Hello and welcome to the Rocky Mountain Chocolate Factory First Quarter Earnings of Fiscal 2014 conference call. [Operator Instructions] Please note this event is being recorded. Some of the statements made during this call may be considered forward-looking statements that involve a number of risks and uncertainties. There are several factors that could cause actual results of Rocky Mountain Chocolate Factory to differ materially from these forward-looking statements. These factors include, but are not limited to, the potential need for additional financing, the availability of suitable locations for new stores, and the availability of qualified franchisees to support new stores, customer acceptance of new products, dependence upon major customers, economic and consumer spending trends, and other 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 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 this transmission and the company does not undertake any obligation to update this information in the future. I would now like to turn the conference over to Franklin Crail, CEO. Mr. Crail, you may begin.

Thank you, operator. Good afternoon, everyone, and welcome to Rocky Mountain Chocolate Factory's first quarter of fiscal 2014 conference call. I am Frank Crail, President of Rocky Mountain Chocolate Factory and with me here today is Mr. Bryan Merryman, the company's Chief Operating Officer. We're going to start the call this afternoon with Bryan giving you a summary of our first quarter operating results and at the conclusion of his presentation we will be happy to answer any questions that you might have. I'll now turn the call over to Bryan.

Thanks, Frank. I'd like to welcome everybody to our call today as well. I am going to start out covering just some highlights of the quarter, then I'll get into the detail of our operating results. Our first quarter of fiscal 2014 was a great quarter for us. We had record net income and record earnings per share. We also had improved retail gross margins. Our frozen yogurt operations swung from a significant loss in the prior year to a significant profit in the current year, validating expectations that the transaction consolidating our yogurt operations would create scale and a profitable company capable of becoming, with the backing of Rocky Mountain Chocolate Factory, a consolidation force in the frozen yogurt industry. We also had solid revenue growth driven by increased royalty and marketing fees, increased retail sales and increased franchise fees. We had strong positive same-store sales and same-store pounds purchased for our domestic system of franchise Rocky Mountain Chocolate Factory stores. We had significant further international progress with the execution of license agreements covering the countries of South Korea and the Kingdom of Saudi Arabia, and we opened our first store in South Korea in May. After exceeding expectations in initial of Kellogg's Rocky Mountain Chocolate Factory, Chocolatey Almond Cereal, Kellogg's informed us of an expanded roll-out plan for early 2014. We also finished the quarter debt free and on June 14th we paid our 40th consecutive quarterly cash dividend, marking a 10 year run of returning excess cash flow to our shareholders through dividends and stock buybacks. The detail for the quarter is as follows: Total revenues increased 5.4%, our factory revenues were down 3.1%. This was due primarily to a timing difference in shipments to our largest third party customer. We expect shipments to also be down…

Thanks, Bryan. Operator, at this point we will be glad to take any questions.

[Operator Instructions] Our first question comes from James Fronda at Sidoti.

Is the test market for Kellogg's cereal reflected in the numbers and if not, I guess, could you give a sense of how much incremental revenue we could expect in '14 and '15?

We really don't have an expectation around what the financial impact of this partnership is going to be. It's early on; sales have been strong through the test. There is going to be an expanded launch in January and as we gain more experience with this type of arrangement we will be able to report in -- sometime in the future what it means to the company from a financial standpoint. We definitely think there is the potential for it to be material but I think we are going to need to have more time under our belts.

Right, okay. And I guess the cost savings that you are seeing in the first quarter, I guess do you think that will continue throughout the rest of the fiscal '14? You know that was the reason for the transaction.

Yes, I think that the transaction was put together and executed the way we expected and that the management of U-Swirl has executed very well and we will see, I think a good second and third quarter and then the winter quarter will be what winter is for yogurt.

The next question is from Daniel Zeska [ph] with Best Capital.

Do you guys have any stated or internal growth plan? You've got an excellent high margin, high return business and a lot of growth initiatives, international and otherwise. Is there a target, can you get to double-digit growth or are we seeing what you are happy with, at this point?

Well, I would answer the question first saying of course we have internal growth plans in -- over the next year and then over the next 5 years and beyond. Of course we have that. We manage our business by a business plan. We have not given guidance however on our plans and we don't plan on doing it on this call. So we discuss our initiatives and we report our results but we do not give guidance.

Is U-SWIRL going to raise capital or can they grow through this consolidation plan that they seem to have and you seem to have organically?

Well, it really depends on how the opportunities play out. I think U-Swirl will ultimately have the ability to raise capital. Maybe as of today they don't have that ability, but certainly Rocky Mountain Chocolate Factory is willing to put more capital to facilitate growth for U-Swirl. But I think as we do another transaction or 2 that, that company will then be able to finance itself.

Great, and on the margin side, pre-tax margins are growing. And in the franchising business I imagine they can go even higher than that 18% or is that getting too aggressive?

I think the leverage that -- the potential leverage in our business at Rocky Mountain Chocolate Factory is in our factory. We are currently at about 50% capacity and so there is tremendous leverage still in our business to drive margins up higher as we fill the capacity in the factory.

Our next question comes from Vincent Rudisill [ph], private investor.

I suppose to a certain extent you've already answered this question, but I will ask it nonetheless, in stating that as you won't provide guidance. But both back in May and now again today you used the term "results rebounding in fiscal 2014" significantly. Can you at all quantify how you are defining significantly?

We have answered that question and no I am not going to quantify that.

Our next question comes from Jerry Falkner, RJ Falkner and Company.

Bryan it would -- a question I have on the Kellogg's cereal and the success of that in the initial test, marketing and then the roll-out here, it would appear to me that one of the most significant benefits of this whole program would be the fact that you are getting these boxes of cereal with Rocky Mountain's brand very prominently displayed on them in the hands of thousands of new consumers and it's almost like a free brand advertising that could benefit the franchise store network and I am kind of wondering if you would agree with that #1? And #2, have you seen any indication just from customers' commenting when they come into the stores that they saw the cereal box and that's kind of what drove them to the store when they saw the store in the mall?

Well, I mean, I certainly agree with the characterization that this is definitely exposing our brand to potentially millions of people that are not familiar with it. And as far as saying that it's driving people into the store, we are not that far into the program for me to make that kind of a claim. Our stores are running promotions with the cereal, we have Caramel Apples that are using the cereal as toppings; we are getting a lot of press on it. We have tons of positive anecdotal feedback on it right now. Whether it ultimately drives same-store sales up or not is yet to be seen, but it certainly has that potential. But it's been a great brand building program for us and ultimately I think it will be great for us financially as well.

Okay, and then 1 other question -- couple of weeks ago it seems like there was a press release that was put out by some law firm conducting an investigation regarding your 2007 equity incentive plan and I was just wondering if you could enlighten us regarding this situation and what it might mean for the shareholders?

Jerry, thank you for that question. I'd like to point out that that announcement that was made on July 3 is a relatively common tactic by plaintiff's attorneys. Similar announcements have been made by that firm with respect to numerous other companies, both large and small. There is no lawsuit filed at this time and it is not clear whether any lawsuit will follow the announcement. We are confident the Board of Directors undertook a thorough analysis and acted in the best interest of the company and that the proxy statement contains all the disclosures necessary for the shareholders to analyze the proposal and make an informed voting decision.

The next question comes from Jeff Geygan, Milwaukee Private Wealth.

Will you update us with respect to your Japanese strategy?

Sure, right now we have seen a significant set-back in Japan. We don't really expect a lot more development in Japan from our partner there right now. They are concentrating on shoring up their operations. They have had some operational problems. We are going to work with them to help ensure that they are successful and we are also going to look for another better capitalized partner in Japan. And so we really don't expect a lot of expansion out of Japan for the balance of the year, but we are going to work hard on finding another partner. The initial sales that we had in Japan were really truly amazing and I think that they tailed off a lot because of our partner's operational problems. And we are going to work hard to make sure they are successful, but we think that we need a larger more capitalized partner and we've started the process to find somebody to work with.

Given your subsequent initiation of agreements in South Korea and Saudi Arabia and your existing arrangement in Abu Dhabi how would you characterize this issue as being systemic to your arrangement or specific to your partner?

Well, I think it is very specific to our partner. The concept isn't the easiest concept to run and you have to be good operator to be successful at our business. Our partner in Japan runs another retail concept, it's much simpler than our concept and they do a very good job with it. But they have been struggling with our concept. In Saudi Arabia that remains to be seen. We will see how our partner there is doing. The initial read on how our partner is doing in South Korea is very positive. They are off to a very good start. They are looking at their second locations and planning their other 3 locations after that. So it's very partner specific, it’s very franchisee specific in the U.S. as well.

And if I may, regarding the Kellogg's arrangement that is all through Target stores is my understanding.

It's primarily through Target stores right now. There is also some others stores that are carried in the northeast, just to get some national data from the test and that -- the sales in those stores will continue on into the next phase of this agreement, the roll-out that we are talking about in 2014. But in early 2014, hopefully in January, we will see it expanded to a lot of other national retailers, large national retailers.

Does this lead to a logical conclusion that you will bring Rocky Mountain to the retail shelf?

Bringing Rocky Mountain to the mass market has -- we have gone down that road before and we are considering it again. But we are going to be very careful with the retailers that carry Rocky Mountain Chocolate Factory product. Most of our product that is not sold in our store is sold through the Internet in partnerships with third party companies. The mass market is a potential future growth channel for us and we are going to approach it very carefully however.

[Operator Instructions] And our next question comes from Daniel Zeska [ph] with Best Capital.

What is the market looking like domestically in terms of capacity for you guys and can you discuss a little bit -- can you quantify the returns that your franchisees are getting versus Dunkin' Donuts or something like that?

I can't quantify those returns. I have no idea what the franchisees of Dunkin' Donuts are getting but I can tell you about our domestic franchise system, and our domestic franchise system is not expanding right now. The financing environment for our concept hasn't changed. We've addressed this question in almost every conference call we've had over the last several years. Nothing has changed for us. Financing's not really available for our concept. The FDA changed the rules and our unit growth has really dried up as a result of that. We see some openings from our system and we see some new franchisees. But our domestic system right now under these circumstances is not going to be the source of growth for us in the near term.

[Operator Instructions] And we show no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

Thank you, operator. Thank you again, everyone, for coming to our conference call again this afternoon and we look forward to talking with you in a few months. Have a nice day, thank you again.

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