Greetings, and welcome to the RCI Hospitality Holdings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce Mr. Gary Fishman, who handles Investor Relations for RCI. Please go ahead, sir.

Thanks, Tom. For those of you listening to this call on the phone, you can find our presentation on the RCI website. Click Company & Investor Information just under the RCI logo. That'll take you to the company investor info page, scroll down a little and you'll find all the necessary links for this call. 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. 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, and 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 of non-GAAP measurements that we use and are included in our presentation and news release. Please turn to Slide 4. Here are our comparable GAAP versions, the 4 charts and tables that we will be using in today's presentation. Finally, RCI will be at the Sidoti & Company Fall Investor Conference in New York City tomorrow. Registration is free for professional investors. We encourage you to attend our presentation or sign-up for 1-on-1. All investors can also meet management tomorrow night at Rick's Cabaret New York from 6 to 8:00 at 50 West 33rd Street between Fifth and Broadway. Now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric?

Thanks. Thank you for joining us today. This is our first conference call since February, and we've got a lot to cover. Please turn to Slide 5 to review today's news. We filed our second and third quarter 10-Qs. There were no changes to any of the preliminary income and cash flow statements we published in July and August. Approximately $1.1 million of notes receivable on the preliminary balance sheets were moved to current assets, increasing total current assets and reducing long-term notes receivable by corresponding amounts. All other balance sheet items remained the same. Looking at the fourth quarter, sales trends for the first 2 months look good. Nightclub business continues to be strong. The Bombshells same-store sales rebound has continued for 3 months in a row. New clubs and restaurants are doing very well. We are currently marketing properties with asking prices totaling approximately $14 million, most of them non-income producing. About $6 million of it is under contract or letter of intent. Looking at free cash flow and dividends. As of the first 9 months of fiscal '19, we hit our full target -- full year target of $26 million of free cash flow and, in August, increased our cash dividend per share, 8.3% on an annualized basis. Please turn to Slide 6. The internal review has been completed. We're now in the process of implementing the recommendations to enhance corporate governance. To date, we have named 2 independent members to the Board of Directors and Audit Committee. Elaine Martin founded 2 successful companies in Houston. She's our first female director. And Allan Priaulx is a communications executive and former publisher of American Banker. We welcome them both. With regard to the SEC matter, the company has and is continuing to cooperate throughout the process. Shortly after…

[Operator Instructions] We'll take our first question from Frank Camma with Sidoti.

So obviously, a lot of information here. So I was just trying to pick a couple. It's more of a big-picture question. I don't think it's very legal, more just a question about the new auditors. I mean obviously, not to audit, but they did review the Qs, and I had a couple of minutes to go through both. I didn't see anything shocking there. Nothing that stood out when I look at the pipeline as they're making changes. I mean you mentioned the one balance sheet change. Was there any other observations that they have so far called out about processes that you might need to change to satisfy them as accountants?

Now we -- I mean they have some questions. Of course, they're trying to learn the company. It was a process, and I think the K will continue to be a process as we move to the K. The only changes were those notes that were -- short-term notes that we put in a longer-term deal. That was kind of a BDO hangover from -- BDO had them classified one way, and they were classifying them a different way. So yes, from long term -- yes, from a long-term note to a short-term note because they become -- anything comes due in the next 12 months should be considered short term according to both.

Okay. I guess one of the things that stuck out to me was the size of opportunity of how many more properties you could sell here. I mean obviously, you're talking about existing clubs that are underperforming from your standard. I mean I know you probably got to keep some of this confidential because you just signed a letter of intent. But can you talk about like...

No, I'd be happy to tell you. Well, it's actually 2 leased properties. We don't operate clubs in those properties. It's 2 leased properties, and the rest is raw land that are associated with the Bombshells, where we purchased 6 acres, developed our 2-acre site and we're selling off the additional 4 acres in 2-acre tracks or 1.5-acre tracks, depending on how we decide to break down those properties.

And that adds up to the $14 million.

Yes, in asking price. Now that's not what we paid for those properties because, first thing, we did development. We changed zoning on some of them. We put in utilities. We put in some other minor improvements. But yes, that will be the -- that's the total approximate asking price.

Okay. Okay. That's fair enough. But okay, that was my next question, that is so you're going to have a book gain theoretically if you get near your asking price it sounds like.

I believe that every property that we are currently trying to sell or lease on these properties would all be book of profit. I don't think we have a single one of them that we would book a loss on.

Yes. It wouldn't be an operating game, that side...

They were near our asking price. Anything below our asking price, 10% to 15% below our asking price, we'll still book profits on.

Okay. Great. And then I guess -- so let's say theoretically, you take that, the proceeds, and you clearly, I think if I'm doing my numbers right, would then be -- maybe at or below 3x as EBITDA improves. So would you then be in a position to have more capability to do acquisitions? Would that maybe free up your appetite to do so?

I think we're in the -- I think we have the appetite now. Let -- EBITDA is only one kind of gauge that we use. The real gauge we use is the 7.5% cost of occupancy. And based on that, if you go to a 9% cost of occupancy, that'd be about 1.5% increase, which would give us about a 3 million -- on about $200 million of revenue, which we're getting pretty close to, give us about $3 million in additional interest expense we could afford. If you look at that on a 6% interest rate, if we could get bank financing or certain order financing for that, that'll put us in the range of about $15 million in additional debt we could carry. So we're in a perfect position even now to do that. So while we like and we look at the 3x, I think with our current -- because so much of our debt is real estate related, I think we could actually look at closer to 4x as an acceptable limit. Obviously, that would be pushed so we won't get too close to that. But that's kind of the ability, I think, we have at this point. And keep in mind, when we do that, we're going to add additional EBITDA, which is going to kind of expand it down, bring that expansion down a little bit as well. So I think we're in a pretty good position right now. Anywhere in the $30 million to $40 million range, we're probably very comfortable. And we're still actively looking at that acquisitions right now. So we haven't stopped looking at acquisitions at all.

Okay. And my last question is just -- because I felt that turnaround that you mentioned in Bombshells was pretty sharp here. Just looking at the last 2 months that you say in the press release, the earlier press release. So 20% same-stores, just remind me, that's on the stores that were open more than 18 months, right? So roughly -- I don't have the other spreadsheet in front of me, but that would be the bulk of the stores that are now opened, right?

It is. All the store -- well, not -- it's all but 3. So it's 5 of the locations.

Five, okay, 5 of the 8.

The 8. Two are brand new, opened them the last year and Pearland was opened in April. It will go into same-store sales in November.

We'll take our next question from Marco Rodriguez with Stonegate Capital.

So I wanted to kind of follow up on one of the questions on the acquisitions, specifically on the Nightclubs side. I believe in your prepared remarks, you sort of indicated a bit of a shift in the strategy from the focus away from, I guess, the smaller clubs to much larger clubs. Can you maybe talk a little bit more about that as far as what kind of drove that change? And then also if maybe you could give us a sense as far as how many larger clubs as far as the pool availability, if you will, or targets in comparison to the whole industry itself, where you have obviously a lot more smaller clubs included in that.

Yes. I've always said, if we're just on the top 50 clubs, we'd be a $1 billion company. We wouldn't have to be so concerned with all the smaller clubs. But basically, we're looking for clubs that are probably in the $80,000 to $120,000 a week range. That's kind of our target right now, where we used to target $30,000 to $50,000 a week locations. And I'm not saying we won't look at the $30,000 to $50,000 a week location. We're still looking. Just our preferred acquisition is going to be a much larger club, a Chicago, a Scarlett's in Miami, the Pittsburgh-type locations. Those locations we're going to be spending most of our time looking at, and those are kind of deals we want to do, something -- a purchase price of $10 million to $15 million.

Got you. And will the financing strategy change in terms of those acquisitions for the Nightclubs, large Nightclubs?

I don't think so. I mean I think when I use bank financing, hopefully, we use more cheaper money. The bank gave us a $5 million loan at 7%. It was much shorter term, which is fine. We can work through that with the free cash flow we have right now. It's not an issue. I like 7% money better than 12% money. So we're going to be using that. We're going to using real estate financing. We'll finance the real estate through the banks as much as possible. And of course, a certain portion will remain owner financing, just because we have to have some kind of offset against unknown liabilities or we want a much cheaper price. We're not going to have that safety net. We want to pay below 3x instead of 3, 3.4, 3.6x. We've been on a couple of these last deals.

Okay. And kind of shifting here to Bombshells. The 20% same-store sales that you're talking about here for July and August, I'm assuming that's a year-over-year measurement.

Yes. That's year-over-year.

Got you. And then can you talk a little bit about what was implemented over the last 3, 6 months, let's just say, that kind of drove those sales a bit higher, and that's about a 30%-plus delta versus where the same-store sales were for Q2 and Q3?

Yes. I mean we're pushing new menus, which helped. We raised some of our food costs or recouping some of our food costs now from some food price increases. We're stacked with management because we've had new management in. The locations we're opening, new stores coming up, so we've had a little extra management in some of those clubs. So costs are a little bit higher as you're seeing from our margin shrinkage. As we open these new stores and move these new teams into their stores from their training stores, that's going to help lower the cost. But I think we'll retain the atmosphere and the mood that we've set in these locations now. Some of it is new promotions and stuff that we're doing as far as entertainment goes, some new DJs, some new exciting stuff contest, beach weeks that we've done, stuff like that just to bring in customers.

Got it. And through -- obviously, the month of September is not quite done yet here. But just kind of give us a sense as far as are you still seeing that same-store momentum through the first few weeks, things maybe pulling back a little bit. Any color there?

We're still over double digits in same-store sales growth through the first 21 days.

Got you. Okay. And then just on the expense side and the assets that you had for sale, which maybe primarily the Bombshells just excess land, if you will. Are the gains that you are booking on those sales, is that positively impacting the operating margin for Bombshells?

No. It's not part of Bombshells. It's part of our RCI Holdings. All of our -- all of RCI Holdings property, all the property is just mixed in with Nightclubs because that's the majority of that. And the Bombshells properties are a very small percentage of that income and revenue.

So all those gains that you book, will they be below the operating line or above the operating line?

Below in gains and losses.

Got you. And last quick question, just on the expense side. I believe you said in the prepared remarks that you expect legal fees to drop, just given the fact that you've stopped with the internal audit or internal investigation that you had. Just trying to get a sense here. If I'm not mistaken, I didn't have a chance to look through the intel, all of your Qs you just released here, but I did notice that the SEC inquiry want a formal inquiry, I guess. I'm just trying to get a sense as far as your idea as far as the drop in expenses, just kind of given that new information.

Well, the internal review was a little more expensive for us, obviously, because it was all paid for by us. We have insurance that's going to cover some of the costs of the SEC stuff. So that will save us some expense there.

[Operator Instructions] We'll go next to Jason Scheurer, Orchard Wealth. Jason Scheurer;Orchard Wealth and Legacy Management, Inc.;President: Quick question for you. Obviously, I would think between the time frame that this whole investigation thing and all the accusations came out, you guys probably put a dampener on buying back shares. So the question is now that you've reported everything, do you feel like right now you can again begin an aggressive purchase repackage, given the $27 target that you were talking about for return on capital?

We can purchase stock any time. We do not have material inside information. With these disclosures, I believe we have disclosed everything that we possibly know that the market wouldn't have known. So I believe that we're free to buy stock on a go-forward basis until such time as the company, for some reason, gains some type of material inside information again. Jason Scheurer;Orchard Wealth and Legacy Management, Inc.;President: Are you guys capped at a certain dollar amount like average daily volume or something that you can take down each day?

Yes. We buy -- well, unless it's a block trade, and block trades are exempt, but yes, we do buy within the safe harbor provision of the SEC for all of our stock buybacks, which is 25% of the average daily volume for the last 30 days. Jason Scheurer;Orchard Wealth and Legacy Management, Inc.;President: Okay. And then the other question I have for you is, obviously, you've got all these Bombshells opening up now. Is there -- do you feel like you've had enough operating units right now that now suddenly it becomes much more of a franchise opportunity that people could look back with your operating history? Or do you feel you need to open up more in order to get third parties to want to become involve and open up their own in like Cleveland or something, for example?

Yes. We've been talking with some third parties. Obviously, we're fully licensed in all 50 states to sell franchises still. Actually, I believe that the 10 stores are going to make a change, and I think the next 6 months are going to tell the real tale. As we go through October -- we've opened up 6 locations in the last 18 months basically. We opened our -- well, actually, I guess, almost 2 years now if you count the 290 location. But 5 locations in the last 18 months, starting in April of '18 when we opened the Pearland store. We've opened now I-10, 249 and then we'll have Katy and the 59 location open. So those 5 stores will be -- all be opened in like an 18-month type period. There was a lot of expenses there. Now we didn't separate out any preopening costs, right? They're just -- they're all just baked into the numbers, because it was such a small segment that we didn't -- we just really didn't, and we've had a lot of other things in our plate. We just really didn't sat down and track and calculate all that to report it. So I think with -- the first time, you're going to seeing no preopening costs or very minor preopening costs, October through December quarter. And then the January to March quarter, we'll have no preopening costs because we're not in the process of opening any other units at this time. So we're going to get a nice view over the next 6 months of what these units are going to look like, what the segment itself is going to look like with no extraordinary costs involved. We had a bunch of legal costs back in -- last year, in the summer of last year and then with the District Attorney's office claims that we beat in court. Then we -- and settled with them, got those taken care of and gone. Now we've recouped from that. We've got these new opening costs. All that's going to be kind of out of the numbers on a go-forward basis, and we're going to get to see, really, what these stores look like. And I think we're going to see $11 million to $12 million a quarter in revenues, and I think we're going to see our 15% to 18% margins again. Jason Scheurer;Orchard Wealth and Legacy Management, Inc.;President: Okay. And then just circling back to that quote that you made. If you own the top 50 clubs, you'd be doing $1 billion in sales.

No. We'd be a $1 billion company, not $1 billion in sales. Jason Scheurer;Orchard Wealth and Legacy Management, Inc.;President: $1 billion company. Okay.

That kind of sales. Jason Scheurer;Orchard Wealth and Legacy Management, Inc.;President: All right. So help me out here. How many clubs are in the United States?

About 2,200 is the current estimate. About 500 -- about top 25% is what we'd like to own. Jason Scheurer;Orchard Wealth and Legacy Management, Inc.;President: Got it. Okay. All right. Good. And then do you know how much those 2,200 clubs do approximately in annual revenue?

There's all kinds of estimates are all over the place from $1 billion to $8 billion or something like that.

And we'll take our next question from Richard Keim with Kensington Management.

My questions have been answered.

[Operator Instructions] We'll take our next question from [ Peter Rojait ] with -- he's a private investor.

Couple of my questions have already been answered. It did have one though -- I think it was Slide 7. There was mention of a revitalization of the -- that churn company, the Robust, I think it was.

Yes.

Could you -- I could be mistaken. I thought you guys had abandoned that at some point, just because it wasn't turning out the way you had hoped. So I was just wondering if you could talk a little bit about that.

Yes. Well, basically, we bought our partner out, and we took control of operations. We were not an operating partner. We're a minority shareholder in the deals, but we were a huge consumer of the product through our clubs. It saves us a ton of money a year. So we ended up buying that partner out and taken 100% control of Robust and, since then, have added distributors. And we're continuing to grow it to third parties outside of just our use, and so that's where it's coming from.

Got it. Is that -- so do you feel like there's still a pretty decent opportunity there? Or...

Yes. I think -- I mean it's -- we're continuously growing. We're starting to pick -- picking up more distributors as we add distributors and add customer base. The nice thing is that retention is super high because the product sells well and mixes well with vodkas and other mixed drinks, and it's got a flavor profile that's similar to the brand leader. It's kind of the generic version at a much cheaper price. And once clubs switch to it, they tend to stick with it as we have for many years now.

[Operator Instructions] And we'll take our question from [ Maxwell Ellis ], private investor.

Most of my questions have been answered. But I was wondering, you kind of touched on this a little bit earlier, kind of run rate operating income margins on Bombshells. You said that 15% to 18% margin run rate, is that where you're thinking '20 will end up? Or because a couple of them are still new in coming online, will we not really see that run rate margin until 2021?

I mean it's really hard to say. I just kind of look at the historicals. If you look at the chart on Page 4 that we put out, you can kind of see in fourth quarter of '16, we were about 8% and we jumped up 14.9% if kind of look through that time frame, another time frame where we weren't doing a lot of expansion, so I think that's kind of -- seems to be kind of the target. Our target is between 15% and 20%. It looks like we're well in there between 14.9% and 19.5%. So I think if we stay 15% to 18%, I'll be happy with that.

Yes. I'd be happy with that too, fingers crossed. And then kind of final question for me. I know you said your target free cash flow yield on the stock buyback is 9.7%, I think you said. I'm just wondering how that compares to kind of -- and I know you said EBITDA is not the way to view it, but how you view that versus free cash flow that you might get from an acquisition of a new nightclub. I know there's risks involved with a new nightclub acquisition onboarding synergies by -- what's kind of the safe buying your own stock, your company versus, hey, I'm actually buying this separate club owned by somebody else and yes, it's riskier because I don't know it as well, but I'm really getting an extra return for the risk.

Yes. Well, the 9.7% you're talking about is the yield on paying down our 12% debt. We actually targeted double digits. So we want 10% plus. Right now, based on $26 million, that's about a $27 share price based on current stock outstanding. So we're probably buyers up to around $27 a share, but that doesn't keep us out of the market for clubs. We -- the last couple of clubs we've done have been 100% financed. So we can 100% finance, and we may do that. We may use our cash to buy those clubs. But at the current rate, I think our yield is about 17% on buying back our stock at $17 a share. So we're going to be looking very heavily at buying back our stock at this point versus acquisitions. If we do a risk factor acquisition, we typically like to have a 25% to 33% cash-on-cash return. So if we're going to put $1 million of our money back, we want to make sure we get $1 million that -- outside of the debt financing, we want to get that $1 million back in about a 3- to 4-year period max. And so that's kind of what we target. And really, we've been targeting higher to a 3-year -- pushing for a 3-year return of our cash is really what we've been looking at lately. If we're going to put cash out, we want it back within 3 years. But like the Scarlett's transaction, we really didn't put any cash out at all. But it's been a great acquisition for us and that we're generating all these cash out of location and paying off interests and the investors with the cash we're generating and keeping the remaining cash.

[Operator Instructions] Mr. Fishman, there appear to be no further questions at this time. I'd like to turn the call back over to you for any closing remarks.

Thank you, Eric. Thank you, Tom. We've included a few supplemental slides in our appendix. For those who joined us late, RCI will be at the Sidoti & Company Fall Investor Conference in New York City tomorrow. Registration is free for professional investors. You don't have to be a customer of Sidoti. All investors can also meet management tomorrow night at Rick's Cabaret in New York from 6:00 to 8:00 50 West 33rd Street between Fifth and Broadway. If you haven't RSVPed, ask for me at the door. On behalf of Eric, the company and our subsidiaries, thank you and good night. As always, please visit one of our clubs or restaurants. Thank you.

Ladies and gentlemen, thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.