Rocky Mountain Chocolate Factory, Inc. (RMCF) Q4 2016 Earnings Report, Transcript and Summary

Hello and welcome to Rocky Mountain Chocolate Factory Incorporated Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. Please note this event is being recorded. The statements made on this conference call which are not historical facts or forward-looking based upon the company’s current plan and strategies and reflect the company’s current assessment of the risks and uncertainties related to its business including such things as product demand and market acceptance, the economic and business environment and the impact of government pressures, currency risks, capacity, efficiency and supply constraints and other risks detailed in the company’s press releases, shareholder communication and Securities and Exchange Commission filings. For additional information the company urges you to consider reviewing its 10-Q and 10-K SEC filings. I would now like to turn the conference over to Frank Crail, Chief Executive Officer. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and welcome to Rocky Mountain Chocolate Factory’s fourth quarter and fiscal 2016 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’re going to start the call today with Bryan giving you a summary of both our fourth quarter and fiscal 2016 year-end operating results. And at the conclusion of this presentation we’ll be happy to answer any questions that you may have. So at this time, I’d like to turn the call over to Bryan.

Thank you, Frank. I’d also like to welcome everyone to today’s call. I’m going to start with details on operating results from the year-ended 2016, February 29, and then get into a little detail on the fourth quarter. Then I’ll turn the conference back over to Frank for question-and-answers. Total revenues for the year declined 2.5% from $41.5 million last year to $40.5 million this year. This was driven by factory sales increase of 1.8%, primarily due to 8.1% increase in shipments to customers outside of our network of domestic franchised and licensed stores. This increase was partially offset by lower domestic Rocky Mountain Chocolate Factory stores in operation and a 1.5% decline in same store pounds purchased. Royalty and marketing fees decreased 3.1%. We had a decline in domestic Rocky Mountain Chocolate Factory units in operation of 5.3%. And we also had a decline of 11.1% in total franchised units in operations, the result of store closures and acquired yogurt franchise systems, in line with expectations that poor performing stores would close. We had fewer acquisitions and store openings this year to offset these declining units. We also had a system-wide same-store sale increase of 0.7%. Rocky Mountain Chocolate Factory stores’ same-store sales were up 1.6% and our yogurt stores declined on a same-store sales basins 1.4%. Franchise fees decreased 6.5%, due to fewer international license fees. Retail sales declined 19.4%; this was the result of the sale of three U-Swirl locations and the closure of two underperforming U-Swirl company-owned locations. We also sold two Rocky Mountain Chocolate Factory company-owned locations. We had a 0.8% decrease in company-owned stores’ same-store retail sales. Factory adjusted margins decreased 140 basis points. This was the result of a change in customer and product mix resulting from the addition of new customers and products outside our system of franchised and licensed locations. We also saw a higher commodity prices, particularly in the first six months of the year with a little of abatement in the second-half of the year, but still pressured our margins. Adjusted EBITDA for the year was $8.223 million versus $9.014 million in the prior year. Income from operations decreased 37.8% in fiscal year 2016 to approximately $3.7 million compared with $6 million a year earlier. The decrease in operating income resulted from charges related to the impairment of goodwill and certain company-owned long-lived assets of U-Swirl. Pretax income declined 38.7% to $3.545 million in fiscal 2016 versus $5,781 million in the previous fiscal year. The company recognized an income tax benefit of $262,000 in fiscal year 2016, compared with an effective tax rate of 35.3% and an expense of $2.038 million in fiscal year 2015. An income tax benefit of approximately $2.140 million was recognized during fourth quarter, as the result of the company foreclosing upon its interest in U-Swirl and recognizing tax assets reserved for when U-Swirl was a separate tax entity. RMCF will consolidate U-Swirl in future tax returns, and consequently with tax assets that were fully reserved for previously now had their valuation allowances reversed. Net income was approximately $4.426 million compared to $3.938 million in the previous fiscal year. The difference between the decrease in operating income and the increase in income attributable to RMCF shareholders was primarily due to a $2.327 million charge for impairment of goodwill and certain long-lived company store assets, more than offset by income tax benefit of $2.149 million. Of the impairment charge of $2.327 million, 61% of that is absorbed by the non-controlling interest in U-Swirl. Fully diluted earnings-per-share was $0.73 versus $0.61 in the prior year. On March 11, the company paid its 51st consecutive quarterly cash dividend of $0.12 per share. During the year, we continued to repurchase shares, buying approximately 233,000 shares or 3.9% of the shares outstanding. We opened 40 new locations in fiscal 2016, including 11 U-Swirl locations, 10 Cold Stone Creamery locations and 14 international locations, as well as 5 domestic standalone Rocky Mount Chocolate Factory openings. On February 29, 2016, the company foreclosed on its loan with U-Swirl, Inc, the company’s 39% owned subsidiary, due to defaults and non-payment by SWRL. As a result of the foreclosure, U-Swirl International, Inc., which contains all of the franchise and other operating assets of U-Swirl, became a wholly-owned subsidiary of the company. Earlier today the company announced that its 52nd consecutive quarterly cash dividend will be paid on June 7, 2016 in the amount of $0.12 per share. For the quarter, total revenues decreased 1.4% from $11.2 million to $11 million. Factory revenues increased 0.6%; this was driven by 2.9% increase in shipments to customers outside our system of franchised stores. Retail sales declined 12.2%; this was the result of the sale of three U-Swirl locations and the closure of two under-performing U-Swirl company-owned locations. We also sold a Rocky Mountain Chocolate Factory company-owned location in the fourth quarter. In the fourth quarter same-store sales at all company-owned locations increased to 3.2%. Rocky Mountain Chocolate Factory stores increased 3% and U-Swirl stores increased 3.5%. Royalty and marketing fees decreased 2.1% in the fourth quarter. This was driven by a decline of 9.5% in the total franchised units in operation, the result of store closures and acquired franchise systems for the yogurt. Franchise fees decreased 2.2% in the fourth quarter, primarily as the result of higher international license fees in the prior-year quarter, with no such fees occurring in the current year quarter. Factory margins decreased 50 basis points in the fourth quarter to 21.8% - 28.1% versus 28.6%. This resulted from a change in customer and product mix, resulting from the addition of new customers and products outside our system of franchised and licensed locations. It was partially offset by a slight decline in certain commodity costs in the fourth quarter. Adjusted EBITDA was $2,183,000 in the fourth quarter versus $2,242,000 in the fourth quarter of last year. Net income was approximately $2,442,000 compared with $1,387,000. Fully diluted earnings per share for the quarter was $0.41 versus $0.22 last year. We opened 11 new locations in the fourth quarter, including two U-Swirl locations, four co-branded Cold Stone locations, and five international openings. We finished the quarter with $6.2 million in cash and current ratio of 1.9 to 1. And that’s - with that, I’ll turn it back over to Frank for any questions that you may have.

Okay. Thanks, Bryan. Operator, at this time, we’d be happy to answer any questions that anyone might have.

[Operator Instructions] And our first question comes from Tim Call with Capital Management Group. Please go ahead.

Congratulations with growing your system-wide chocolate store base, but sequentially in year-over-year. What’s the outlook for international chocolate store growth today, and has the bank lending environment eased at all for Cold Stone Creamery co-branding opportunities to grow?

I believe that we’ll see continued international growth opportunities and see more international openings and we do have domestically. I believe also that on a longer-term basis. International would be a contributor to our profitability long-term. We don’t expect it to move the needle in the short-term, but I still see faster growth international than we’ll see domestically. And what was the second part of your question? I’m sorry.

The lending environment for Cold Stone Creamery stores to have moved to co-branded with Rocky Mountain?

I’m not sure the lending environment really was an impediment to growth in terms of Cold Stone Creamery stores, remodeling their stores, so that become a co-branded Cold Stone Rocky Mountain Chocolate Factory store. I think that’s more applicable to standalone Rocky Mountain Chocolate Factory stores. And I think, well, that lending environment is somewhat not much for the kind of franchise that we attract.

What are the expansion opportunities for things like candy bars serial and internet sales?

Well, I think the candy bars serials, we have less opportunities going right now, then we do with the ability of expand our online sales to Rocky Mountain Chocolate Factory or rmcf.com. I think there is a great opportunity for that, I think that in our plans for the fiscal year that we are in right now is to grow that business significantly. From a small base, but still grow at significantly. We won’t really know how successful we are with those efforts until Q3, Q4. That business will be a gifting business and we’ll be seasonal like most chocolate sales.

Thank you.

The next question is a follow-up from Tim Call with Capital Management Group. Please go ahead.

I just had a couple of more questions. The interest expenses here fell around 17%, because you’re paying off your promissory note as it comes due. As that continues, should we expect interest expense this coming up year to also fall around 17% or more?

I think it will be approximately in that range, yes. And we’ll continue to pay that down in interest expense, will continue to go down.

And you expect to pay down debt as it comes due?

Yes, that’s our plan. It’s not to pay that down, that debt, any earlier than it is due.

In the balance sheet, cash is almost twice the level of current liabilities and your free cash flow remains very strong. Does that mean there is a chance later on this year that you might increase the annual dividend beyond $0.48 and are share buyback still a possibility.

Well, I’ll answer that question this way. We have and we will continue to pay dividends, buy back stock, invest in the business within the constraints of the cash flow, that’s generated by operations. So, specifically, we don’t have plans to increase the dividend and that’s going to depend on whether we grow earnings and free cash flow and what the level of investment we’re going to make in our factory. And so, that is not a given, but it is something that we continually look at.

Thank you.

The next question comes from Vincent Rudisill, [ph] a private investor. Please go ahead.

Thank you. Could you tell us what your long-term debt was on the balance sheet at the end of the fiscal year?

It was roughly $4.1 million total long-term debt and that is the current long-term purchase [ph].

And I believe you were owed $7 million from U-Swirl. What is - what happens with that?

The note that was between U-Swirl, Inc. and Rocky Mountain Chocolate Factory, because we consolidated U-Swirl was eliminated in consolidation. And that note has been satisfied through the foreclosure process. And so, that note is no longer in existence.

Okay, all right. Thank you.

[Operator Instructions] The next question comes from Bill Wolfenden with Cottonwood Investments. Please go ahead.

Hi, I have a couple of big-picture questions. The first one is, if you could just talk broadly why the same-store sales were so strong in the fourth quarter? And secondly, what are the plans for U-Swirl, because obviously that business wasn’t doing that well yet to foreclose on it, so I’m just trying to figure out how that fits into your business.

Well, I think U-Swirl continues to fit into our business. It’s not too dissimilar from Rocky Mountain Chocolate Factory’s franchise system in terms of the infrastructure that you need to support those franchisees. It’s a contributor in terms of cash flow. And through the foreclosure process we got access to $3.3 million in cash and almost $2.2 million in tax assets. And so, I think it fits into what we’re doing. And hopefully at some point, we’ll see more units opening and closing as we get through the process of closing the weaker stores and we see a less saturated frozen yogurt market nationally. So that’s the U-Swirl question. And I think that the fourth quarter same-store sales; there is no new trend there. They were up slightly on the year; they did better in the fourth quarter than they had on year. But if you look at the year number, on same-store sales, it’s much weaker than last year, but in line with the previous four years. And so, I don’t think there is any new trend in same-store sales. We had four years of slightly positive same-stores sales, in one year our same-store sales were very strong.

Great, and if I can just follow-up, is the cash flow profile, i.e., margins et cetera for U-Swirl similar to that of Rocky Mountain or is it lower?

Well, on the Rocky Mountain side or on the U-Swirl side we don’t purchase the product, that’s purchased by the franchise system. So the revenue that’s generated per store is much lower in the yogurt business than it is in the chocolate business.

Okay. Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Frank Crail for any closing remarks.

Thank you. And I’d like to thank everyone that listen to our conference call this afternoon and we look forward to talking to you again at the end of the first quarter. Have a great day and thank you again. Bye.

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