Q1 2013 Rocky Mountain Chocolate Factory Earnings Conference Call

Jul 10, 2012 AM EDT
RMCF - Rocky Mountain Chocolate Factory Inc
Q1 2013 Rocky Mountain Chocolate Factory Earnings Conference Call
Jul 10, 2012 / 08:15PM GMT 

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

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Conference Call Participants
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   *  Steve Shaw
      Sidoti & Company - Analyst
   *  Kevin Gruneich
      - Private Investor
   *  Timothy Call
      Capital Management - Analyst
   *  Jerry Falkner
      RJ Falkner and Company - Analyst
   *  Sam Obenchain
      - Private Investor
   *  Jeff Geygan
      Milwaukee Private Wealth Management - 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 first-quarter 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 franchises 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 Mr. Franklin Crail. Mr. Crail, the floor is yours, sir.

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 Franklin Cail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, President & CEO   [2]
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 Thank you, operator. Good afternoon, ladies and gentlemen, and welcome to Rocky Mountain Chocolate Factory's first quarter of fiscal 2013 conference call. My name is Frank Crail. I am 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 the operating results for our first quarter, and at the conclusion of his presentation, we will be happy to answer any questions you may have. So at this point I'm going to turn the call over to Bryan.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [3]
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 Thanks, Frank. I would also like to thank everybody for listening to our call today. The positive trends that we saw in the fourth quarter of fiscal 2012 continued on into our first quarter of this fiscal year. We saw double-digit revenue growth, driven by increased product sales to virtually all customer categories, and an increase in Aspen Leaf Yogurt retail sales related to new units in operation.

 We saw slightly positive same-store sales. We executed a 100-unit master development agreement covering the company country of Japan, and opened our second unit at the beginning of June pursuant to the agreement. All revenue segments were up over last year -- royalty and marketing fees; franchise fees; factory product sales; and company-owned stores sales.

 We also increased our quarterly dividend 10% to $0.11 per share, and pursuant to a share repurchase plan approved by the Board of Directors in 2008, we resumed share repurchases during the quarter by purchasing approximately 34,000 shares of our Company's stock. Additionally, we purchased another 130,000 shares subsequent to the end of the quarter. The average price on the 34,000 shares that we bought back during the quarter was $10.73. And the average price on the approximately 130,000 shares that we bought back after the quarter ended was $10.44.

 Total revenues for the quarter were up 11.8%l factory revenues were up 11.2%. That was driven by an increase in specialty markets sales of 13.2% and an increase in sales to franchisees and licensees of 10.3%. These increases were partially offset by a 2.8% decrease in average domestic units in operation, and a decrease in same-store pounds purchased of 5%. The decrease in same-store pounds purchased was primarily related to the timing of Easter. For the last six months same-store pounds purchase were basically flat.

 Our retail sales increased 16.3%. We had more units in operation, the result of opening five Aspen Leaf Yogurt stores and one Rocky Mountain Chocolate Factory store in the fourth quarter of the previous fiscal year, and a 3.3% increase in Rocky Mountain Chocolate Factory company-owned store sales.

 Royalty and marketing fees increased 9.3%. This was driven by an increase in royalty revenue resulting from the Company's purchase-based royalty structure, and a 1.1% increase in same-store sales. Franchise fees increased 16.3%. This was driven by the international licensee fee that we collected on Japan, and it was mostly offset by a decrease in new domestic franchise locations. We opened four in the current year versus six in the prior year.

 Factory margins were up 150 basis points. This was primarily the result of improved efficiencies associated with 10.5% higher production volumes. Operating expenses increased 16%, so driven by costs associated with our international development effort, an increase in franchise support related expenses and operating costs related to Aspen Leaf Yogurt.

 Net income for the quarter was $1,000,062, compared with $920,000 in the prior year. Basic earnings per share increased 13.3% to $0.17 in the current year, versus $0.15 in the prior year. Fully-diluted earnings per share increased the same amount to $0.17 in the current year versus $0.15 in the prior year. We opened six stores during the quarter, two cobranded Rocky Mountain Chocolate Factory Cold Stone locations, two domestic Rocky Mountain Chocolate Factory franchise stores, and two international Rocky Mountain Chocolate Factory locations.

 We continued to generate excess cash flow during the quarter. We finished the quarter with approximately $5.1 million in cash and a current ratio of 4.7 to 1, and the Company remained debt-free. That's my summary of the results for the quarter, with that I'll turn it back over to Frank.

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 Franklin Cail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, President & CEO   [4]
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 Thanks, Bryan. Okay, at this point we'd be happy to answer any questions that you might have.



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Questions and Answers
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Operator   [1]
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 (Operator Instructions). Steve Shaw, Sidoti.

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 Steve Shaw,  Sidoti & Company - Analyst   [2]
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 Hi, guys. How are you doing? Just wondering what -- I know last time we spoke, Bryan, that you said maybe the Japanese locations might open a little faster than originally expected. Can you guys provide any color on maybe the franchise fees associated with opening those up, and how we might project those?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [3]
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 The franchise fees, well, the license fee that we are going to collect this fiscal year has been paid. And so there's not going to be any more fees associated with store openings. However, we're going to continue to collect a royalty on sales, provide opening orders and sell product to those stores.

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 Steve Shaw,  Sidoti & Company - Analyst   [4]
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 Okay.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [5]
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 And in terms of the timing of openings, I think it's going to -- for the balance of the fiscal year we'll see them get close to their annual requirement of 10, which they have until next April to hit 10. I think they will get close to that this fiscal year and I think that we will see an acceleration of that in the following year.

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 Steve Shaw,  Sidoti & Company - Analyst   [6]
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 Okay. And then the test stores in China, any color you guys can provide on that, whether how many, or what's planned after the test stores, if things run smoothly?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [7]
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 What appears most likely at this point is our first test stores in China will be in Hong Kong. And while we have not secured the locations yet we are hoping that this happens in the Fall.

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 Steve Shaw,  Sidoti & Company - Analyst   [8]
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 Okay, thank you.

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Operator   [9]
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 Kevin Gruneich, investor.

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 Kevin Gruneich,  - Private Investor   [10]
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 Thank you. Kind of a two-parter regarding franchises. I think that in discussing the Asian stores that, it was mentioned in your press release, that this could offset the lack of franchising that was happening due to unfavorable credit market conditions in the US in recent times. And I was wondering if you could just update us, at least qualitatively, on the credit situation, if that's changed for franchisees in recent months.

 And then secondly, one of the only negative things I could find in this press release had to do with Aspen Leaf, and it sounds -- in page 2 to you mention you're refining -- looking into refining the store footprint and business model. I was wondering if you could be a bit more specific on that. I was kind of surprised there were no stores opened in the Spring quarter leading into the Summer, which a layperson such as myself might think a normal time to open, and if that's going to be the case in the quarter that we are in right now?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [11]
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 Thanks, Kevin. To address the first part of your question, unfortunately there is no update on the credit situation. It hasn't changed for our business proposition at all. There has been some loosening of credit for certain types of individuals and businesses, but not a franchisee that's going to be in business for the first time. It's just literally impossible to find people that have the capital that's required now to open new stores. So we just don't see a lot of stores opening this year on the Rocky Mountain Chocolate Factory side.

 In terms of Aspen Leaf Yogurt, we didn't see any stores open in terms of refining what we are doing. What we have interest in right now on the Aspen Leaf Yogurt side is cobranded stores. We expect to open up two small footprint, cobranded stores in supermarkets in August as a test, and then we also have a Company store that we've cobranded, the Rocky Mountain Chocolate Factory side of that will open up very shortly. And so we'll see three cobranded tests happen in this next quarter.

 And then we do have some interest; right now we are in the process of filing our FDD and cannot sell franchises on Aspen Leaf Yogurt for just very short period of time here. But we do have some interesting cobranded locations. But we don't have a lot of interest in standalone Aspen Leaf Yogurt locations right now.

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 Kevin Gruneich,  - Private Investor   [12]
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 Got it, thank you. Just a quick follow on, what's your expectation for this fiscal year's CapEx?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [13]
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 We don't -- there's not a whole lot of CapEx that we are planning this year, other than maintenance CapEx in our factory. Some IT infrastructure, and that's really it. We don't disclose that amount, so we don't disclose our CapEx budget for the year. But it's minimal.

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 Kevin Gruneich,  - Private Investor   [14]
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 Thank you.

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Operator   [15]
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 Timothy Call, Capital Management Corp.

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 Timothy Call,  Capital Management - Analyst   [16]
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 In the second paragraph, saying higher shipments of product to specialty market customers, what kind of customers are those?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [17]
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 Those are customers that are outside our system of retail stores.

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 Timothy Call,  Capital Management - Analyst   [18]
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 So what would be a large example of that?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [19]
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 The largest example is a company called ProFlowers.

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 Timothy Call,  Capital Management - Analyst   [20]
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 And when you look at those sales, do you see them as recurring, or do see them as one-time in nature?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [21]
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 Oh no, they are recurring. Almost all the growth in sales is with existing customers that have been customers for -- longtime customers of the Company.

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 Timothy Call,  Capital Management - Analyst   [22]
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 And when you have factories, in the next paragraph, factory sales up 13.2% and shipments to outside the Company's retail store network, it's again the same area?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [23]
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 Yes, it's what we just talked about.

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 Timothy Call,  Capital Management - Analyst   [24]
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 Can you tell us the seasonality of your cash flow through the year?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [25]
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 Well, we are really not that seasonal because of our customer mix. If you look at earnings from quarter to quarter, and we definitely have some seasonality in our yogurt and our chocolate business, the flower business is much different seasonality than the chocolate business, so it also gives us a strong first quarter. So between everything that we do, we are not that seasonal as a Company. We make money and are profitable every month of the year.

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 Timothy Call,  Capital Management - Analyst   [26]
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 Thank you.

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Operator   [27]
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 [Brendan Merrill], [Merrill Brothers].

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Unidentified Participant   [28]
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 Thank you for taking my call. I wanted to get some understanding on the recent share buybacks. A few years ago on a call you said you would buy back shares if they traded at approximately $4 or $5 dollars a share, and even some the dividend if shares traded this low. Are you going to continue more recent buyback, at these current prices?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [29]
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 The stock has run up quite a bit since we made those purchases. However, we also, since the last time we had pegged a range like that, the prospects of the Company have improved significantly. So we will continue to monitor availability of stock, and if larger blocks like this become available, we'll make a determination at the time.

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Unidentified Participant   [30]
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 Okay, thank you. And are you going to seek any other international deals like the (technical difficulty) deal?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [31]
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 There is quite a bit of interest percolating on the international front. In terms of disclosing when and if we will have another deal, we are not going to do that.

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Unidentified Participant   [32]
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 Okay, thank you very much for your time.

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Operator   [33]
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 (Operator Instructions). Jeff Geygan, Milwaukee Private Wealth Management.

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Unidentified Participant   [34]
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 Hello, gentlemen.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [35]
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 Hello, Jeff.

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Unidentified Participant   [36]
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 This is actually Nick. I have a question. What has been the factors and into the negative trend in pounds of product purchased from the factory by the franchisees over the last quarter, and also last several years?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [37]
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 I think over the last six months it's been relatively flat. The longer-term trend of seeing negative same-store pounds purchased is really a product mix shift in the franchise system, from factory-made products to store-made products. We've seen that trend for as long as I have been with the Company.

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Unidentified Participant   [38]
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 Do you have any plans to change that trend, or do think that's a long-term and it's going to stay that way?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [39]
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 There is a chance it's getting near where we won't lose much more market share in our stores, but we don't have a history there of positive same-store pounds. But the way product mix has changed over the last 10 years, hopefully we are getting near equilibrium there and we won't see really much of a change going forward. If the economy holds together and we see comps -- really low comps like the 1% to 2% range, I would suspect that we would have pretty flat same-store pounds purchased.

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Unidentified Participant   [40]
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 Is there anything in the franchise agreement that would limit the most they can make on site or that they have to purchase from you?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [41]
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 For all the franchise agreements that have been signed recently, in the last 10 years or so, the franchisees pay a 10% royalty on product that they make in the store. And they pay no royalty on products they buy from the factory. So when you do see a shift, you also see a shift in our royalty revenues as well. Easter caused a shift this year, where we were positive in the fourth quarter of last year and then we were negative in the first quarter of this year. And that really offsets with either lower royalties or higher royalties. So there is that structure that really is an economic equivalent for the Company. Also, the franchise agreement requires that franchisees maintain at least 50% of their retail space -- that they have Rocky Mountain Chocolate Factory factory product. So there is also some legal basis for us to challenge stores that are too low.

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Unidentified Participant   [42]
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 Thank you.

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Operator   [43]
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 Jerry Falkner, RJ Falkner and Company.

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 Jerry Falkner,  RJ Falkner and Company - Analyst   [44]
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 Hey, Bryan.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [45]
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 Hi, Jerry.

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 Jerry Falkner,  RJ Falkner and Company - Analyst   [46]
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 Regarding the stores in Japan, can you talk a little bit about how those stores are similar to, and how they might differ from, a typical store in the United States? And how their relationship with you, in terms of purchasing product, is there any difference between those stores and the US stores?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [47]
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 Well, first of all the stores in Japan are very, very small footprint stores. They pay percentage rents. And their average unit volume so far is substantially higher than a full-blown Rocky Mountain Chocolate Factory store in the US. Other than apples and some few supplies, they get all of the product that they sell in the store from our factory here. They pay a lower royalty, but all of the confection product is required to come from the Company.

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 Jerry Falkner,  RJ Falkner and Company - Analyst   [48]
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 So if they have to buy basically all of the confectionery products from you, that could have some positive implications for the utilization of your factory in Durango as you go forward and open these Japanese stores. The factory margins this last quarter were up a pretty nice 150 basis points. What sort of capacity utilization are you at with your plant in Durango, and do you think you can continue to show improvement in factory margins as the sales improve?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [49]
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 I think it depends on what happens with commodity prices, but for sure as we see higher volumes, we can leverage our fixed costs and improve our purchasing power. And the stores in Japan will have a much higher -- the factory here in the US will have a much higher market share in terms of store sales in Japan. And so where -- we are a little over 50% of capacity right now, so I guess quickly, those are all yeses to your questions.

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 Jerry Falkner,  RJ Falkner and Company - Analyst   [50]
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 Okay, thank you.

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Operator   [51]
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 [Sam Obenchain], investor.

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 Sam Obenchain,  - Private Investor   [52]
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 Hi, Bryan. Hi, Frank. How are you? Just wanted to see if you guys could shed a little color on commodity prices year over year.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [53]
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 Pretty even year over year, right now. We have a favorable chocolate contract that's been offset by some other commodity price increases.

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 Sam Obenchain,  - Private Investor   [54]
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 Very good (multiple speakers). Thank you.

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Operator   [55]
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 Kevin Gruneich, investor.

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 Kevin Gruneich,  - Private Investor   [56]
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 Thank you. It's a follow-up on my CapEx question. Understanding that you are roughly $3.3 million in CapEx was on the high side last year, if you would tack a similar figure onto the $2.9 million that you pay in dividends on an annual basis, you come up with about $6.2 million. Understanding there's other items involved in your cash flow statement, that would -- would that eat up more than the $5.1 million cash you have on hand. So I guess the question is, would you use debt to help fund a dividend down the road?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [57]
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 We have no plans to do that, and last year when you look at the CapEx, that was building the Company-owned Aspen Leaf Yogurt stores. Maintenance CapEx for our factory run roughly $250,000 a year. And then we always have discretionary CapEx that we use to improve our business. But CapEx this year will be substantially less than they were last year.

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 Kevin Gruneich,  - Private Investor   [58]
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 Okay, thank you.

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Operator   [59]
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 Jeff Geygan, Milwaukee Private Wealth Management.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [60]
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 Morning, gentlemen.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [61]
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 Hey, Jeff.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [62]
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 I commend you for doing a very nice job over the last 6 to 12 months. I think it's been a challenging environment and I think you have done an excellent job, frankly. The question that I have relates to the $5 million in cash that you're holding that Mr. Gruneich referred to. What is your thinking about uses of that cash at this point, given your very pristine balance sheet?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [63]
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 Right now I think, Jeff, the uses are the minimal CapEx that we've talked about. Also paying the dividend and having a little bit of a reserve. If we see a dip in the stock price, maybe, and shares become available, having some bullets for that. And also, if we get the opportunity down the road, we'd like to have some cash to potentially take equity stakes in some of the international deals that we do, where we see such positive results as, like we've seen to date in Japan. I'm not sure that we'll get that opportunity with our partners in Japan, but if we did, at least right now we would like to have the flexibility to do that.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [64]
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 All right, that's interesting. Based on Mr. Falkner's comments, your press release mentioned a factory gross margin improvement of 160 basis points and your retail margin, you actually give the percentage, have you ever disclosed your factory gross margin percent?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [65]
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 Yes, we did on the call here. And in this quarter it was 31.7% versus 30.2%. And then you can also see both of those numbers in the Q when it gets filed.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [66]
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 Great, I appreciate it. That's all, thank you very much for your time.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [67]
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 Thanks, Jeff.

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Operator   [68]
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 Kevin Gruneich, investor.

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 Kevin Gruneich,  - Private Investor   [69]
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 Hi, just a quick one, and I apologize if I missed this. Do you have to do a different formulation for the candies you sell in Asia or is it identical to the US sales?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [70]
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 So far it's been identical. I think maybe once we have more of a critical mass there that we will work on developing some unique packaging items for them, but they very much like American brands and want the product to be the same as it is here.

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 Kevin Gruneich,  - Private Investor   [71]
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 Got it, thank you.

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Operator   [72]
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 Well it appears that we have no further questions at this time. We'll go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentleman?

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 Franklin Cail,  Rocky Mountain Chocolate Factory, Inc. - Chairman, President & CEO   [73]
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 Thank you, operator. I'd like to thank you all again for listening to our first-quarter conference call, and we look forward to talking with you in three months, at the end of the second quarter. So have a nice day and thank you again.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory, Inc. - CFO, COO & Treasurer   [74]
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 Thank you.

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Operator   [75]
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 Thank you, sir, and thank you, gentlemen, for your time. The conference call has now concluded. To access the digital replay of this conference, you may dial 1-877-344-7529, or area code 412-317-0088 beginning at 5.30 p.m. Eastern today -- Eastern time today. You will be prompted to enter a conference number, which will be 10016063. Please record your name and company when joining. We thank you for attending today's presentation. At this time you may disconnect your lines. Thank you.






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