Rocky Mountain Chocolate Factory, Inc.
Q2 2018 Earnings Call Transcript

Published: 5 Oct 2017

[Operator:]

Hello everyone and welcome to Rocky Mountain Chocolate Factory's Second Quarter Operating Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded. The statements made on this conference call which are not historical facts are forward-looking statements based upon the company's current plan and strategies, and reflect the company's current assessment of the risks and uncertainties related to its business, including such things as product demand and market acceptance, the economic and business environment, and the impact of government pressures, currency risks, capacity, efficiency, and supply constraints, and other risks detailed in the company's press releases, shareholder communication, and Securities and Exchange Commission filings. For additional information, the company urges you to consider reviewing its 10-Q and 10-K SEC filings. At this time, I'd like to turn the conference call over to Mr. Franklin Crail, President. Sir, please go ahead.

[Franklin Crail:]

Thank you, Operator. Good afternoon everyone and welcome to Rocky Mountain Chocolate Factory's second quarter fiscal 2018 conference call. I'm Frank Crail, President of Rocky Mountain Chocolate Factory and with me here today is Mr. Bryan Merryman, the company's Chief Operating Officer. We're going to start the call today with Bryan providing you a summary of both our second quarter and first six months of fiscal 2018 operating results. At the conclusion of his presentation, we will be happy to answer any questions that you may have. So at this point, I like to turn the call over to Bryan.

[Bryan Merryman:]

Thanks Frank. I would also like to thank everyone that attended today’s call. I will start with our year-to-date results and then cover the second quarter. For the first half of fiscal 2018 overall revenues decreased 2%, driven by decreases in royalty fees and retail sales mostly offset by increases in factory sales and franchise fees. Factory revenues increased 3.1% due primarily to a 22% increase in shipments to customers outside our network to franchise stores, partially offset by 1.2% decrease in same-store accounts purchased by franchisees and license fees. And a decline of 2.6% in the average number of domestic Rocky Mountain Chocolate Factory franchise stores in operations. Retail sales decreased 15.4%, due to the sale of certain company-owned locations and the closure of underperforming company-owned locations. Same-store sales of all company-owned cafes and stores decreased 5%. Royalty and marketing fees decreased 12.3%. This was driven primarily by 15.9% decrease in domestic franchise units. Same-store sales at domestic Rocky Mountain Chocolate Factory franchise stores decreased 2.1%. Same-store sales at domestic U-Swirl franchise cafes declined 4.8%. Total same-store domestic franchise sales across all brands decreased 3.2%. Franchise fees increased 165.9%. We have international license fees in the current quarter with no international license fees in the prior year. Factory margins increased 90 basis points to 26.6% from 25.7%. This was driven primarily by decrease in the cost of certain commodities. Excluding retail expenses, operating expenses decreased 4.8% on lower G&A expenses and lower sales and marketing cost. Adjusted EBITDA was $3,762,000 versus $3,755,000. Net income was $1,742,000 compared to $1,707,000. Diluted earnings per share came in at $0.29 in the current year, compared to $0.28 in the prior year. During the first six months, we opened five stores, three Cold Stone Rocky Mountain cobranded stores, one domestic Rocky Mountain Chocolate Factory franchise opening, and one international location. We finished the quarter with approximately $5.7 million in cash, the current ratio of 1.9 to 1 and on September 15, 2017 the company paid its 57th consecutive quarterly cash dividend to shareholders in the amount of $0.12 per share. We also executed license agreements covering the countries of Vietnam, the Republic of Panama, and the State of Qatar. In the second quarter, total revenues decreased 3.9%. Factory revenues decreased 1.9%, primarily due to 4.2% decrease in same-store pounds purchased by franchise fees and license fees. A decreased 2.1% in the average number of domestic Rocky Mountain Chocolate Factory franchise stores in operation, partially offset by 39.5% increase in shipments to customers outside our network of franchise stores. Retail sales decreased 11.9% in the quarter, the result of the sale in closure of certain company-owned stores and cafes. Same store sales at company-owned stores and cafes decreased 4.1%. Royalty and marketing fees decreased 8.8%. This was due to a 15.8% decrease in domestic franchise units in operation. Same store sales at domestic Rocky Mountain Chocolate Factory franchised stores decreased 3% in the quarter. Same store sales at domestic U-Swirl franchise cafes decreased 1.5%. Total same-store domestic franchise sales across all brands decreased 2.4%. For the quarter, franchise fees increased 229%. This was a result of the international license fee associated with the State of Qatar. Franchise margins increased 130 basis points in the quarter to 29.1% versus 27.8% last year. Again, this is due to the decrease in cost of certain commodities. Excluding retail expenses operating expenses decreased 2.2% in the quarter. Adjusted EBITDA was $2,014,000 versus $2,019,000 million. Net income came in at $928,000 versus $975,000 more next year. Diluted earnings per share were $0.16 in the current quarter and in the prior year quarter. We opened five stores during the three months ended in August, three Cold Stone co-branded stores, one domestic Rocky Mountain Chocolate Factory Store, and one International store. We finished the quarter again with $5.7 million in cash with current ratio of 1.9 to 1 and as I said earlier we paid on September 15, the company’s 57th consecutive quarterly cash dividend to shareholders in the amount of $0.12 per share. Those are my prepared remarks. With that I will turn it back over to Frank.

[Operator:]

Mr. Crail is it possible your phone is on mute?

[Franklin Crail:]

Yes, it was. I’m sorry. Thanks Bryan and at this time, we would be happy to answer any questions you might have.

[Operator:]

[Operator Instructions] And our first question today comes from Tim Call from Capital Management Corporation. Please go ahead with your question.

[Tim Call:]

I was wondering where you see future international growth and if you could quantify any of that opportunity?

[Bryan Merryman:]

Thanks Kim. I really can't quantify the future opportunities. We are working in a number of countries including China, but I really don't want to speculate or create expectations as it relates to international expansion. We have a very good operation in Canada and South Korea. We have sold some smaller countries and we will see how those go, I think it is going well in Philippines, but I really don't want to create any kind of expectations in the future as it relates to international operations.

[Tim Call:]

With your huge operating cash flow you’ve spent some of that, some additional amounts to and reinvesting in your company, manufacturing, and mail-order operations website what’s the timeline of that spending, when will that spending decline and when will we see the benefits from that spending and where should we not only when should we see it, but where should we see it?

[Bryan Merryman:]

I hope that we see the benefits of last year's spending in our factory and the back half of this year. The first half of this year went as expected. We saw some margin improvements. I think we saw some efficiency improvements. We’ve built some inventory more so in the past for the back half of the year and really expect to see some margin expansion in the next six months. So, I think we will see that, most of the capital that we have allocated to the factory will be spent in the last six months of the year, and most of what were spent in the first part of the year where maintenance CapEx and so hopefully we will see the benefits of the last two years of spending in the factory in margin improvement next fiscal year. In terms of mail-order and efforts we put there, really not mail-order Internet and we are seeing good percentages of very, very small numbers right now. Most of over 50% of our sales from our Internet site rmcf.com happen in the month of December. We are going to spend some advertising this year that we haven't done in the past and we will see if we can significantly increase our sales. We have big increases in it now, but the numbers are so small it is really not worth talking about. So we hopefully will see that and I don't know if I have answered all of your questions, if I didn’t go ahead and ask it again.

[Tim Call:]

You did. Thank you, Bryan.

[Operator:]

[Operator Instructions] We do have a follow-up question from Tim Call from Capital Management Corporation.

[Tim Call:]

As your cash flow, your free cash flow is significant and will grow not only with your operations, it's going to grow - the increase of spending in your operations and Internet and so forth that’s going to be over soon. So as that spending subsides your free cash flow will grow even more. Given that, should there be an expectation that over the next two years that you increased the dividend or have more significant share buybacks to benefit your loyal long-term shareholders.

[Bryan Merryman:]

That’s great question Tim. Over the next two years we will completely repay all of our long-term debt. Our debt service is right about $1.4 million annually. We’ve been investing in the factory, we invested heavily last year and back half of the year we will invest heavily. We do have some initiatives that we are working on our very preliminary that could use free cash flow and - but having said that with the debt service going away there is -- obviously that could be a source to significantly increase the dividend, as well as the factory getting back to mainly maintenance CapEx. So both of those areas can produce some free cash flow that we could use to increase the dividend. So, I think that it is possible over the next two years and if there was also, if we have some tax reform and our rate was lower, that could produce some significant cash flow too and all of that could be used for a variety of uses to hopefully increase revenues, increase the dividend as well. So, yes there are some positive events that we hope to materialize and that’s - your question is exactly right.

[Tim Call:]

And so that is some possibility of no debt in two years and so interest expense might fall by 100% over the next two years?

[Bryan Merryman:]

If we started to use the credit line for instance maybe it wouldn't be zero, but we would definitely - the interest expense we are incurring now would go to zero.

[Tim Call:]

Thank you very much.

[Bryan Merryman:]

Sure.

[Operator:]

[Operator Instructions] Our next question comes from Jason Cassidy. Please go ahead with your question.

[Jason Cassidy:]

Hi Bryan, I was wondering if there was any update to the active litigation matter, I believe in the call last quarter you said, you thought it would be over - or at least have an update by the end of September.

[Bryan Merryman:]

The company won the litigation and summary judgments. The claims were completely dismissed and we expect no activity as it relates to those matters in the future.

[Jason Cassidy:]

Okay, great, thank you.

[Operator:]

And ladies and gentlemen at this time I’m showing no additional questions. I’d like to turn the conference call back over to management for any closing remarks.

[Franklin Crail:]

Thank you, Operator. Again, thank you very much for listening to our second quarter conference call. We look forward to talking with you and giving you an update in three months. Have a great day and thanks again, bye, bye.

[Operator:]

And ladies and gentlemen to access the digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088, beginning at 5