Greetings, and welcome to RCI Hospitality Holdings First Quarter 2025 Earnings Call. You can find the company's presentation on RCI's website in the Investor Relations section, with all the links at the top of the page. Please turn to Slide 2 of our presentation. I'm Mark Moran, CEO of Equity Animal, and I will be your host today from Denver, Colorado. Eric Langan, President and CEO of RCI Hospitality, and CFO, Bradley Chhay, are in Houston. Please turn to Slide 3. RCI is hosting this call exclusively on X Spaces. All participants are in a listen-only mode at this time, and a question-and-answer session will follow. This conference call is being recorded. Please turn to Slide 4. I want to remind everyone of our safe harbor statement. You may hear or see forward-looking statements that involve risks and uncertainties, and actual results may differ materially from those currently anticipated. We do not have any obligation to update information disclosed in this call due to subsequent developments. Please turn to Slide 5. I also direct you to the explanation of RICKS' non-GAAP financial measures. Now I am pleased to introduce Eric Langan, President and CEO of RCI Hospitality. Eric, please take it away.

Thanks, Mark. If everyone will please turn to Slide 6. Thank you for joining us today. Let me run through some key takeaways. All comparisons are year-over-year unless otherwise noted. In our Nightclub segment, we generated an increase in total sales and same-store sales. While GAAP and non-GAAP operating profits were approximately level with the year-ago quarter. In our Bombshells segment, total sales declined as expected with the sale closure of underperforming locations, but GAAP and non-GAAP operating profit and margins both improved. On a consolidated basis, net cash provided by operating activities and free cash flow nearly matched year-ago levels, and we continue to make notable progress with our back-to-basics five-year capital allocation plan. During the first quarter, we sold or closed four underperforming locations in the Bombshells segment for a total of five since September of 2024. We also repurchased 66,000 shares for $3.2 million and as of December 31, we had 8,989,000 shares of common stock outstanding. In January, we acquired the Flight Club, a premier gentleman's club in the Detroit market. The purchase price was $8 million for the club and $3 million for the real estate. We estimate the club to generate about $2 million in annually adjusted EBITDA. We also opened the Bombshells in Denver and as part of the effort to improve Bombshells, we have changed leadership and Rafael Pedraza has now been promoted to our Director of Operations from Assistant Director of Operations. Now here's Bradley to review our performance in more detail.

Thank you, Eric. Please turn to Slide 7. All comparisons are year-over-year unless otherwise noted. Fourth quarter sales totaled $71.5 million, which largely reflects the sale and closure of the non-performing locations in the Bombshells segment, partially offset by the increased sales in the Nightclub segment. Other gains totaled $2.2 million. Net income attributed to RCIHH common shareholders was $9.0 million. EPS was $1.01 GAAP and $0.80 non-GAAP. Net cash provided by operating activities was $13.3 million, free cash flow was $12.1 million, and adjusted EBITDA was $15.7 million. Please turn to Slide 8. Nightclubs revenues increased $0.7 million or 1.1%. The key factors driving the first quarter revenues included a 3.7% increase in same-store sales and the addition of three new or reformatted clubs. This was partially offset by the absence of Baby Dolls Fort Worth. Food, merchandise, and other sales increased by 8.6%, alcoholic beverages by 3% while service declined by 3.7%. Other net gains totaled $0.8 million versus virtually nil from a year-ago quarter. The first quarter 2025 amount included $1 million in additional cash proceeds from Baby Dolls Fort Worth insurance. Operating income was $20.9 million compared to $20.4 million. Margin was 33.8% of revenues versus 33.4%. Non-GAAP operating income was $20.6 million compared to $21 million, and non-GAAP margin was 33.4% of segment revenues versus 34.3%. Please turn to Slide 9. Bombshells revenues declined $3.1 million or 24.7% due to the selling closure of five underperforming locations and a 7.5% decline in same-store sales. This was partially offset by a full quarter of the Stafford, Texas location, which opened in mid-November 2023. Other net gains totaled $1.3 million versus virtually nil from a year-ago quarter. The first quarter 2025 amount reflected a gain for the Bombshells that was sold. Operating income increased $1.9 million with a margin of 20.6% of segment revenues versus 0.7%. Non-GAAP operating income increased $0.5 million with a margin of 6.7% of segment revenues versus 1.2%. During the first quarter, there were no weather closures for Nightclubs and Bombshells. To date, however, in the second quarter, we've had 14 days for Nightclubs and seven days for Bombshells. Please turn to Slide 10. Corporate expenses increased $1.7 million on a GAAP and non-GAAP basis. This was due to the establishment of an insurance reserve. Please turn to Slide 11. We have some slides upcoming that discuss the free cash flow and adjusted EBITDA, which are non-GAAP. In advance of that, we wanted to present the closest GAAP equivalents on this slide, which are operating income, net cash provided by operations, and net income. Please turn to Slide 12. We ended the first quarter with cash and cash equivalents of $34.7 million. During the quarter, we used $3.2 million to buy back shares. As a percentage of revenues, free cash flow was 17% and adjusted EBITDA was 22%. Free cash flow was slightly lower than the year-ago quarter because maintenance CapEx was almost 30% higher. Please turn to Slide 13. The debt at December 31 declined by $2.7 million from September 30, reflecting scheduled paydowns. The weighted average interest rate was 6.65% compared to 6.61% in the year-ago quarter. Total occupancy costs were 8% versus 8.2% in the year-ago quarter. Debt to trailing 12-month adjusted EBITDA was 3.32 times compared to 3.28 times in the preceding quarter. This metric will decline as sales growth from locations that have come online more recently and are anticipated to open. Debt maturities also continue to remain reasonable and manageable. Now here's Eric.

Thank you, Bradley, and please turn to Slide 14. For those of you who are new to the company, let me explain our capital allocation strategy. We plan to allocate 40% to club acquisitions and 60% to share buybacks, dividends, and debt repayment. Our goal is to increase free cash flow per share by 10% to 15% on average each year. Please turn to Slide 15. Operationally, this means concentrating on our core Nightclub business. We are currently assessing every club in our portfolio with the aim of regularly boosting same-store sales. Our Nightclubs strategy also includes acquisitions, targeting an average of $6 million in adjusted EBITDA each year by focusing on the best clubs and emphasizing consistent gains, along with a few significant successes. Our target metrics remain at three to five times adjusted EBITDA for the club business and fair market value for real estate, aiming for 100% cash-on-cash returns within three to five years. Purchases will be funded through cash on hand, bank financing, and seller notes. For Bombshells, we aim to enhance the performance of existing locations. Our immediate target is to achieve 15% operating margins and return to same-store sales growth. We also plan to complete two additional locations currently being developed in Lubbock and Rowlett, Texas. Lastly, we expect to continue our regular buyback program and anticipate small annual dividend increases. Overall, we project generating more than $250 million in free cash over the next five years and buying back a substantial amount of stock. Given our current share prices and our outlook on the business, we believe this is a wise use of our capital. Our fiscal '29 targets include reaching $400 million in revenues, $75 million in free cash flow, and reducing our share count to 7.5 million shares. This would double our free cash flow from fiscal '24 to roughly $10 a share in '29. Now, please turn to Slide 16. With Bombshells Denver now operational, we have six more developments to complete. Chicas Locas in El Paso is finished and will reopen as scheduled on March 1. The interior construction at Bombshells Lubbock is progressing, with a target opening in mid-March. We are finalizing the last touches at Rick's Cabaret in Central City with an April opening goal. Framing and stucco work are in progress at Bombshells in Rowlett, aiming for a May opening. I would like to mention that both the Lubbock and Rowlett constructions are being funded through bank loans. We are still waiting on construction permits for Baby Dolls Fort Worth West and are awaiting engineering review for the original Baby Dolls rebuild. At this point, I want to express my gratitude to our loyal and dedicated teams for their hard work and to all our shareholders who believe in and contribute to our success. Here is Mark.

Thank you very much, Eric and Bradley. To start things off, we'd like to take questions from Rick's analyst, Scott Buck of H.C. Wainwright, and then some of our larger shareholders. Scott, please take it away.

Hey. Good afternoon, guys. Thanks for taking my questions. Bradley, I want to ask about the $1.7 million to establish the self-insurance reserve, is that non-cash or is that a cash expense? And should we think of that as one-time in nature?

Yeah, I can answer that Scott. It is a one-time deal. It was kind of a catch-up since we decided to self-insure starting in October due to the outrageous cost of insurance and until we get our captive set up or in the process of setting that up. So once the captive is set up, we will see how that all plays out. But right now, we have to follow the GAAP rules on accounting for this insurance potential liability. Of course, it's just going to be non-cash flow that goes into a reserve account and the balance just sits there. And then, if we get claims or have to pay defense costs, they will be for this time period, it will come out of those reserves.

Okay. And you guys did not add that back into your adjusted EBITDA number, right? So I think that adjusted EBITDA is a little north of $17 million?

Yes, we did not add that back in. The rules don't allow for that.

Okay. No, I appreciate that. And Eric, the club you acquired in Detroit, can you tell whether or not there's any opportunity there to maybe improve the EBITDA margins? I know you said $2 million this year, but I'm curious if that could move a little higher over time?

It's too early to say since we've only had it for a few weeks. The weather in Detroit has been extremely cold with a lot of snow, making it difficult to assess the situation. However, we believe that as we progress in that market and move past this unusually cold weather, we will definitely see improvements.

I appreciate that. Regarding the Bombshells that closed, are there any remaining cash obligations for the five locations that you shut down?

Not at this point. We do have a landlord suing us, but we believe our defenses will hold up. The parent company did not guarantee the lease in any way, and they're attempting to involve the parent company, but we don’t think that will be feasible under Texas law. Also, I want to clarify that the $1.7 million insurance reserve represents the excess insurance we applied to the corporate level. The actual reserve amount is $4.1 million, allocated by segment based on last year's insurance and a prorated share of the excess. The $1.7 million is essentially a makeup for how actuarial tables are managed, which is quite complex. It felt like trigonometry going through all this because we have never estimated our insurance costs before; we have always had them set. This time, we had to estimate a worst-case scenario to determine our maximum liability for the quarter. We analyzed all historic deals, considering both the best and worst quarters over a five-year period, and combined everything, which made it very complicated. However, this is the conclusion reached by the actuarial professionals, and that’s how we approached it.

I appreciate the clarification there. And then last one for me. If you could just kind of speak broadly to the operating environment, especially, on the club side, what you're seeing and what is kind of in-store here for the first part of 2025?

In the December quarter, our two largest contributors saw a slight decline, while many of our mid-size clubs experienced growth. This shift indicates that we have improved our approach, focusing more on attracting quality customers. Although some VIP spending has returned, our sales service revenues fell by 3.7% year-over-year, which is not ideal. However, we implemented some pricing and cost adjustments that allowed us to increase fluid merchandise and other revenue streams by 8.6%, raising overall nightclub revenues by 3.7%. I am confident in our pricing power, which will help us maintain our margins and aim for close to 3% same-store sales growth, consistent with our five-year plan. We also have between $23 million and $28 million in non-income producing assets that we plan to lease or sell to generate income or recover cash for reinvestment. This will be a focus over the next year. Reflecting back, when we adopted our capital allocation strategy in 2015, we began divesting some properties in early 2017. We are currently looking to sell a couple of clubs within that total asset range, as well as other properties purchased previously. We will continue to pursue this strategy to help achieve our growth targets by 2026.

Great. I appreciate the time guys. Thank you very much.

Yeah. Thank you.

Thanks so much for the questions, Scott. Next up, we have an analyst from Orchid Wealth. Please take it away.

Hey, guys. I see that we have 56 clubs right now. Does Detroit make it 57?

I believe so, but I don't know if we're counting. It should be 56 or 57. We haven't finalized that yet. I'll pass that on. The problem with counting is I can't keep track. So I actually have to go to accounting to get an exact number of clubs that are open and made money to start generating revenue this quarter. So I think those are revenue generating.

With the reopening of El Paso, what are your projections for sales from those locations? You have seven clubs, which includes four clubs and three Bombshells that will be added, not counting Detroit. What are your expectations for total sales once all of these are integrated into the existing figures?

I don't know. We've reformatted El Paso. I know the old El Paso club used to generate about $600,000 EBITDA. I'm hoping with the new format and upgrades in liquor that we can actually generate more income than that, but I just don't know at this point. We don't have the liquor license there yet, do we? No, El Paso doesn't have liquor yet. I'm sorry, I meant to say. So we don't have liquor yet, but we're trying to get the liquor license there. So probably very similar numbers to what we were doing before around $600,000 EBITDA from El Paso.

Obviously, we don't know anything about Central City because that's brand new. But...

Yeah, that will be brand new. But I think I'm hoping it's $1 million to $2 million EBITDA a year out there. I think that will be a deal. There are a lot of moving factors in that, let's get it open, and then whether we open the whole club, whether we open four days a week or seven days a week. There are a lot of factors that are going to influence that one until summer. I will have a really good idea on the August call regarding that location.

And then the Baby Doll Fort Worth?

We're aiming for October 1 to finish the construction on the west side and get it open. For the location where the fire occurred, we're targeting January. However, both timelines are uncertain as we are still in the process of implementation. Once we receive the permits, we can complete the builds in about six months, but we need to secure those permits and get everything underway for both locations.

Just then just to go back because obviously, the rebuild because of the fire, how much was that contributing before the fire, because obviously, if you get it back online.

We generated approximately $4 million in revenue, and I estimate the margins to be around $1.5 million, which is about 35% margins on that revenue for that location. Fortunately, we didn't lose all of that revenue because a significant portion of our customer base transferred to our club across the street. We have restructured that club, allowing us to recover some of the losses. I haven't checked the exact figures, but I would estimate we've managed to recover about 40%. Thus, the actual loss was around $1 million instead of $1.5 million, meaning we've recovered a third of it. At our other locations, we probably gained about $0.5 million, while we lost around $1 million at that particular location. The most significant setback for us has been the late-night changes in Dallas, which led to the need to reform XTC Cabaret. If we still had XTC, our financial situation would be significantly better; based on all the figures, we would likely see an increase of around $2 million to $2.5 million in EBITDA and over $1 million in free cash flow.

Currently, we have around 60 locations. Looking ahead to a year from now, we expect to add about 70 more, bringing the total to 67 clubs.

Six more.

Six more?

Yeah, Denver plus six. Denver is open now. So Denver was not open in this quarter, but it is open; it opened in January. So we'll be open in this quarter.

On any buys or things you're still working on? Obviously, we…

We have clubs out there that we're looking at. Lots of opportunities. You'll see that we actually adjusted the capital allocation strategy from a 50-50 split between debt and acquisitions on one side and stock buybacks and dividends on the other. We moved the debt to the stock buyback and dividend side and raised that to 60%, which basically works out to about $13 million for stock buybacks, $2.5 million for dividends, and $15.5 million for debt reduction or debt payoff, leaving us close to $25 million in cash — on the other side of that — I'm sorry, $20 million in cash on the other side of that equation to go to the cash portion of acquisitions.

Okay. But I'm assuming if something comes along that's better, you'll make an exception?

We will always follow a strategic rationale if one presents itself. However, for the next five years, our focus will primarily be on capital allocation strategies. This means we might adjust our investment percentages, potentially buying less stock if a better acquisition opportunity arises or if our stock price becomes very attractive. Our main considerations will involve stock buybacks and acquisitions. At this point, I do not intend to initiate any new projects; I’m not actively seeking them. I often receive calls asking if I'm interested in this or that opportunity, but if they aren't generating income, my answer is likely no. We're maintaining a conservative approach until all of our ongoing projects are completed, and we have refined our capital strategy to its fullest extent. We need to streamline all expenses and organize our non-income-producing assets before considering new ventures, like acquiring or developing a club, unless it’s a strong concept from an underperforming licensed facility. For at least the next nine months and through the remainder of fiscal year 2025, we plan to adhere to this strategy. We have plenty on our agenda without adding anything new, so our priority now is to ensure everything is running smoothly.

And then, on the last point, the idea being is over the course of the year, you've got $23 million to $28 million worth of non-performing assets that you'll be repositioning that could be used for any of these other items we discussed.

Absolutely. I was just going to comment that it will become capital and go into our cash, and then we'll allocate it accordingly.

All right. Thanks, guys.

Fantastic. Thank you so much for that. Next up, we have D&D Realty. Please take it away.

Hi. Thank you for your time and for taking my question. You mentioned that you are considering selling some clubs. How many clubs are you currently looking to divest? Additionally, you own 88 properties. Have you conducted an analysis on the actual value of your real estate? I know you carry your property and equipment at about $280 million, but what do you believe the fair market value is for all your real estate? Thanks.

I think you're including property and equipment in the $280 million.

Yeah. But I'm just wondering what...

There is a significant amount of equipment involved, and it's not just about real estate. I'm uncertain about our real estate situation. Prices and values have fluctuated quite a bit, and we haven't conducted recent appraisals. The last appraisals we had were in 2021 for a few projects that were part of the new refinance process, with the original refinance happening in 2017. We haven't performed any new appraisals on those properties since then. If I had to estimate, the value of the real estate alone is likely in the range of $250 million to $280 million, excluding all the equipment and other factors. However, it's challenging to determine an accurate figure because I haven't thoroughly assessed everything.

And then how many clubs are you considering?

There are two clubs located in the same area that we want to divest. We have a broker who specializes in selling adult clubs and is discreetly reaching out to potential buyers. We will not be publicly listing these clubs for sale; instead, they will be marketed through this broker, who has established connections with individuals already involved in the adult entertainment industry and is currently evaluating those two locations with us.

Thanks.

Fantastic. Thank you for that question. On behalf of Eric, Bradley, and the company as well as our subsidiaries, thank you, and good night. Please visit one of our clubs or restaurants to celebrate Valentine's Day, Saint Patrick's Day, or just to have fun and have a great time. Take care and have a good one.