Greetings, and welcome to RCI Hospitality Holdings Fiscal 2019 First Quarter Results Conference Call and Webcast. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. 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. You may begin.
Thank you, Sherry. For those of you listening to call on the phone, you can find our presentation on the RCI website. Click Company and Investor Information just under the RCI logo. That will 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 is posted at the beginning of our conference call presentation. It reminds you that you may hear or see forward looking statements that involve a number of risks and uncertainties. I urge you to read it.
Actual results may differ materially from those currently anticipated, 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 newscast. Finally, I'd like to invite everyone listening 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 1 gentlemen's club. You can also tour Rick's sister club, Hoops Cabaret and Sports Bar next door.
Rich is located at 50 West 33rd Street between 5th Avenue and Broadway, right around the corner from the Empire State Building. If you haven't RSVP'd ask for me at the door. Now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality.
Thank you, Gary. Thank you everyone for joining us this afternoon. If you please turn to Slide 4 to review today's news. We generated strong Q1 results. Total revenues increased 6.8 percent to $44,000,000 and GAAP EPS was $0.65 compared to $1.47 a year ago.
This year's Q1 included $1,200,000 in pre tax gain from the sale of non income producing assets. It also included $447,000 in pre tax non operating loss. This reflected implementation of a new accounting standard for changes in market value of equity securities. On the other hand, the year ago quarter included $9,700,000 in deferred tax credit as a result of federal tax reform. The year ago quarter also included $900,000 in debt issuance cost write offs and prepayment penalties related to our large Centennial Bank refinancing.
On a non GAAP basis, which eliminates all of these items and some others, EPS was $0.61 up 15% year over year and free cash flow was 11 $100,000 up 47%. In line with our capital allocation strategy and given where the stock was trading, we began buying back shares in the Q1. We have been active here in the Q2 as well. Altogether from October through January, we bought 28,211 shares in the open market. We continue to maintain our positive outlook for the year and our $26,000,000 free cash flow target.
I'll talk more about our free cash flow dynamics on Slide 8. I'd like to note that in our 10 Q filed today, we identified mechanical errors in our goodwill impairment analysis in our fiscal 2018 10 ks. It involved tax rate and debt service assumptions for 2 clubs in Texas and resulted in an additional impairment of $834,000 This is a non cash item. It was also considered to be an immaterial revision and have no effect on our Q1 results. If you please turn to Slide 5.
Sales were preliminary driven by 7.1% year over year increase in Nightclubs and to a lesser degree 3.2% increase in Bombshells. As previously reported, nightclubs same store sales were up 4.3%, while Bombshells were down. The latter was more than made up for by our Perryland location and a week or so of the new I-ten location, both in the Greater Houston area. GAAP operating income increased 21.8 percent or $2,000,000 That was driven by a $2,000,000 improvement in Nightclubs. The segment benefited from higher revenues, in particular higher service revenues and that $1,200,000 gain on sale.
But nightclubs also saw higher legal expenses in part due to Chicago and Pittsburgh acquisitions. Bombshells profitably reflected profitability reflected reduced operating leverage, while corporate expenses improved due to lower professional fees compared to a year ago. On a non GAAP basis, which excludes the Q1 gain, operating income increased 9.9% or about $1,000,000 Margins expanded 64 basis points to 23.1 percent of revenue. Please turn to Slide 6 to review sales of non income producing assets. We sold 3 assets in the Q1 for $1,900,000 resulting in that $1,200,000 gain, including where the former Club Onyx Philadelphia business, our former corporate offices and related real estate and a small parcel in San Antonio.
Collectively, we received $1,200,000 in cash and $625,000 promissory note. The cash was used in part to pay down close to $1,000,000 in related real estate debt. Subsequent to the quarter, we sold an access parking lot near the former Club Onyx in Dallas. The sales price was $1,400,000 with $250,000 paid upfront in cash and the remaining $1,150,000 dollars payable in the form of a 3 year seller note at 8%. We expect to record a pre tax gain of approximately $383,000 in the 2nd quarter results.
At the end of January, the only assets we held for sale were 2 access parcels near Bombshells I-ten and US 249. We anticipate closing those sales soon. We have several other tracks near our Bombshells locations that we hope to have under contract in this fiscal year. I'd like to note that the sale of non income producing former club related assets stems from our capital allocation strategy. In fiscal 2016, we took a good hard look at our assets.
We wanted to dispose of assets that were not providing us with adequate return and we wanted to return money losing assets into money making assets or free up as much capital as possible for more productive purposes. This is what these bigger asset sales in the Q1 and in January were about. Please turn to Slide 7 for a review of sales and margins. At $44,000,000 the Q1 of 2019 was a record quarter and it marked the 11th quarter in a row of total same store sales increases. This is the longest streak we've ever had.
While operating margin can fluctuate between quarters due to the seasonality of our business, we can see you can see on this chart on this slide that we have been making progress expanding margin as we drove larger. We hope to keep that up. Please turn to Slide 8 for a review of cash generation. Our cash totaled $9,400,000 at December 31. We had $17,700,000 at September 30.
The September balance included proceeds from debt used to finance the cash portion of the 2 November Club acquisitions and the related real estate. Adjusted EBITDA performed well, increasing 8.4 percent year over year to $12,000,000 Free cash flow for the Q1 had an impressive performance, was $11,100,000 versus $7,500,000 in the year ago period. I'd like to caution you not to get ahead of us with this. Sometimes the Q1 has a bit of a tailwind due to changes in working capital when we pay a lot of bills at the end of the Q4 and pay fewer in the Q1. This benefits free cash flow.
We will let you know when we feel comfortable whether we are likely to exceed our initial $26,000,000 target. Please turn to Slide 9. Our strategy for capital allocation remains the same. We've adjusted our graph on this slide to take into account our slightly lower share count due to share buybacks. But the general parameter is that $27 continues to be the breakpoint for buying shares at our current free cash flow run rate.
As I mentioned at the start of the call, we relaunched our buyback program when the stock began to soften in the Q1. And after the 10 ks was filed, we began purchasing again in January. We'll continue to do so in our standard and judicious manner. Please turn to Slide 10. Long term debt increased a net $12,500,000 for September 30.
This was primarily due to the addition of $12,000,000 in seller financing for the Chicago and Pittsburgh club acquisitions in November, which is secured by those clubs' assets. Our weighted average interest rate increased only 10 basis points and in total 85 percent of our long term debt is secured. Please turn to Slide 11. While slightly higher, debt continues to be manageable. We are paying down our $5,000,000 bank line of credit installment loan with Centennial.
That was used to finance the Chicago and Pittsburgh acquisitions. As of September 31, the balance was $3,100,000 and that should be paid off by the end of April. We continue to be on track for our large Centennial real estate loan to be 65% or less loan to value by the end of fiscal 2019. At that point, amortizations will drop $250,000 a month, freeing up $3,000,000 on an annualized basis. Looking forward ahead or looking farther ahead, the $3,100,000 Realty balloon in fiscal 2020 relates to Access Bombshells parcels and we plan to sell those before that becomes due.
As you know, we also look at occupancy costs and debt to adjusted EBITDA for debt manageability. Occupancy costs are rent plus interest as a percent of revenues. Both of these metrics increased in the Q1. That was a function of the debt we raised in advance of the Chicago and Pittsburgh acquisitions as well as debt related to the construction of new Bombshells locations. Occupancy costs and the debt ratio should decline with a full quarter of Chicago and Pittsburgh's Clubs and the bond shelf I-ten in the second period and then as the other 3 bond shelf open.
Please turn to Slide 12 and 13 to recap our fiscal 2019 plan. In Nightclubs, we will continue to complete the integration of Chicago and Pittsburgh. Most recently, they were renamed Rick's Cabaret, expanding the hiring gentlemen's club chain to 9 locations. We must also keep our eyes open for the right club acquisitions at the right price. With Bombshells, we will complete and open the 3 remaining units under construction and then review our progress.
We will also focus on improving same store sales. I'm pleased to report that the January Bombshells same store sales were down only a single digit percentage. As for our balance sheet, we anticipate closing sales on the access Bombshells parcels at prices that should enable us to reduce our debt on the actual Bombshells investment. And we will pay down the Centennial loan in order to drop our monthly amortization and free up cash. With regards to margins, we continue to look for ways to reduce costs and with capital allocation, we will continue the strategy that
has worked so well for us.
Thank you to all of our investors for supporting us and all of our staff for doing a great job. It is truly appreciated. Operator, let's begin the question and answer session.
Thank Our first question is from Frank Camma with Sidoti and Company.
The beat to my number when I adjust the numbers was pretty nice considering we're already near the revenue. And it sounds like it kind of when I go through my model, it really goes down, boils down to the service revenue and the margin to that, which you actually called out. But why would that be so strong in the quarter? It seemed pretty outstanding. So just wondering, was there something particular there that I'm missing as the mix or something like that or just it continues to be strong because of consumer confidence?
Yes. We just had a very, very strong December, especially for service revenues, in 3 of our markets in Florida, New York and Minnesota, which carried a bunch of it. And I think part of it is also the sale of assets.
You mean as far as getting rid of some weaker revenue producers. So it is kind of a mix this year when you look at it from that perspective, right? Yes. Okay. All right.
And so just I know you focus a lot on capital allocation. You have a pretty clear strategy. One question on that just is, obviously, you keep doing better and better free cash flow and one of your priorities is to buy back shares, which you totally appreciate. But do you worry it gets a little self defeating given just sort of your market cap as far as taking out some liquidity. I just wonder if you have any thoughts there?
Well, when the stock was $6 that was a problem because we were buying large number of shares with very small amounts of money, but with the stock in $22, $23 range as you can see, we spent well over $600 and some $1,000 between basically November and to January and we bought 28,000 shares. So I don't see it being a problem. Taking out 3% to 5 percent of our float in a calendar year at this point, I don't see that being a huge issue. I certainly think there's plenty of shares out there in the float that will trade.
Sure. Okay. And just one quick question on Bombshells. I didn't catch you made a comment about the did you say the first the January numbers were down to single digit comp declines, is that what you said?
Yes. We were down less than 10% in January for Bombshells. We've got some pretty good programs in right now. New stores are opening. The construction is moving along on the other three locations, which is exciting our management team and we like we've been marketing and hiring new management to help build and train for the new stores.
And I think that's really helping excuse me, re motivate our existing stores.
Okay. And it looks like the schedule is unchanged. I didn't compare to select the company. It wasn't that long ago, but it looks like the opening schedule is exactly the same as for right now.
Yes. Right now, we're on schedule. The only thing is the 249 for could run into early March, 1st week of March or something, if inspections run over, if we have any inspection issues because there's always those are out of our control. Everything in our control will be on time and we don't suspect we'll have any issues, but they're always possible. So but I don't think we would be any later than the 10th March opening.
And I think we could be as early as right around the end of February. Okay, great. Thanks guys. We're planning on right now as we get open right for that 1st week of March. Good.
Thanks.
Our next question is from Marco Rodriguez with Stonegate Capital Partners. Please proceed with your question.
Good afternoon. Thanks for taking my questions. I was wondering if we could talk a little bit about Bombshells and the operating margins non GAAP. Obviously, down here in a single digit area, just kind of trying to understand that this is just a function of the same store sales aspects or are there other sort of promotional activities that are kind of driving that down versus historical numbers?
I'll tell you what really drove it down was legal. We paid some pretty heavy legal bills in that quarter that we left as normal. We also had some depreciation and changes with the way some of the depreciation and deferred rents were booked in this quarter. So I think some of those changes hit in this quarter as well because of the way we did the write offs in the last I'd say in the year end or something. They were trying to explain to me exactly all these deals, but I thought this is crazy.
I know how I can look at the cash and see we generated all this cash from Bombshells, but you're telling me I didn't make any money. It doesn't make any sense. And so some of the non cash stuff kind of worked through there, but because of the way it's booked its GAAP and we it could be affected into the non GAAP number as well. So we didn't none of it was subtracted for non GAAP purposes.
Understood. So is that going to reverse itself coming in the second half of this fiscal year for you on Bombshells? Would you expect it to come back up to that 15% to 20% operating margin? Or is that going to be a lingering effect?
I think it should, yes. I think we're going to see a much different
quarter this quarter. And we'll get
an idea it's kind of headed from January, February, March. We won't have the legal bills. We does the county dismiss the case with prejudice. So that's all in the past for us. We don't have to we're not going to be facing those legal fees anymore.
The deferred rent issue is booked and worked out now. So it's going to be normalized rent going forward on those locations. And the stuff on whatever the deal with the Austin location was is all in the past now too. So I think we're going to see a normalized quarter this quarter. I'm hoping so anyway.
Got you. I mean, I know you guys are looking at it, what is the I'm having a hard time myself really figuring out all these adjustments that they did. So I just went back to the cash flow, okay, and said, okay, forget all that. Show me all the stuff is non cash, take it out. Show me what we're doing in cash.
Okay, we're doing good numbers in cash. Great.
Great. That's helpful. Then kind of shifting gears here to the night clubs. I was wondering if you can just kind of update us a little bit here on Chicago Pittsburgh. Kind of I know it's still early days, but how is that kind of progressing versus your expectations?
Pittsburgh is doing great, a little ahead. Chicago had some extreme weather. All three of our Illinois clubs, St. Louis, Kappa and Chicago were all affected by the big snowstorms and stuff, as well as Minnesota a little bit in January. So and of course, this year, we didn't have the Super Bowl in Minnesota.
So there are certain markets that are down a little bit. But overall, I think we're about I would say we're flat to down a little bit through the 1st 5 weeks on the Nightclubs. But we have the NBA All Star Game coming up in Charlotte, which will give us a big boost that week. And then we had some really good lineups for the March Madness. I'm sorry, I can't get my brain to work right now.
And then of course, in April, we will have the final 4 in Minnesota. So even if this quarter is down a little bit, we'll make it all back up in the April quarter. But I'm hoping we're all pushing, we've got our team, we know we've had 11 consecutive quarters of same store sales growth and we have all the teams pushing to these next 8 weeks to really beat last year's numbers so that we have a boost in same store sales for the 12th consecutive quarter. But this is a tough comp quarter for us for sure.
Understood. Got you. And then in terms of the acquisition landscape for Nightclub, maybe if you could kind of update us there if you have some possibilities that are moving along the line or further down the line, if you will, to a potential close?
I'm sorry. Can you ask it again? I missed the first part of it.
Yes. The acquisition landscape on the Nightclubs, just kind of trying to get an update.
We're looking at several still. I would say I don't think we do anything in this quarter unless something extreme popped up that we just couldn't say no to. But we are getting serious on a couple that we would move forward on probably the April to June quarter. Got you. Thanks a lot guys.
Appreciate your time.
Thank you.
Our next question is from Darren McCammon with Cash Flow Kingdom. Please proceed with your question.
Hi, guys. Most of my questions have already been asked. So I just really have 2. First, on the margin improvement that we saw this quarter, is that something you expect to continue? Or is it just a one time kind of thing?
If you see in the past, it fluctuates from quarter to quarter and it's really going to depend on how service revenue continues through the rest of this quarter and how it does for March Madness. March will be the real tale of how the quarter is going to go as it always is for the January, February, March quarter.
What is the specific service revenue that did better this quarter?
All of our VIPs. The business team? There's more people through the door in December, bigger parties in December, just a little bit of everywhere.
Okay. And then on the $11,100,000 in free cash flow, I know a nice chunk of that must be changes in working capital. Can you tell us give us an idea how much?
I don't know off the top of my head. I can get with Phil and the team and get you that number though.
Okay. Well, I'll be able to see it once the
In the queue, yes, we can definitely show up in the queue. Okay.
There are no more questions at this time. I would like to turn the conference back over to management for closing remarks.
Thank you, operator. Thank you, Eric. We've included a few supplemental slides in our appendix. Slide 18 is our calendar. For those who joined us late, you can meet management tonight at Rick's Cabaret, New York from 6 to 8 o'clock at 50 West 33rd Street between 5th and Broadway.
If you haven't RSVP'd ask for me at the door. The next event on our calendars, are appearance March 28 at the Sidoti and Company Spring Investor Conference in New York City. Registration is free for professional investors. We encourage our Tri State Area investors to attend our presentation or sign up for a 1 on 1. For those based out of town, use it as a reason to come to New York City and see us.
And on April 9, we're currently scheduled to report 2nd quarter nightclubs and Bombshells sales. On behalf of Eric, the company and our subsidiaries, thank you. Good night and as always, please visit 1 of our clubs or restaurants. Thank you.
Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.