Q2 2013 Rocky Mountain Chocolate Factory Earnings Conference Call

Oct 04, 2012 AM EDT
RMCF - Rocky Mountain Chocolate Factory Inc
Q2 2013 Rocky Mountain Chocolate Factory Earnings Conference Call
Oct 04, 2012 / 08:15PM GMT 

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

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Conference Call Participants
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   *  James Fronda
      Sidoti & Company - Analyst
   *  George Whiteside
      SWS Financial Services - Analyst
   *  Bob Atley
      - 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 second-quarter earnings 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 on major customers; economic and consumer spending needs and such 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 period presented in this call do not necessarily indicate results that may be expected for any future quarters or the upcoming fiscal year. To Rocky Mountain Chocolate Factory's knowledge, the information related 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 Frank Crail. Please go ahead.

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 Franklin Crail,  Rocky Mountain Chocolate Factory - Chairman, CEO, President   [2]
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 Thank you, operator. Good afternoon, ladies and gentlemen, welcome to the Rocky Mountain Chocolate Factory's conference call for the second quarter of fiscal 2013. I'm Frank Crail, the 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 give you a summary of both our second quarter and six-month operating results. And at the conclusion of his presentation, we will be happy to answer any questions you may have. So at this point, I'll turn the call over to Bryan.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [3]
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 Thanks, Frank. I would like to also thank everyone for getting on the call today. The first six months of fiscal 2013 have been exciting. We've had strong revenue growth, driven by increased product sales to virtually all of our customer categories and increased Aspen Leaf Yogurt retail sales, primarily related to new units in operation.

 We had slightly positive same-store sales for the first six months. We also started an international expansion that really began with executing a 100-unit master development agreement covering the country of Japan, and opened our third unit in Japan at the end of September. We also increased our quarterly dividend 10% to $0.11 per share quarterly. And pursuant to the share repurchase plan that was approved by our Board of Directors in fiscal 2008, we resumed share repurchases during the first six months of the year by purchasing approximately 163,000 shares of stock at an average price of $10.50. And in the first six months of this year, the core Rocky Mountain Chocolate Factory business net income grew slightly more than 10%.

 As I said earlier, for the six months, revenues increased 7.2%. That was driven by an 11.4% increase in specialty market sales. Our royalty and marketing fees also increased 5.8% in the first six months of this year. Franchise fees decreased 36.3%. We had four domestic franchise openings this year versus nine last year. And we also -- that decrease in franchise fees was partially offset by the master license fee that we collected from Japan.

 Our retail sales increased 11%. That was mainly driven by an increase in Company-owned units. We had 18 in the first six months of this year versus 14 last year. And we had a very slight decrease in Company-owned same-store retail sales of 0.4%. Franchise same-store sales for the first six months were up 1.1%; however, same-store counts purchased in the factory were down 2.7%. Factory-adjusted margin increased 110 basis points the first six months of this year, primarily driven by higher sales prices and partially offset by increasing commodity costs.

 Our net income was $1,891,000 versus $1,831,000. Fully diluted earnings per share were $0.30 versus $0.29. We continued to generate excess cash flow, and on September 14 the Company paid its 37th consecutive quarterly cash dividend of $0.11 per share.

 Despite the sluggish economy, the Company is in excellent financial condition. We have a 4.5-to-1 current ratio and we remain free of long-term debt. We opened 12 locations in the first six months of this year, including 5 co-branded locations with Cold Stone, 3 international locations and 4 domestic Rocky Mountain Chocolate Factory locations.

 For the second quarter, total revenues increased 2%. Factory sales were up 2.9%. That was driven by an increase in shipments to our international master franchise customers, an increase in sales to Cold Stone Creamery locations and was partially offset by a decrease in same-store pounds purchased. Retail sales increased 6.3%. We had 17 Company-owned stores this year versus 13 last year and we also -- that was mostly offset by a 15.8% decline in same-store sales at Company-owned locations, which is really just the grand opening effect from Aspen Leaf Yogurt openings during the prior year. You get a big bump at grand opening, and then your sales are lower in the comparable period in this year.

 Royalty marketing fees increased 2.5% in the quarter. This was driven by a 1.1% increase in same-store sales partially offset by increased license locations with Cold Stone Creamery, 53 this year versus 44 last year. And we also had a little bit of a bump in our royalty from the structure that we have where if same-store pounds purchased go down, our royalty goes up slightly. And that helped royalty and marketing fees in the second quarter as well.

 Franchise fees declined 75.4% with two domestic openings in the second quarter this year versus five last year. Factory-adjusted margins in the quarter increased 80 basis points. This was due primarily to, again, higher average selling prices partially offset by increasing commodity costs.

 Operating expenses increased 3.2%. Mostly, that's related to a decrease in development costs related to Aspen Leaf Yogurt, more than offset by an increase in franchise development for our international initiative. Retail operating expenses increased 13.4%, more than offsetting the increase to retail revenues.

 Net income was $829,000 this quarter versus $912,000 last year. Basic earnings per share were $0.14 versus $0.15; fully diluted were $0.13 versus $0.14. During the quarter, we opened six stores. Three of those stores were co-branded stores with Cold Stone Creamery, two domestic franchise openings and one international opening in Japan. In the quarter, we continued to generate excess cash flow. We finished the quarter with approximately $3.8 million in cash.

 For the full year, we expect to open between 6 and 8 domestic franchise stores, 8 to 10 units with Cold Stone Creamery, 5 to 8 international locations, 6 to 8 co-branded Aspen Leaf Yogurt, Rocky Mountain Chocolate Factory locations, for a total of 25 to 34 units for the year. With that, I'll turn it back over to you, Frank.

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 Franklin Crail,  Rocky Mountain Chocolate Factory - Chairman, CEO, President   [4]
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 Thanks, Bryan. At this time would be happy to answer any questions you might have.



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Questions and Answers
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Operator   [1]
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 (Operator instructions) James Fronda, Sidoti.

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 James Fronda,  Sidoti & Company - Analyst   [2]
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 I am a little new to the story, but I know that you had a pretty decent fourth quarter last year. Any insight into what the next two quarters might be looking like on your own -- can you give us any color?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [3]
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 Well, not really. We definitely have insight into it, but we don't give guidance. So I can't comment on that.

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 James Fronda,  Sidoti & Company - Analyst   [4]
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 If cocoa beans continue to rise, do you think you will be able to raise prices?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [5]
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 We have a policy of having an incremental kind of a CPI-type price increase every year.

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 James Fronda,  Sidoti & Company - Analyst   [6]
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 Okay.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [7]
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 And so in years when commodity prices are increasing more than an inflationary amount, our price increases don't offset that. And so we would see margins go down.

 We basically have to pass it on to our franchise system, and that takes profitability of that operation. So we don't do 10% price increases like you see some other chocolate companies do.

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 James Fronda,  Sidoti & Company - Analyst   [8]
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 All right, that's all I had, thanks, guys.

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Operator   [9]
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 George Whiteside, SWS Financial Services.

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 George Whiteside,  SWS Financial Services - Analyst   [10]
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 In the past, you have commented on the fact that your Japanese licensees was having good results and was making progress. Do you see that continuing?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [11]
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 We do. They have three stores open now. The sales are strong in all three locations and we are very excited about the agreement. There has been no real change from how we feel about Japan since our last conference call. They continue to get the infrastructure in place to expand. They have opened their third unit. They also opened another -- one of their other concept units this month as well. So they got a couple units opened this month, so we are excited about that continuing to get traction and seeing an acceleration of unit openings in the future.

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 George Whiteside,  SWS Financial Services - Analyst   [12]
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 Well, that's certainly encouraging. My second question has to do with the domestic scene and the banking industry. There have been some news items that banks are becoming more active in terms of loaning, or making loans. And you have commented on the fact that your domestic expansion has been hampered by the lack of loans to franchisees. Have the franchisees -- or are you aware of any improvement in the availability of credit?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [13]
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 There has been no improvement in availability of credit for our business opportunity. So as it relates to Rocky Mountain Chocolate Factory openings, there has been no improvement. Really, what needs to happen before there will be an improvement is a change in the way the SBA approaches its guarantee on those type of loans. Until that changes, I do not expect the credit outlook to improve. It doesn't matter, I think, what you hear in the press. That's credit availability to larger organizations, not somebody that's going to open up a mom-and-pop business. That financing is not available.

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 George Whiteside,  SWS Financial Services - Analyst   [14]
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 Well, that's certainly understandable. And thank you for the clarification. I'll get back in the queue if there are other questions I want to ask.

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Operator   [15]
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 [Bob Atley], Private Investor.

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 Bob Atley,  - Private Investor   [16]
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 I wanted to find out -- were you guys plotting to turn around the franchise for the frozen yogurt and become profitable?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [17]
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 Well, I don't think we have path to profitability in this current year. Hopefully, by next year, we will see profitability in that initiative. We continue to sell units. I think we are one of the few small franchisors out there that are selling units. Most of the demand is for co-branded Rocky Mountain Chocolate Factory/Aspen Leaf Yogurt stores. We should see 8 to 10 of those open up this year. I would expect the same sort of openings next year as well.

 So it's just a matter of getting to critical mass. We have spent a fair amount of money in the first six months on advertising. We've fine-tuned that. The amount that we spend per month going forward will come down there, be a little bit more targeted and have, I think, a little bit higher success rate than some of the other forms of advertising that we've tried.

 And so I don't see it happening this fiscal year. But hopefully by next fiscal year, we will have an operation that is at least not losing money. For the first six months of the year, at store level, we were slightly profitable.

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 Bob Atley,  - Private Investor   [18]
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 Okay, thank you.

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Operator   [19]
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 (Operator instructions) Jeff Geygan, Milwaukee Private Wealth.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [20]
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 Bryan, can I just verify as part of my first question -- you said the Company was free of long-term debt. But the last time I looked at your balance sheet, you really had no long or current debt, unless you have drawn on your line of credit, which I am not aware that you have done.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [21]
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 No, we have not. We finished the quarter with $3.8 million in cash.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [22]
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 Okay. So, in fact, you have no real debt in place?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [23]
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 Yes, we have no -- other than trade debt.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [24]
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 Then back to this Aspen Leaf -- and I appreciate that you broke out on your release your loss from ops on Aspen Leaf Yogurt, because I don't think we've seen this in the past. Just piecing this together, it looks like the data we have shows Q1 a year ago, you lost about $20 million followed by $40 million. And jumping forward this year, you lost 100 followed by 172. Under what circumstance do you believe that you can turn Aspen Leaf next year?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [25]
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 Just by getting more critical mass and spending less on advertising, is really the two big changes that we will make.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [26]
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 Well, when you say critical mass, I read that as more stores. But I was under the impression you are done opening stores.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [27]
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 Well, we are done opening company stores, but we're going to have 8 to 10 new stores this year and we expect to have that next year. I don't know if we'll see an acceleration, but we continue to get leads and we continue to make sales. I've followed some other small yogurt franchisors; I don't think they are doing as well as we are. What's carrying that is the co-brand, and so I think we will continue to open up units And that will get us to the point where we are not losing money. I don't think we're going to need to make much more in the way of personnel investments, so it's just getting some scale now.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [28]
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 And then, thinking about that franchisee who needs to raise some kind of financing, I think intuitively if the guy that's going to open up the Rocky Mountain stores having trouble getting financing, wouldn't that apply to the guy trying to open the Aspen Leaf store?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [29]
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 It does. However, we have been able to find franchisees more so on the co-branded side than on the stand-alone side. And I think some of them have struggled, definitely, to pull the funds together, and others have been higher-net-worth individuals.

 A couple of the openings that we are going to see here very soon from Aspen Leaf Yogurt are going to be by a very high-net-worth company that is going to open two units. So yogurt is still attracting a little bit different kind of a franchisee. However, the average unit volumes on yogurt are coming down to where they are really very similar to Rocky Mountain Chocolate Factory. And I think that's why you seen a real deceleration in the opening of those units, although it's still a new concept and there's still a lot of openings that are happening in the industry.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [30]
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 Yes, I've noticed that as well. And then my second question -- I think this is to Frank, really. Frank, how satisfied are you with net income of $829,000 this year versus $912,000 last year, and how might you adjust your course of action, given that decline?

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 Franklin Crail,  Rocky Mountain Chocolate Factory - Chairman, CEO, President   [31]
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 Bryan, would you take that one for us, please?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [32]
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 Sure. I think that the year-over-year decrease is 100% attributable, more than 100%, to Aspen Leaf, and Aspen Leaf needs to continue to grow and turn a profit. So I think we've actually addressed that already. Nobody is happy with putting a lot of work into a concept and having it lose money. But we still haven't been in this business very long. Our first store opened in December 2010, and we hoped that it would be instantly profitable. But that expectation turned out to be not a very reasonable expectation, given what is going on in the industry.

 I think Aspen Leaf Yogurt is going to contribute in the future or we won't have it. We're not going to keep a business around that doesn't make money. And so we're going to turn it around, we are going to get enough units open and it's going to make money, or we'll change course. The core chocolate business grew 10%.

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 Franklin Crail,  Rocky Mountain Chocolate Factory - Chairman, CEO, President   [33]
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 Jeff, in the early days of the Chocolate Factory, when we were running 20 units and 30 units, we weren't profitable at that point in time because you have to get to a certain scale. And it's just a matter of we continued to sell this interest in Aspen Leaf right now. We are franchising it, as Bryan has already dimension. And if we can get the number of units up, we think Aspen Leaf is going to be able to contribute to profitability and we will be able to grow it as a franchise concept, just like we did the chocolate factory.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [34]
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 Well, I appreciate that. We are going to be supporting you in any way that we can. So thank you for your time today, and good luck going forward.

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Operator   [35]
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 George Whiteside, SWS Financial Services.

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 George Whiteside,  SWS Financial Services - Analyst   [36]
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 This is also on Aspen Leaf. In previous calls, you have remarked on how competitive the industry is. And I presume that that has not changed. If that be the case, do you see any possibility of potential acquisitions in the yogurt business? Or, is it that the models used by others just wouldn't fit with Rocky Mountains?

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [37]
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 Well, I think the models that are used by our competitors are nearly identical to a stand-alone Aspen Leaf Yogurt, rather than a stand-alone Aspen Leaf Yogurt has Rocky Mountain Chocolate Factory toppings. So that certainly is a way for us to get scale is, as the industry shakes out and the smaller franchisors stop opening units, which is happening, at least a few companies I am very familiar with. Most of the small franchisors in the 20-to-40-unit range are struggling to get new units opened and sold.

 And so I still think there's a lot of units opening for moms and pops and the very first players in the industry. So there's definitely that opportunity, once these guys see there really isn't a path to profitability for themselves, to get realistic about what their businesses should be valued at. And I think that a roll-up opportunity is definitely on the horizon.

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 George Whiteside,  SWS Financial Services - Analyst   [38]
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 Well, it sounds as though maybe their concerns are similar to yours, in that you want to achieve scale and these other competitors also want to. But as you point out, they don't have Rocky Mountain behind them and, therefore, they might be interested in a combination.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [39]
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 Well, I think what we have going for us that they don't is that we have Rocky Mountain Chocolate Factory and the interest we are seeing is to open up a co-branded store that differentiates itself from the competitors that are on every corner. We just opened a market where there's three or four stores within a mile, and we -- and still yet another yogurt store opened up, and it opened up with Rocky Mountain Chocolate Factory. And in that way, it's different, and it's doing well. The numbers are good, the product mix is good.

 So we have an angle on this that nobody else has. So, while we are 14 units and growing toward 20-25 right now, when we get there, we are still going to be able to sell -- maybe it will accelerate more than 10 in a year. What we are seeing with other concepts is they are not able to sell any more units. It's just almost impossible to have a profitable franchise company with 20 units.

 So I think we have a huge advantage just on Aspen Leaf stand-alone. And then we have the ability -- I think we'll have that ability in the future to roll up companies, is that's will want to do.

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 George Whiteside,  SWS Financial Services - Analyst   [40]
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 Excellent. Thank you for the update.

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Operator   [41]
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 [Bob Atley], Private Investor.

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 Bob Atley,  - Private Investor   [42]
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 I have a follow-up question. In the last couple of years, I have realized that many of the existing franchisees have been closing locations, and you guys have replaced those locations with the co-branded stores. So can you explain or give us a little bit more details why they are closing those stores and you are not able to replace them with new franchisees, Rocky Mountain Chocolate, instead of going and doing compounded with --

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [43]
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 Well, I think we've explained it already. We've talked about it on every single conference call and in every press release. And that is, without the ability to borrow money and help fund an opening, a franchisee in the old days didn't have to have $100,000 or $150,000 in cash to open up the unit. The SBA guaranteed 90% of the loans.

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 Bob Atley,  - Private Investor   [44]
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 No, no, I understand that. I didn't express myself well. I understand that completely. The point is (multiple speakers) --

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [45]
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 (inaudible) (multiple speakers).

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 Bob Atley,  - Private Investor   [46]
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 On the first place, that means they are not profitable or what? They already have the loan, and they are already in operation.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [47]
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 In my estimation, there's one reason to close the business, and that is because it's not making money. So of course, if a unit is closing, it's closing because the economics are not good.

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 Bob Atley,  - Private Investor   [48]
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 Okay (multiple speakers) do you support them? Do you help them? Do you teach them what they can fix? Because what I've seen when you guys take over some of the stores, you make them profitable. But when they manage them, they cannot manage to become profitable. That's my point, you know? When the franchisee manage, they cannot make them profitable because nobody wants to lose money and they close it down. But some of the stores you guys take over, and somehow you are able to make them profitable. So somewhere down the line, probably you don't teach them or they don't understand or I don't know what. That's what I'm trying to understand.

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 Bryan Merryman,  Rocky Mountain Chocolate Factory - COO, CFO, Treasurer, Director   [49]
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 I think that our concept, like every other concept that is in our revenue category -- you get a variety of people come in and try the concept. And some of them just aren't good business people. We offer tremendous support. We will support a franchisee if they will take your support at any level and do anything to keep the store open. And so, usually, when you see a store closure, it's a combination of two issues -- poor operations and poor location, or a location that was good and became poor. But the number-one reason that an operator doesn't make money is because they are not good at the business.

 And we have -- we spend a tremendous amount and have very dedicated support people that that's all they do is try to help keep franchisees in business.

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Operator   [50]
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 This concludes the question and answer session. I would like to turn the conference back over to Frank Crail for any closing remarks.

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 Franklin Crail,  Rocky Mountain Chocolate Factory - Chairman, CEO, President   [51]
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 Okay, thank you. I would like to thank you all again for attending our second quarter conference call, and we're looking forward to talking with you again in three months. Have a nice day and we will talk to you later.

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Operator   [52]
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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 PM Eastern today. You will be prompted to enter a conference number, which will be 10018338. Please record your name and company when joining.

 The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.






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