Greetings, and welcome to RCI Hospitality Holdings Fiscal 2019 First Quarter Sales Call and Webcast. At this time, all participants are in a listen-only mode. A 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 go ahead.

Thank you. For those of you listening to this call on the phone, you can find our conference call presentation on the RCI website, as usual. Click 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 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. 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 on this call as a result of developments that occur afterwards. 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, New York, Manhattan’s number one gentlemen’s club. You can also tour its 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’d, just ask for me at the door. Now, I’m pleased to introduce Eric Langan, President and CEO of RCI Hospitality.

Thanks, Gary. Thank you for joining us today. If you please turn to slide three. As I mentioned on our last call, I wanted to use the occasion of our first quarter sales report to hold a follow-up call, so investors that couldn’t make the fourth quarter call on such short notice to fully participate in this one. I also wanted to hold a meat management at Rick’s Cabaret, New York. A number of new investors have asked to meet with me and tour the club. Now, let’s turn to today’s news. This morning, we announced total club and restaurant sales for the first quarter ended December 31st of $43.4 million, that’s up 6.5% year-over-year. It was also a record quarter and the 11th quarter in a row of same-store sales growth. Fiscal 2019 is off to a good start. Nightclubs experienced solid same-store sales in what is seasonally our strongest quarter. Bombshells same-store sales, while still down from a year ago, improved on a sequential quarterly basis, and all new club acquisitions and restaurants performed well. We continue to be on track for our fiscal 2019 target for free cash flow of $26 million. I’d also like to note, last week, we announced our Board of Directors increased our stock buyback authorization by $10 million. That gave us a total authorization of $12.7 million as of January 3rd. Based on our market cap and as of yesterday, $12.7 million represents more than 6% of the Company that we can buyback with this authorization. Please turn to slide four. The data on this slide does not include non-core operations that are included in Nightclubs segments when we report complete first quarter results. Same-store sales totaled $35.3 million, up 4.3% or $1.5 million. This reflected effective marketing, management and appeal, combined…

[Operator instructions] Our first question comes from line of Frank Camma with Sidoti. Please proceed with your question.

Good afternoon, guys. How are you doing?

Good. How are you, Frank?

Hey. Obviously always surprises at strength here the ongoing stuff at Nightclubs same-store, given that your comp against like a 7% last year and you explained some of that. But in a regular economy, regular decent economy, not great, not bad, what do you think the clubs should do on a same-store basis?

I mean, I think we'll see in a 2% to 3% range. That's what I’d like to see, a minimum of 2% to 3% growth. I think that we're seeing the growth, it’s for such a long period; there's 11 quarters, that's a long time for same-store sales, if you look, I guess never done that. But if you also look, what we started about 11 quarters ago was our capital allocation strategy. And what we've done is we've closed underperforming locations. We've closed the locations that were costing us money. But what we gained from those closures is a massive amount of management's time. So, management's time and efforts were being spent on properties that weren't making us money. Now that management time is being spent on our top locations and they're seeing solid growth and solid sales. So, when we look back at how we did things in the past without this capital allocation strategy, you’re starting to see the real benefits of the strategy, not only from the improved capital allocation but also across management's time and their efforts. And when they increase the club that's already very profitable, a lot more of those bottom line dollars are making it to the bottom line. And so, if we can continue this, I don't know for how long, I hope so forever, but I mean, I think at some point we're going to get that law of diminishing returns but so far we’re 11 quarters…

Nothing lasts forever, right? I got it. So, turning to the restaurants real quick. Do you see the same trends -- I mean, I know it's a little harder pursuing one in each market, but do you see the same-store trends in Dallas and Austin?

We don't, Austin is actually doing much better now, we've made some management changes there. They're starting to do a little better there. In hindsight, that was like the third location we ever built. We probably would have closed at about 2x south of where it's at, but it's doing okay, it's making money. I’d like to see it making more and we're starting to, we're starting to get some nice improvements there, I said with some management changes, some style changes to some of the entertainment stuff we're doing. Dallas had a huge run for several years. They’re a little off this year. I don't think that Dallas market and the Houston market really have a lot of affect with each other, a lot of our clubs down in the Dallas market too because the convention businesses was down so much. Hopefully, we're going to start seeing the convention business come back, they say it's going to. Our sports teams up there haven’t been performing fantastically. But, now, the Cowboys are doing better. Hopefully the Mavericks and the Stars will start picking up for us, which all helps our business.

Okay. My last question is just -- and maybe you said this, I might have missed this. What do you think the secret of success of the Pearland location is, given the amount that -- when you look at the amount of revenue that dos on average compared to the average of the other locations? It's pretty materially different?

Sure. Even Pearland has been down a little bit, but it's -- from where it was -- of course it's not in same-store sales yet. So, we won't see till the year-over-year. We have those honeymoon periods and then they will decline and we start to build back up. I think we're back to build back up stage at that location now. It's just a great location. There is some freeway construction going on in front of it, but I don't think it -- it hasn’t affected access or flow at this point. So, as long as it doesn't cause any problem with that, we’ll be fine. We’ve got to get additional parking there. That's another thing I think that's hurting us a little bit there. When you’re brand new, they really didn't mind fighting for parking and having to park on the street and having to walk and whatnot. As soon as -- the rain's been stopped; we've had this parking lot going for a while but the rain’s been making it very difficult to get the forms in so we can pour the concrete, but should be soon. Once that parking -- then, I think we're going to see Bombshells pair and pick up even more sales. I think it's just a location. I think you're going to see the same thing that I-10. We've learned and we started out with the first five locations with lease locations. We started buying our locations. We wanted to cherry pick, like we want -- we knew exactly what demographics we wanted, we knew exactly what kind of traffic flow patterns we wanted. We want on our exit ramps for the freeways, great visibility. And so, we went and found properties and bought dirt to build exactly what we wanted. And I think we're going to see that in the numbers of these five stores that we're building right now. It's going to be a little different than our leased locations.

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

Hey. Good afternoon. Thanks for taking my questions. I was wondering if we could dive in a little bit more on Bombshells. I just kind of want to get a little bit better of an understanding in terms of locations of your facilities and exit ramps off of a highway. Obviously, last quarter you guys called out the one large club that I guess was being negatively impacted by the closing of a freeway. I guess, I want to understand, the people that come to the Bombshells, are they more of, well, there is a restaurant, let’s go over there and eat or are they people that kind of frequent to place. I'm just trying to understand why they wouldn't just go to the next exit and turn around?

I think it's a little bit of both. And it wasn't just one exit. They closed the freeway, which made -- you got to understand Houston traffic. First of all, when they close 290, the wait can be an hour to move a mile. So, it's just -- it's horrible. But, the reason we’re closing -- and they actually closed not just our exit, they closed our street at one point for a whole weekend where our employees had to park at a Home Depot and walk about a quarter of a mile to get back to our location and so did any customers that wanted to come. It's a massive undertaking when they build these highways in Houston. I don't think there is going to be too much effect from highways. 290 is about completed; they're far enough down now that when they do close that it doesn't affect any of the southbound traffic to come to our restaurant. It only affects northbound traffic. So, that's helped somewhat because they're far enough down the freeway now. I think that all-in-all, by the spring, everything's going to be done with that highway. The Pearland, where they're building, it's not really -- we're off of the feeder road; they're not really do anything with the feeder road. They're actually only working on the actual 288, a national toll road. And they're actually making it better because they've already widened it and made it, so traffic flows. Even though they did construction, the traffic was better than it did before they started construction. So, that’s helped. So I don’t see any problem there. And then, all the other freeways are very established freeways that were -- U.S. 59, near Bellaire, they have Katy Freeway and your Fry Road, all very established freeway systems and 249.

Okay. Got you. So, what other impacts did you see in the December quarter that caused same-store sales to decline in the 20% range?

We lost between 10 and 11 baseball games. We’re kind of arguing ourselves; we can’t figure out if we had -- because one might have actually been in September. So, it might have been one in September and then -- I mean, -- yes, in September and 10 in October. But basically those 10 games, every Astros [ph] home game was about $50,000 to $70,000 increased sales for us. So, if you take that $500,000 to $700,000 and take it off the $1.2 million same-store sales decline, which means we really had somewhere between $500,000 and $700,000 in same-store sales decline much, much better than the previous quarter. And we can’t control the sporting events, stuff like that. Those are just bonuses for us when they when they work in our favor.

Got you. Okay.

I’m hoping that we have less than single digits. I mean, it’s obviously very early. It’s only the 10th of January. But, I’m hoping to keep same-store sales declines in this quarter in Bombshells in single digits. And then hopefully going forward, we’re back to positive, when we recaptured it.

Got you. And you mentioned that you’re putting forth some promotional activity to kind of spur growth of Bombshells into the spring. Can you talk a little bit about those activities, what you have planned?

I don’t want to give my competitors too much advantage. But, a lot of has to do with patios, some of our -- we do a big contest on Wednesdays. We’re getting some third parties involved and we have some pretty big prizes with our -- we call a big ball, it’s like a giant beer pong that they play out in the parking lot. We finish it off, so you can drink out there while you’re playing stuff. So, we’ve got some big prizes that we’re working on for those events. Some other type -- contest type stuff for the late night from 10 to 2 business where we really were affected, especially as few play in 290 at late night with the freeways closed there, closed on Friday and Saturday, which are big nights. So, we watched that the crowd, we watched that 25, 35-year old crowd that comes here and have a few drinks before they go out for the night. And so, we want to do some things to draw them back in there. What happens as they come there, and then they start having such a good time that they end up not leaving and that’s when we have our really big nights. And so, we’re working on things to bring that crowd back into both our Fuqua location and our 290 location, as well as taking those ideas and going ahead and trying to increase business at the other existing locations.

Understood. And then, in terms of your commentary on taking a pause this fiscal year on Bombshells that you’ve put in the additional 4 stores that you had forecast before. Is it fair for me to assume then that the expansion potential to Miami and San Antonio is maybe pushed another two years out after fiscal ‘19?

I don’t know if it’s two years, but I would say that we probably will open -- we should open basically, I think a store in February, a store in May, a store in June. That’s kind of the plan right now. I don’t think we’ll open anything else in ‘19 and calendar ‘19. But that doesn’t mean we won’t look towards the end of calendar ‘19, which -- the new guys -- we’ve got a guy that’s doing these last two Bombshells, the 249 location and the Katy [ph] on about a 4.5-month schedule to build these things. So, if we can keep up with this and open on time, these two locations, then we will be at a 4.5-month build and about a 3-month setup time. So, we can open in 7.5 months from start to finish. So, if we can get on that type of time schedule, say, we -- we're very happy that all these stores opened by June, by October, we're very happy, we start looking, that means we could open a store in April-May of 2020. No, we're not in a hurry. It’s really going to depend on our capital allocation strategy. If our stock price is 20 bucks a share, I'm not going to be looking to do anything but buying back my stock, and get guaranteed returns, risk-free. Why take the risk? The stock is performing and we don't have the opportunity to reinvest our capital in our own assets, then we'll -- and the next step, we're going to look for a Nightclub acquisition. The Nightclub acquisitions have been very hot. We've had some great location we've just recently picked up. We're looking at several more great locations right now. So, I'd be more inclined to do those Nightclub acquisitions before I would even think about of Bombshells. So, I’d say in the best case of all worlds, if we couldn't find acquisition, club acquisition, we had tons of cash, stock price went back up, then we start maybe look at Bombshells, you might see something in April-May of ‘20. Otherwise, you’re probably right, probably won’t see anything till probably the end of ‘20.

Got you. And then, kind of just segueing here into the Nightclubs. You mentioned that this is kind of a unique time for Nightclubs and vis-à-vis your capital allocation strategy should probably see you aggressively buying your stock. But, it kind of sounds like maybe there is some very unique or very fruitful potential acquisitions on the landscape. Can you talk a little bit about what's kind of driving this unique position right now in Nightclub industry?

I think just timing. I think a lot of these guys are older -- and the fact we've proven ourselves, right. We've proven the model. We've bought enough owners out, paid them enough money down, we've paid our payments for a long enough period of time that they all talk good about us, say these guys always make their payments, they do what they say they're going to do. And so, it's creating a comfort level in some of these older sellers to trust us to take their 25%, 50% down payment, let us paying the rest over 5-year, 12-year payout like we do. And I think that's just the timing is just right. We hit that I guess that tipping point.

[Operator instructions] Our next question comes from the line of Darren McCammon with Cash Flow Kingdom. Please proceed with your question.

Hi, guys. Thanks for doing this extra call.

Hey, Darren, no problem. I just felt a lot of people with one day's notice on New Year's Eve, it didn't seem fair. That's all. Make sure everybody had a fair chance to have time to look at the K as well and see what was going on.

Yes. I think that was a good idea. I don't know if you guys may answer this, but since black -- I'm going to focus a bit on the buybacks. Since you've exited blackout, have you been able to do any buybacks?

To be honest, I’m not going to telegraph my buyback plan because I don't want to -- I'm not trying to run the stock price up and trying to buy back as much stock as I can like any other investor. I will say, we're following our capital allocation strategy to the T. We're using excess capital to do the things we say we're going to do with it. And you'll see those results in February, when we release the K, we’ll announce our stock buybacks to that date, like we have in the past. That's as far as I can go with that today.

Okay. Fair enough. Could you tell me -- tackling this from a different point of view, what kind of cash flow you either have now or maybe you had at the end of the year? I'm sorry, what kind of cash on hand you have?

I don't know the exact numbers yet, we're still closing out the quarter, probably get those when I get home tomorrow and I will be able to start looking through stuff. But I mean, our cash flow is in -- we're in a decent position, we're not struggling for cash. We do have a very large cash payments coming up of about $1.8 million for property taxes by the end of this month. We've got our normal sales tax and quarterly patron tax cash going out. So, there is going to be some considerable cash out in January like every January. But I don't think we're stressed at this point. We still have a little bit of available cash left over. And as we move into February, March, April, every month we're going to end up with more and more cash available. Of course by April, we pay off that $5 million bank line that we're paying $200,000 a week on. That will free up lots of additional cash, come April. If the stock still in these markets, we'll see us to be a little more aggressive. I haven't been extremely aggressive when I'm doing buybacks; I wasn't in ‘16, I was wasn't in ‘17. We buy a little bit at a time, we buy for a few days, we may skip a few days. Because like I said, our goal is not to run the stock price up, our goal is to get the maximum value for our shareholders. That's really how we look at our stock buybacks.

Okay. Well, that's a good thing for the long run. Also, this real estate you’ve talked about selling, is there four different pieces of real estate and that are up for sale? And what is -- I guess, what's the listing price in total roughly for those four?

Technically there is -- I don't know -- eight sites, Bombshells sites, pad sites, not properties. There's only three properties -- there's only three different sites that have of pad sites available that we're selling off. To give you two examples, we sold the property at I-10 under contract; we're waiting for the electrical events to be approved. Once those are done, that property will sell. We paid 8.71 a foot for that property; it’s under contract right now 15.71. The second property, we paid $10.50 a foot for, we bought 11.5 acres. It will have basically about four different pad sites that we're selling plus our pad site on the property, all around 2 acres plus pad sites. And the site we have under contract right now, we have under contract at $1.4 million for a 1.59 acre site, which is about -- the idea with $21 a foot I think comes out to about $20.85 or something like that, whatever they finally negotiate. We started out dollars per foot and then we went to even dollar amounts. And we were at 1.5 and they were at 1.3 and so we just took 1.4 and called it a day.

Okay. So, is that 1.4, is there some debt that needs to be paid off in conjunction with that or does that…

Yes, about $1 million of that 1.4 will go to the bank. We'll get a little bit of cash on that one. The other property, which has a total price of $1,050,000 will all go straight to the bank. We'll pay a 100% of the bank loan off on that one. Now, we have about $4 million worth of [multiple speakers] and about $8 million to $9 million in total value from the remaining pieces, based on what we're selling the current pieces for.

And it sounds like they're all being sold at a profit.

Yes. I mean, that's why you buy the big pad sites. You buy the big site, you then go in and -- that's all developers do basically. You go and buy a big pad site, then they sell it off in smaller pad sites because there are people paying more money per square foot when they only have to buy what they need to build on.

When does that property get recognized, when that’s closed or is it…

Upon closing, yes, from what I understand. I mean we haven't -- these two will be the first two we've actually sold. So, once we sell those -- I've talked with the accountants. And from what I understand, we'll use our cost per square foot based on the total property and then our profit mark will be based on just the property sold.

Okay. You had a Texas club that was closed for the hurricane and it is now reopening. Do you know what the revenue was or is expected to be?

It's a very small club. That's about $60,000 to $80,000 a month. It's one of our smallest clubs that we own.

Okay. And then…

It probably, I have to go look at it, but it makes $150,000 to $200,000 a year maybe.

Okay. And then also on the Bombshells segment, could you tell me what your gross and operating and -- I'm sorry, your gross margins and your operating margins were for the quarter?

For which quarter? I can't talk about operating margins for the December quarter. That won't come out till February. This is…

No, September quarter. I'm having trouble finding it.

In the K?

Yes.

It was considerably down -- 4.3%. I think it was 4.3% in that quarter. But keep in mind, one of the things with that quarter was there were about $300,000 in legal bills from Fuqua.

If you look at our last -- our fourth quarter news release, there was a chart in the last page that gives you the non-GAAP segment information.

Okay. Does that give you gross margin also?

It's just the operating margin for the segment, for the quarter and the year.

Okay. I guess, what I'm getting at is, I think your gross margin for Bombshells runs around 75%, if I remember correctly. I’m trying to get an idea if it's about the same for Q3 -- sorry September quarter.

I don't know off the top of my head. I'm sorry, Darren. I'd have to really -- I'd have to go back and dig through it. Our food runs about 30%, 34% cost of goods, liquor is about 14%, I think cost of goods. So, it just depends on the mix of each location. If you combine them all, I mean I really have to pull it all up and put it all together to give you the total gross margins for Bombshells.

That's all right. Maybe we can do it later offline.

Yes, sure.

That’s the only -- that’s it for the questions. Thanks, guys.

All right. Thanks, Darren.

Our next question comes from the line of Richard Aulicino with Dawson James. Please proceed with your question.

Hi, Eric. I was wondering are you planning on opening new Bombshells outside of Texas?

At some point, yes. We said we’re going to look at Miami and San Antonio next, but we’re kind of putting -- this was when the stock was in the $30 range. Now that stock’s come down, we’re more focused on as our cap allocation requires our stock buybacks. So, we’re kind of putting the Miami deal on hold. But yes, I think our next expansion more than likely when we start back up will be in Miami. We could always sell franchise between now and then. And then, they’ve been -- who know what they’ll be. I mean, we talk to some people. So, if all of a sudden franchisee heats up for us, it could be anywhere.

[Operator Instructions] Our next question is a follow-up from Darren McCammon with Cash Flow Kingdom. Please proceed with your question.

Thanks for taking me again. I just thought of something. So, originally, when we talked on New Year ’s Eve, you talked about pausing with Bombshells. You sounded like to do some analysis and optimizing and things. But in answer to a previous question, it really sounds like redirecting the cash flow towards buybacks that might have otherwise on the Bombshells is just a significant of factor. And if you might…

It’s a little bit about -- obviously we’re going to follow our capital strategy and we’re going to do what it says to do. It’s worked very well for us since we started it. And the reality of it becomes we have to get such high returns. So, we want to analyze the returns to verify that the investments we’re making in Bombshells are getting us to cash on cash returns that are required by the capital allocation strategy, right? So, basically, we have the old concept, we know we leased the building, we did whatever, we’ve made money on those. However, the downside risk, if something goes wrong which was extremely high, and there were 100% cash requirements. We’ve now switched the model, right -- we switched the model with Pearland. So in April of ‘18 we kind of switched the model. We bought the property, we’re building the buildings. We’re using bank financing, so less of our cash is going in there. But, we really need to analyze and say okay this is how much cash it really costs us, because we had to buy this property, we had to build this building, this is our cash outlay. And so, what is our cash return. So, until we have more data from those stores, it’s kind of hard to go, are we meeting all the requirements. All of our models say we’re going to in practice, right? So we know in practice it all works. But I want to make sure it works in reality and that we’re -- especially when I have the opportunity for risked reinvestment of buying back the stock at such high yields.

Okay. That helps. Thanks. That makes a lot of sense.

Okay. Thanks Darren.

[Operator instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Gary Fishman for closing remarks.

Thank you, and thank you, Eric. As usual, we've included a few supplemental slides in our appendix. For those of you who joined late, as you can meet management tonight at Rick's Cabaret New York from 6 to 8 o'clock that's at 50 West 33rd Street between Fifth and Broadway. If you haven’t RSVP’d, ask for me at the door. The next event on our calendar is the fifth anniversary of Vivid Cabaret in New York at the end of the month and the first quarter financial results which will be out the second week of February. 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.

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