't RSVP-ed then ask for me at the door. I guess it's the 20th anniversary of the acquisition and merger with the tourist entertainment companies, August 19 to 22 as Eric talked about earlier is our Annual Gentleman's Club Expo in Las Vegas, this is the adult night club industries national convention trade show and awards. Now the following week on August 29 we're holding our annual meeting at corporate headquarters in Houston, and on October 9 we'll be reporting our next quarter of night clubs and bombshell sales. On behalf of Eric, the company, and our subsidiaries, thank you and good night, and as always, please visit one of our clubs or restaurants. Thank you.

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.