Q4 2012 Rocky Mountain Chocolate Factory Earnings Conference Call

May 03, 2012 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D   V E R S I O N

RMCF - Rocky Mountain Chocolate Factory Inc
Q4 2012 Rocky Mountain Chocolate Factory Earnings Conference Call
May 03, 2012 / 08:15PM GMT 

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Corporate Participants
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   *  Franklin Crail
      Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President
   *  Bryan Merryman
      Rocky Mountain Chocolate Factory, Inc. - COO, CFO, Treasurer, and Director

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Conference Call Participants
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   *  George Whiteside
      SWS Financial Services - Analyst
   *  Jeff Geygan
      Milwaukee Private Wealth Management - Analyst
   *  Steve Shaw
      Sidoti & Company - Analyst

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Presentation
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Operator   [1]
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 Hello, and welcome to the Rocky Mountain Chocolate Factory fourth quarter and fiscal year-end earnings 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, 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 those forward-looking statements. These factors include, but are not limited to, the potential need for the additional financing, the availability of the suitable locations for new stores, and the availability of qualified franchises to support new stores, customer acceptance of new products, dependence upon major customers, economic and consumer spending trends, and such other facts 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 turn the conference over to Franklin Crail, please go ahead.

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [2]
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 Thank you, operator. Good afternoon, ladies and gentlemen, and welcome to Rocky Mountain Chocolate Factory's fourth quarter and fiscal 2012 year-end 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 are going to start the call this afternoon with Bryan giving you a summary of both the fourth quarter and year-end operating results, and at the conclusion of his presentation, we'll be happy to answer any questions that you might have.

 So at this time, I'll turn the call over to Bryan.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - COO, CFO, Treasurer, and Director   [3]
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 Thanks, Frank. I would also like to thank everyone for attending the call today. I'm going to start out with a brief summary of fiscal 2012 and then get into some more detail on our fiscal year. And then, I'll also get into some detail on our fourth quarter and then turn it back over to Frank for some questions and answers.

 Fiscal 2012, we look at as a very positive year for the Company. It was our second year in a row of slightly positive same-store sales growth after three straight years of negative same-store sales growth. We had fairly strong revenue growth for the year, driven by Aspen Leaf Yogurt retail sales and a real strong increase in specialty market sales.

 In a still very tight credit environment, at least for our concept, we managed to open 22 net new domestic franchise locations, of which eight were standalone Rocky Mountain Chocolate Factories, 10 were Cold Stone Creamery co-branded locations, and four were Aspen Leaf Yogurt locations.

 Rocky Mountain Chocolate Factory's operating results were comparable with fiscal 2011 despite a pre-tax operating loss of $586,000 related to Aspen Leaf Yogurt start-up costs. We finished the year in a manner that gave us the confidence to raise the dividend and we successfully tested a kiosk location in a upscale Tokyo mall that has resulted in a 100-unit Master License Development Agreement and created a new focus on international development for the Company.

 For the year, total revenues increased 11.2%; royalty and marketing fees were up slightly, increasing 0.7%. This was driven by a 1.1% increase in same-store sales, partially offset by a decrease in domestic units in operation. Franchise fees declined 21.9%. We had fewer Rocky Mountain Chocolate Factory domestic franchise locations opened. We opened eight this year versus 11 in the prior year. We also had fewer Cold Stone Creamery licensed locations opened, 10 opened in the current year versus 22 in the prior year.

 Our factory sales for the year increased 9.1%. This was due primarily to a 25.7% increase in shipments to specialty market customers and was partially offset by a 0.5% decrease in same-store pounds purchased. Retail revenues increased 42%. This is primarily the result of increased Company-owned units in operation and a 6.8% increase in Company-owned same-store sales.

 Factory margins were comparable in fiscal 2012, when compared with 2011, primarily due to efficiencies associated with higher production volume and offset by commodities still being near historical highs. Net income was $3.876 million compared to $3.911 million in the prior year. Our fully diluted earnings per share was comparable at $0.62 in both the current and prior year.

 On March 16, 2012, the Company paid its 35th consecutive quarterly cash dividend of $0.10 per share and subsequent to year-end, the Board of Directors approved the payment of our first quarter fiscal 2013 dividend at $0.11 per share, an increase of 10%.

 Despite a lackluster recovery to a brutal recession, the Company is in excellent financial condition. At the end of the year, our current ratio was 4 to 1 and we remained free of long-term debt. We opened 33 new locations system-wide, including 10 Cold Stone co-branded stores, two international stores, eight domestic Rocky Mountain Chocolate Factory franchise openings, four franchised Aspen Leaf Yogurt openings, eight Company-owned Aspen Leaf Yogurt openings, and one Company-owned Rocky Mountain Chocolate Factory opening.

 So, that wraps up the year and I'll get into a little bit of detail on the fourth quarter here. For the fourth quarter, total revenues increased 13%. This was driven by an increase in factory revenues of 14.5% during the quarter. Again, in the quarter, we had a real strong increase in specialty market sales of 25.4%. We had an increase in same-store pounds purchased of 6%, that 6% increase in the fourth quarter of same-store pounds purchase was really just a timing difference in Easter this year and the quarter benefited from that.

 Our retail sales in the fourth quarter increased 24.1%. This was due to more units in operation, and an increase -- real strong increase in Company-owned same-store sales of 11.9%. In the quarter, royalty and marketing fees increased 2.5%. This was driven by a 4% increase in same-store sales, an increase in royalties related to the Cold Stone Rocky Mountain co-branded program, and was partially offset by a 3.9% decrease in averaged franchise units -- domestic franchise units in operation.

 Franchise fees declined 67.2% in the quarter. We had fewer domestic franchise openings, one in the current year versus three in the same quarter of the prior year. In the fourth quarter, factory margins increased 140 basis points from 30.6% in the prior year to 32% in the current year. This was due to improved manufacturing efficiencies on a very comparable level of production.

 Operating expenses increased 4%. Excluding the costs associated with the development of Aspen Leaf Yogurt, operating expenses in the fourth quarter were unchanged from the fourth quarter in the prior year.

 The fourth quarter net income came in at $1.320 million compared to $1.162 million in the prior year, despite incurring a pre-tax operating loss of $306,000 related Aspen Leaf Yogurt. Basic earnings per share were $0.22 versus $0.19. Fully diluted earnings per share were $0.21 versus $0.18.

 During the quarter, we opened 11 stores, three Cold Stone Rocky Mountain co-branded stores, one domestic franchise opening, one international opening, five Company-owned Aspen Leaf Yogurt openings, and one Company-owned Rocky Mountain Chocolate Factory opening.

 During the quarter, we continued to generate excess cash flow and we finished the quarter with approximately $4.1 million in cash.

 And with that, I will turn it back over to Frank for any questions and answers you might have.

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [4]
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 Okay, Bryan. Thanks. Operator, at this time, we would be happy to answer any questions that someone might have?

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Questions and Answers
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Operator   [1]
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 Okay. We will now begin the question-and-answer session. (Operator Instructions) [George Whiteside, SWS Financial Services].

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 George Whiteside,  SWS Financial Services - Analyst   [2]
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 Good afternoon and congratulations on an excellent recovery quarter and certainly very interested in your Asia initiative. I've got a couple of questions about that. In your release, you comment on the fact that there is a Tokyo store that is up and running. And I wonder how it is performing as compared to US domestic units.

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [3]
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 Well, I mean, it's a little early to extrapolate the performance in that location to a full year. But, if you want to go through that drill, it looks like that store could be two or three times the volume of a domestic in-line store and it's only a kiosk operation.

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 George Whiteside,  SWS Financial Services - Analyst   [4]
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 It is. Did you say it's a kiosk operation only?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [5]
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 It is, yes. And we expect it will do two to three times what an in-line domestic unit would do.

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 George Whiteside,  SWS Financial Services - Analyst   [6]
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 That's pretty impressive. My other question is relative to AEON Group, and I presume they are the holder of the Master Limited Agreement in Japan, and how will that develop into a China, South Korea presence for Rocky Mountain?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [7]
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 Well, it's pronounced eon, and they are not the holder of the Master License Agreement. Our partners -- we have one of our partners is Hong Kong Chinese and the other is Japanese. And they run an operation in Japan right now, a confection operation, bulk candy and have over 50 units and they are our partners. AEON introduced the Company to our partners, AEON is a real estate company and we have a very good relationship with them.

 They have over 100 shopping centers in Japan, over 50 malls, and so they are not a party to the agreement, but they've worked very closely with us. And how that turns into an operation in China is that our -- one of our partners is Hong Kong Chinese and has connections into Hong Kong and China. And so, they have experience operating in South Korea and in Japan, and have been investigating China for some time. We have two locations potentially identified, one in Shanghai and one in Hong Kong. And so, that's how we go from a Japan Master Agreement to also having test locations in Hong Kong and Shanghai.

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 George Whiteside,  SWS Financial Services - Analyst   [8]
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 What is your -- with this relationship and build out over time, how do you see that being a driver of increased revenue and earnings in the future?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [9]
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 Well, the way the business model for this is a little bit different from what we've done domestically and with our previous international operations, in that 100% of what they need, other than fruit, comes from our factory in Durango. And with the volumes that we expect to do and the weak dollar, it's very economical for us to get our product there, believe it or not, and have them set a pretty reasonable price point at retail compared to what other American brands go for. And so the model is that everything comes from the factory. So all of the product that they're selling is generating factory revenues for us. And then, they are also paying us a 2% royalty on sales as well.

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 George Whiteside,  SWS Financial Services - Analyst   [10]
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 Excellent. Well, I'll let someone else ask questions, and I'll just get back in queue. Thank you.

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Operator   [11]
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 (Operator Instructions) Jeff Geygan, Milwaukee Private Wealth Management.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [12]
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 Good afternoon, gentlemen.

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [13]
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 Hello, Jeff.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - COO, CFO, Treasurer, and Director   [14]
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 Hi.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [15]
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 Can you talk a little bit about Aspen Leaf Yogurt and how that has evolved over the last year. And secondly, can you touch on when you would expect that to be cash flow positive?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [16]
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 Yes. We have started a little bit more aggressive ad campaign on Aspen Leaf Yogurt and we're seeing an increase in lead flow. We're seeing some interest right now in opening co-branded Rocky Mountain Chocolate Factory, Aspen Leaf Yogurt stores with Rocky Mountain Chocolate Factory being the junior brand. We have a test in hopefully this summer of two kiosk units in a supermarket to see if we can do the volumes that we need to, to expand in that channel. We also expect a few other co-branded units to go up this summer. We're hoping that it becomes cash flow positive with our existing locations this year. It should be close to breakeven in fiscal 2013, that's our plan.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [17]
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 All right. And back to George's question about Asia, shall we assume that the 100 stores that are projected will be kiosks or is that a one-off?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [18]
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 Many of them will be kiosk locations. There really isn't vacancies in a lot of the malls in Japan that we're going to open in. Our next unit is a lease line unit, but it's still a very small footprint store, about 250 square feet. So it's going to be kiosk or small footprint stores.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [19]
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 All right, I'm just a little curious about how you established a relationship with these groups in Japan, if you can comment on that?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [20]
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 Well, I mean, it's so great about how this relationship got established is, we really were introduced to our partner by a real estate company, a mall company. Originally, they expressed interest in the Master License, but they have a partner that runs sweet factory locations. They're already importing candy from the United States, and had all the logistics in place to do that. So adding our product to it was very easy for them. And so we don't -- we didn't have the usual barrier you have in a country, where you need critical mass before you can really afford to import product from the United States.

 The yen is very strong versus a dollar, that helps as well. So, we really just got introduced to just a perfect partner through this group AEON, which we met at ICSC in Las Vegas. So it just worked out really well, and we think, from the market potential there, that could lead to economical expansion in Asia.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [21]
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 Great. Thank you very much.

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [22]
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 Good.

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Operator   [23]
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 George Whiteside, SWS Financial Services.

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 George Whiteside,  SWS Financial Services - Analyst   [24]
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 You may have mentioned of importation into Asia and having a system already in place for other product and that it's sort of a ready-built situation. Here in the States, you've used trucking. Presumably, you're going to use airfreight or some other system to deliver product out of the factory over to Asia, is that reasonable?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [25]
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 Well, actually, it's going to go in a cargo container and go -- it's going to shipped to Japan and it has been already for the test. That's the way they import their other product for their sweet factory operation.

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 George Whiteside,  SWS Financial Services - Analyst   [26]
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 And that timing factor works out well, roughly how much time is required to make that trip?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [27]
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 About eight weeks.

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 George Whiteside,  SWS Financial Services - Analyst   [28]
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 And so, there is not an issue about freshness of the product or anything of that sort in that time period, I presume?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [29]
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 No, the product that we ship, all has six months shelf life, more or less.

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 George Whiteside,  SWS Financial Services - Analyst   [30]
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 Excellent. You also may have mentioned of Cold [Stream] Creamery and that you opened new stores, but not at the same pace as you had done in the previous year. Any particular reason for that and how does the overall operation seem to be developing?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [31]
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 Well, I think the relationship with Cold Stone is a very good relationship. I think, the co-brand is working well for Cold Stone's franchisees. And the growth in the previous fiscal year, a lot of that was because we were helping finance some locations, we stopped doing that and the growth of new licenses slowed. I think, that's still an issue. Cold Stone continues to work with us on a some sort of financing vehicle for their franchisees. We still haven't figured -- quite figured that out yet. But, the fact that it's slowed is really due to credit conditions and it's just the franchisees don't have the cash in the bank to put in the co-brand, and so they need financing and it's very difficult to get.

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 George Whiteside,  SWS Financial Services - Analyst   [32]
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 Yes. And you previously have mentioned financing being a real issue domestically, and my presumption is that you won't have that issue in terms of Asia in that operation?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [33]
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 No, I don't believe we will. I think that the average unit volume in Asia is going to be substantially higher in the US. Our partner is going to own a number of corporate stores. They have the capital for that and they also expect their franchisees to open Rocky Mountain Chocolate Factories, once there's more units in operation over there and the revenue numbers hold up. So, I don't think we'll have that [issue] in Asia.

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 George Whiteside,  SWS Financial Services - Analyst   [34]
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 Yes. Well, it would certainly be nice to be able to expand this model, the Asia model into other countries, but I suspect at the moment, you've got plenty in your plate launching of this effort?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [35]
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 Well, we're not going to -- I mean, we're not -- I mean, I think, our partners are going to run with Japan and also a couple test locations in China, but that's not going to stop us from aggressively going after partners and other parts of the world. We're going to try to go to just about every international trade show there is this year and look for partners. Once -- the effort really is upfront for us, and once we get a partner up and established, there isn't a lot of effort involved for us, other than support. And so it's not like there's some kind of infrastructure issue for us, where we couldn't support a number of countries going at the same time, we can and that's our goal.

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 George Whiteside,  SWS Financial Services - Analyst   [36]
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 Well, that certainly is encouraging and by the way, I also want to thank you, congratulate you on increasing your dividend. I know clients are going to really enjoy that.

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [37]
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 Thanks, George.

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Operator   [38]
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 Steve Shaw, Sidoti & Company.

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 Steve Shaw,  Sidoti & Company - Analyst   [39]
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 Hey, guys. How are you doing?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [40]
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 Hey, Steve.

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 Steve Shaw,  Sidoti & Company - Analyst   [41]
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 Bryan, what's the affect going to be on CapEx with the Japanese operations?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - COO, CFO, Treasurer, and Director   [42]
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 No affect on CapEx. The CapEx comes from our partner, not from us.

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 Steve Shaw,  Sidoti & Company - Analyst   [43]
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 Okay. And then, what does the fiscal 2013 CapEx look like?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - COO, CFO, Treasurer, and Director   [44]
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 It looks like maintenance CapEx for the Company and in the past, we haven't disclosed that number, but it's a relatively modest amount of money.

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 Steve Shaw,  Sidoti & Company - Analyst   [45]
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 Okay. Thank you.

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Operator   [46]
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 Jeff Geygan, Milwaukee Private Wealth Management.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [47]
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 Hi, thanks for taking my second set of questions here. Easter fell on April 8, it impacted your quarter ending Feb 28. Can you just explain to me how that is because of the roughly five, six-week difference?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [48]
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 The product went out in the first quarter last year and it went out in the fourth quarter this year. And so, if you look at our trends on an annual basis, as it relates to same-store pounds purchased, that's more indicative of what to expect in the future than our fourth quarter number.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [49]
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 Okay, then you would --

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [50]
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 So, it's a timing difference.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [51]
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 With that in mind, can you comment on same-store sales impact of Easter as well as impact from weather?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [52]
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 Well, I mean the weather always impact sales and it usually reverses out and evens out over the course of a year. I don't think weather played a tremendously strong role in our first quarter, or so far to date in our first quarter. And the trends that we're seeing on an annual basis look to continue in the first quarter.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [53]
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 All right, I appreciate it. And you mentioned specialty sales. What is the driver of specialty sales and can you just describe that a little bit further?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [54]
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 Well, specialty sales are just sales of our product outside of our system of franchised and Company-owned stores. The driver of it is that we've had tremendous growth and tremendous success, and in that channel through growth with our existing customers. And so it's really just growing with the customers that we have.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [55]
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 Okay. So, no -- not necessarily new channels or new customers, just success with current customers?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [56]
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 That is the main driver of that increase.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [57]
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 Your international store count went up, is that Canada, Middle East or --?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [58]
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 The net increase is from Canada. We're going to also see a couple more open up in the Middle East, and then a Japanese unit gets counted as a unit when the Master Agreement became effective. And so that'll be counted as a unit in our first quarter.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [59]
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 [They didn't --]

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [60]
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 We didn't count it as a unit when it was just in the test phase.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [61]
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 Last question, [and I] do appreciate it. Greg Pope is part of your press release and kudos to everyone involved. Can you describe a little more completely, his role versus your role in developing these various foreign markets?

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [62]
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 Well, Greg and I are definitely going to work together and travel together and do the trade shows together in the foreign markets. But Greg was -- Greg definitely set up this deal in Japan, it was through his efforts that we met our partners. And so, he really gets credit for putting this deal together.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [63]
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 Great. Well, good luck.

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [64]
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 Thanks.

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Operator   [65]
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 This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Crail for any closing remarks.

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 Franklin Crail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, CEO, and President   [66]
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 All right. Thank you, operator. Again, thank you very much for tuning into our conference call this afternoon and we look forward to talking to you again in a couple of months. Everyone, have a good day, and thank you again. Bye-bye.

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Operator   [67]
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 To access the digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088 beginning at 6.00 PM Eastern today. You will be prompted to enter conference number, which will be 10013466. Please record your name and company when joining. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.




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