Rocky Mountain Chocolate Factory, Inc.
Q3 2014 Earnings Call Transcript

Published: 14 Jan 2015

[Operator:]

Hello and welcome to the Rocky Mountain Chocolate Factory Third Quarter and Nine Months of Fiscal 2015 Earnings Conference Call. All participants will be in listen-only mode (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. Some of the statements made during this call may be considered forward-looking statements that involve a number of risks and uncertainties. There are several factors that could cause actual results of Rocky Mountain Chocolate Factory to differ materially from these forward-looking statements. These factors include, but are not limited to, the potential need for additional financing, the availability of suitable locations for new stores, and the availability of qualified franchisees to support new stores, customer acceptance of new products, dependence upon major customers, economic and consumer spending trends, and such other factors listed from time-to-time in public announcements and in Rocky Mountain Chocolate Factory's SEC reports. In addition, please be advised that the financial results for the fiscal periods presented in this call do not necessarily indicate the results that may be expected for any future quarters or the upcoming fiscal year. To Rocky Mountain Chocolate Factory's knowledge, the information relayed in this conference call is correct as of the date of its transmission and the Company does not undertake any obligation to update this information in the future. I would now like to turn the conference over to Franklin Crail, CEO. Mr. Crail, you may begin.

[Franklin Crail:]

Thank you. Good afternoon everyone and welcome to Rocky Mountain Chocolate Factory’s third quarter and nine months of fiscal 2015 conference call. I am Frank Crail, President of Rocky Mountain Chocolate Factory and with me here today is Bryan Merryman, the Company’s Chief Operating Officer. We’re going to start the call today with Bryan giving you a summary of both our third quarter and nine months of fiscal 2015 operating results. And at the conclusion of his presentation, we will be happy to answer any questions that you might have. So at this point, I’d like to turn the call over to Bryan.

[Bryan Merryman:]

Thanks, Frank. I would also like to welcome everyone to our call today. I am going to start with some highlights from the first nine months of the fiscal year and then get into some details in the quarter and in nine month period. For fiscal 2015, our non-GAAP adjusted net income and diluted earnings per share increased 31% in the third quarter, a sequential improvement from the 28% and 25% increase in non-GAAP adjusted net income and diluted earnings per share reported in the second. Our year-to-date non-GAAP adjusted net income and diluted earnings per share increased 9% and 8%. Despite the impact of harsh winter storms upon customer store traffic in the first quarter and higher chocolate prices in the first nine months of fiscal 2015, we continue to remain optimistic that revenue and non-GAAP adjusted net income and diluted earnings per share for the full year has the potential to increase to record levels. Our adjusted-EBITDA and non-GAAP measure, that does not include depreciation and amortization, equity compensation expense and impairment and restructuring charges, increased 51% in the third quarter of fiscal 2015 and increased 22% year-to-date. Adjusted-EBITDA from our frozen yogurt operations increased 210% from 477,000 in the nine months ended November 30, 2014 to 1,480,000 in the current year, validating expectations that the transactions consolidating our yogurt operations would create scale and a profitable company capable of becoming a consolidation force in the frozen yogurt industry. We experienced further international progress with the recent signing of license agreement for the Republic of the Philippines as well as the execution of the license agreement for the province of British Columbia, Canada by a licensee of U-Swirl, Inc. During the first nine months of fiscal 2015, we purchased over $2 million of our common stock under a previously announced repurchase authorization. We finished the quarter in excellent financial condition with $7.9 million of cash in the bank. As a result on November 12th, we paid our 46th consecutive quarterly cash dividend and increased our quarterly cash dividend 9% from $0.11 per share per quarter to $0.12 per share per quarter, and we reset the buyback authorization to $3 million. I will now get into some of the details from the nine months. Total revenues for the nine months increased 7.9%. This was driven by factory sales increase of 2.7%, primarily due to a 33% increase in shipments of products to customers outside our network of franchise retail stores, partially offset by 6.2% decrease in the average number of domestic Rocky Mountain Chocolate Factory franchise stores in operation and a 2.1% decrease in same-store pounds purchased. Royalty and marketing fees increased 33.3% in the first nine months. This was driven by increased franchise units in operation, resulting from acquisitions and consolidation of our frozen yogurt operations. Franchise fees for the first nine months increased 22.9%, primarily the result of two international license agreements and the sale of certain Company operated stores and the associated franchise fees. Retail sales were approximately flat, decreasing 8

[Franklin Crail:]

Thanks Bryan. At this point, we will open up conference to any questions that someone might have.

[Operator:]

(Operator Instructions) And our first question comes from Matt Karr with Symons Capital. Please go ahead.

[Matt Karr:]

Just first quick house-keeping question. Going through release, the third quarter pretax income number, I am not exactly sure what's going on here. But I think that there is a calculation error in the press release. It appears that the other net expense is not being deducted from the pretax income. And I just want to make sure I am not missing anything here because the math doesn’t add up?

[Franklin Crail:]

So, income from operations in the press release for the three month period…

[Matt Karr:]

Yes.

[Franklin Crail:]

Is 1,554,000, other net is 45,000.

[Matt Karr:]

Yes, I am talking about income before taxes.

[Franklin Crail:]

The 1,509,000?

[Matt Karr:]

Yes, I am getting 1.464.

[Franklin Crail:]

Well, you are not doing it right.

[Matt Karr:]

Okay, fair enough. Second question I guess would just be the big number in the outside network sales. Would you guys be willing comment at all, is that chocolate bars. What exactly is the explanation for that pretty big numbers in your customer’s chocolate bars? Would you be willing comment on what that is?

[Franklin Crail:]

It’s a variety of products. And it is new business and its existing customers. I mean it’s not just chocolate bars. In fact chocolate bars are very small percentage of that number.

[Operator:]

The next question comes from Bill Chapman with Morgan Stanley. Please go ahead.

[Bill Chapman:]

Bryan, good afternoon this is Bill Chapman. And on the U-Swirl, could you give us more understanding about the growth potential here in the short and medium term, please?

[Bryan Merryman:]

It really depends on future acquisitions, how fast U-Swirl can grow. We have been through -- really we have been through opportunities to acquire most of the larger players in the industry, not all of them, but most of them. And haven’t done any recent acquisitions because in the process that was run to sell those companies, the valuations that we believe were appropriate, management and management advisors for those companies was too low. And so right now we don’t have any immediate plans to do any more acquisitions of the significant nature until we see valuations come down further. So, I still think U-Swirl can be a major consolidator of the frozen yogurt industry. The time is on our side. But we are going to be very patient as it relates to future acquisitions.

[Bill Chapman:]

Is your cost reduction initiative completed?

[Bryan Merryman:]

It was primarily completed in the third quarter. There will be some further cost reductions that are not too material that will happen before the end of the fiscal year.

[Bill Chapman:]

Are we talking about $1 million north of that or south of that on the total cost reductions when you are done?

[Bryan Merryman:]

We haven’t disclosed that number. But when we report our fiscal year, we will disclose that number Bill.

[Operator:]

The next question comes from Neil Simpkins, a Private Investor. Please go ahead.

[Unidentified Analyst:]

It’s Neil Simpkins here. Good afternoon. If my math is correct, it looks as if the drop of 14% in the number of the yogurt stores that you have. And if that number is correct, is that a trend we could look forward to in the upcoming quarters in terms of store closings?

[Franklin Crail:]

The nature of the frozen yogurt industry is that the industry has experienced market saturation and declining same-store sales. The result is that many lower volume stores may face economic pressures causing them to close. When we evaluate potential acquisitions, we understand this trade and we reflect that in the price we are willing to pay. So, the closures that we experienced in the third quarter were expected and anticipated. That level of -- what the level of closure will be in the future don’t have an exact number for it. But we will continue to see closures in our system and in the industry.

[Unidentified Analyst:]

And then a follow-up to that, you have, or had I think a franchisee or licensee in the Midwest, I believe Iowa, who closed the number of stores, including one of the top 20 best performing stores from a revenue standpoint. My question is at what point does the Company acknowledge that there has been impairment to the franchisee, licensee and royalty payments and needs to take a charge to account for store closings and the loss of that future learning issuing to the Company?

[Franklin Crail:]

We conduct impairment test annually or in the event of an impairment indicator as it relates to goodwill. Franchise rights to considered to have a 20 year life and we conduct an impairment test annually, or in the event of impairment indicator. We do not believe we have an impairment of goodwill on our franchise rights currently.

[Operator:]

Our next question comes from David Luebke with J.P. Turner. Please go ahead.

[David Luebke:]

The price of coco has been a headwind for some time. It looks like it will continue to be. But one thing I didn’t realized until reading the press release is the transportation costs were down. And of course since the end of November, the price of fuel has gone down even more. Can you comment on the significance of that, those two headwinds and tailwinds?

[Franklin Crail:]

Well, I'll just say that coco continues to be high, dairy products continue to be high commodities in general, that we experience tend to move in different directions. One year, almonds will be up, the next year they will be down. But as a basket, we don't expect that transportation cost -- our transportation cost, about a third of those costs of fuel. So, looking forward, that's definitely going to help us. If commodities go down and chocolate and dairy prices come down from their highs. And we have low transportations cost, that could be a material and positive for the Company. However, just fuel alone, I am not anticipating that that will move the needle that much next year.

[Operator:]

The next question is a follow-up from Matt Karr with Symons Capital. Please go ahead.

[Matt Karr:]

Hey, first sorry about that on the pretax income question, presentation just threw me off a little bit. And now that I remembered looking back to you guys releases that presentation had messed with my model before. So I apologize for it. Your number is correct, that's my fault. But I wanted to ask about sort of clarification question on your store closures. Just kind of some back on the onboard math from, call it end of third quarter 2014 to the current quarter presentation. Considering like the large jump in yoghurt stores between those two quarters, it looks around like on a net basis probably around like 17% reduction in overall yoghurt stores from period-to-period, starting with the fourth quarter of 2014 to present. And you guys have said before that maybe as much as 30% of the yoghurt stores that you acquire in any given deal might be closed. So, would you be willing to comment and say, I know that you are not willing talk about the pace of store closures. But would you maybe be around halfway done through the closures of the stores that you have acquired since that point? Does that question make sense?

[Franklin Crail:]

It makes sense, but I am not going to elaborate anymore than we have in terms of what our expectations are. I think I actually said 30% to 40% of the stores in any given deal could close and that we're pricing that in. And for the first nine months, we opened 21 yoghurt stores and we closed 44. So, that net loss of stores, whether that continues or not, we don't know or exactly how that plays out quarter-to-quarter we don't know.

[Matt Karr:]

Okay. Fair enough. Thanks again and sorry for the confusion.

[Operator:]

The next question is a follow-up from Neil Simpkins, a Private Investor. Please go ahead.

[Unidentified Analyst:]

Yes, and I will make this brief. It looks like in the prior couple of quarters there was some meaningful, if not, very high percentage of stock buyback done by the Company from the management team. And can you comment on what levels of stock we could expect management to continue to sell back for the Company for the stock buyback plan?

[Franklin Crail:]

In the previous authorization of $3 million for buybacks, $1 million of that was designated to be allowed for management to sell back to the Company. The Board designated a $1 million of that buyback. I have no comments on insider sales in the future.

[Unidentified Analyst:]

So, has that number changed, or is it still a million cap?

[Franklin Crail:]

There is no number related to the new $3 million that allows management to sell back for the Company.

[Unidentified Analyst:]

So theoretically it could be a very large percentage if it is the correct?

[Franklin Crail:]

No, there is no percentage of it is that is designated for management to sell back to the Company. The new $3 million authorization does not have a feature where management can sell back to the Company.

[Operator:]

We show no further questions, at this time. I would like to turn the conference back over to management for any closing remarks.

[Franklin Crail:]

Thank you, Operator. Again, thank you very much for attending our conference call. And we look forward to talking with you again at year-end. Have a good day. Thank you again. Good-bye.

[Operator:]

To access the digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088 beginning at 5