Rocky Mountain Chocolate Factory, Inc.

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 on 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 Franklin Crail, CEO. Mr.

Crail?

Thank you, operator. Good afternoon, everyone, and welcome to Rocky Mountain Chocolate Factory's Fourth Quarter and Fiscal 2014 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 Brian giving you a summary of both our fourth quarter and our fiscal year-end financial results. And at the conclusion of his presentation, we will be happy to answer any questions that you might have.

So at this point, I'd like to turn the call over to Bryan.

Thank you, Frank. I would also like to thank everyone for being on the call today.

I'm going to start today's call with just a brief overview of the progress we made in the fiscal year, and then I'll get into the detailed financial results for both the year and the quarter.

This year was an excellent year, marked by solid revenue growth and an excellent increase in profitability, which was driven primarily by increased royalty marketing fees, increased retail sales, franchise fees and increased specialty market sales.

We had further progress with our international expansion by executing license agreements, covering the countries of South Korea and the Kingdom of Saudi Arabia. And we opened the first South Korean store in May of this fiscal year and the fifth store in September.

We expect the first Saudi Arabian store to open in the first half of next fiscal year.

After exceeding expectations in the initial test phase of Kellogg's Rocky Mountain Chocolate Factory Chocolatey Almond Cereal, Kellogg's informed us of an expanded rollout, which was launched in January of 2014.

Our frozen yogurt operations slumped from an adjusted EBITDA loss of $221,000 in the prior year to positive adjusted EBITDA of $393,000 this year, validating expectations that the transactions consolidating our yogurt operations would create scale and a profitable company capable of becoming a consolidation force in the frozen yogurt industry.

On January 17, 2014, Rocky Mountain Chocolate Factory's minority-owned subsidiary, U-Swirl, Inc., completed the acquisition of 2 self-serve frozen yogurt chains, CherryBerry and Yogli Mogli.

On a combined basis, the acquisition is more than triple the number of frozen yogurt cafés operated by U-Swirl, its franchisees and licensees.

Rocky Mountain Chocolate Factory and Wells Fargo finalized the $7 million, 3.75% bank credit facility agreement for the purposes of funding acquisitions by the company's majority-owned subsidiary, U-Swirl, Inc. The outstanding balance on this facility at February 28, 2014, was $6.4 million.

On February 20, 2014, U-Swirl, Inc. completed the acquisition of Fuzzy Peach frozen yogurt, adding an additional 17 locations to its total franchise locations.

The acquisitions by U-Swirl were funded through a $7.75 million convertible note with Rocky Mountain Chocolate Factory, Inc.

On March 14, we paid our 43rd consecutive quarterly cash dividend. And on May 22, we declared our 44th consecutive quarterly cash dividend payable on June 13.

In summary, we are very pleased with our recovery in fiscal 2014, and we are optimistic regarding the outlook for the current fiscal year. Our business model has been transformed in recent years through the launch of co-branding, international expansion, licensing initiatives and our entry into the self-serve frozen yogurt at a time when the industry is right for consolidation.

For the 12 months, the detailed financial results will be covered now. Total revenues increased 7.9%.

This was driven by royalty and marketing fees increasing 20%. That was due to increased units in operation resulting from acquisitions and consolidation of our frozen yogurt operations.

Franchise fees increased 53.6%, an increase in -- this was due to an increase in international license fees. Retail sales increased 17.3%.

This was due to an increase in average company-owned units and unit volume, resulting from the acquisition of a majority position in U-Swirl, Inc. This was very slightly offset by a 0.7% decrease in company-owned stores, same-store retail sales.

Franchise Rocky Mountain Chocolate Factory same-store sales were up 1.2% on the year.

Same-store pounds purchased by our franchise system were approximately flat with the prior year. Factory adjusted margins decreased 40 basis points.

We increased our average selling price, and this was more than offset by increases in the cost of certain materials.

On a non-GAAP basis, the company's adjusted diluted earnings per share increased 21% to $0.75 per share compared with $0.62 in the previous fiscal year.

Non-GAAP adjusted EBITDA increased 13.7% to $7,709,000 compared with $6,781,000 last fiscal year.

Non-GAAP adjusted net income increased 25% to $4,797,000 compared with $3,839,000 in fiscal year 2013.

1 current ratio.

Also, during the year, we opened up 36 new locations, including 13 U-Swirl locations, 14 co-branded Cold Stone locations, 6 international locations and 3 domestic Rocky Mountain Chocolate Factory standalone openings.

With that, I'll get into some detail on the fourth quarter. The fourth quarter total revenues were up 7.5%.

Factory revenues increased 4.9%. This was driven by a 17% increase in shipments to customers outside our system of franchise stores, slightly offset by a 0.5% decrease in same-store pounds purchased by our domestic franchisees.

Retail sales increased 11.4% in the quarter. This was due to an increase in the average company-owned units in operation, resulting from the acquisition of a minority -- a majority interest in U-Swirl and their company-owned locations.

The retail stores had an increase of 2.5% in same-store sales that all company-owned locations.

Royalty and marketing fees increased 14.7%. This was due to a 47.7% increase in domestic franchise stores, including the U-Swirl franchise locations, partially offset by a decline in same-store sales of 1.5% at domestic Rocky Mountain Chocolate Factory franchise locations.

The increase in units occurred as a result of the January and February acquisitions in the slowest quarter for frozen yogurt sales.

Franchise fees increased 32.6%. We opened -- we had 8 openings in the 3 months ended February 28, 2014, compared with 4 openings in the 3 months ended February 29, 2013.

Factory adjusted margin decreased 100 basis points in the fourth quarter. It was 29.9% versus 30.9%.

Again, this was due to increases in the average selling prices, more than offset by the increases of certain materials.

On a non-GAAP basis, the company's adjusted diluting -- diluted earnings per share increased 69% to $0.27 compared with $0.16 in the previous fiscal year fourth quarter. Non-GAAP adjusted EBITDA increased 32.3% during the quarter to $2,000,136 (sic) [ $2,136,000 ] compared with $1,615,000 in the prior year period.

Non-GAAP adjusted net income increased 73% to $1,000,730 (sic) [ $1,730,000 ] compared with $999,000 in the prior year. GAAP net income was $1.487 million versus $96,000 in the prior year fourth quarter.

Basic GAAP earnings per share was $0.24, and fully diluted GAAP earnings per share was $0.23 versus $0.02 of basic and fully diluted earnings per share in the prior year.

During the quarter, we opened 8 stores, including 7 Cold Stone co-branded stores and 1 U-Swirl café. We also finished the quarter with approximately $5.9 million in cash.

And with that, Frank, I'll turn it back over to you.

Okay. Thanks, Bryan.

Okay. Operator, at this time, we'll be glad to take any questions.

This is Jeremy in for Tom. With apologies, I missed a bit of your prepared remarks.

I just wanted to ask about same-store sales growth in the U-Swirl franchise in Q4. Did you note that same-store sales growth on an organic basis?

We are not reporting same-store sales for U-Swirl, primarily because most of the units have been acquired, and they have not been owned for us for the requisite period. And so we have not reported that number.

Okay. Is that something that once you get them under your belt for either 6 months or a year or such that you'll look to start sharing with us?

When we've owned them for 15 months, we'll be able to start then reporting quarterly same-store sales and then each quarter thereafter.

Okay. That makes a lot of sense.

But we won't -- because those numbers have not been audited in the past. We're not going to report it on acquisitions until we've had the stores under our management for that period of time.

My question is, how much additional ability to borrow from Rocky Mountain does U-Swirl have left under their original agreement?

They can borrow about $1.4 million still.

And how does this compare with the acquisitions that they may have in the pipeline?

Well, we have a variety of opportunities in the pipeline. Right now, we're focusing on integration more than we are adding more chains.

And so for the next 3 months or so, I don't expect that we'll close any more transactions. We could, but it's not my expectation.

I really feel like we need to focus on operations and integrations for a few more months.

And the second question is, what is the number of stores under development by U-Swirl in terms of their current portfolio brands?

Well, there is a variety of stores that are under development right now, and we'll disclose that when we file the K. The Ks for both companies will be filed early next week.

We're still working on our Ks, and that information has not been disclosed in our press release. So you'll have to wait until early next week to see those numbers.

I live out in California, and I just had a quick question. I've noticed in most of the supermarkets I've seen Godiva, Ghirardelli and Lindt really selling a lot of candy bars -- premium chocolate candy bars, all kinds of different types, mostly dark chocolate.

I'm wondering if you guys have given any given any thought to that or thought about time to break into that market, if you have any thoughts on that.

We, of course, were well aware of that trend. It's not just in California, it's across the country.

We've been in product development for quite some time. We have some, what I would consider, fantastic products developed, incredible packaging, and we will be testing the acceptance of our brand and our candy bars in Colorado here this summer.

So we have been thinking about it a lot and preparing for it and expect in the future that if our brand's successful in food, drug and mass, that we will have the products to sell there. But it's going to start in grocery, and it's going to start with candy bars.

My observation is that U-Swirl, through their acquisitions, they're operating under a number of brand names. Do you see any opportunities to perhaps have a sort of a main brand name and fold some of these chains into that type of entity, I mean, name-wise?

If you'd talk to Rico, the CEO of U-Swirl, he feels the magic number is right around 500 when we start to move to a single brand. When we acquired a variety of these companies, they have stores under development.

And so you'll still see almost -- well, most of the brands open several more stores, sometimes more than that because of the development that was in the pipeline. But when we get to around 500 units, we're going to start moving toward a single brand.

It's going to be a lengthy process, but that's our plan right now at about 500 units.

And I presume that when you do that, there will be some cost savings.

Well, I think the cost savings don't come from being under a particular brand name, they come from integration and elimination of duplicate costs and, also, from increases in purchasing power by having a larger system. And we've already seen some synergies along those lines and expect to see more in the future.

So consolidating the brand doesn't necessarily drive profitability, its other things. But it definitely drives branding recognition and long-term value.

Good. My other question is that you've got a program going where you co-brand with U-Swirl and the Rocky Mountain name.

What's -- now what is the status of that? And how are they doing?

They are doing fantastic. If the results that we're seeing by co-branding with U-Swirl, we've seen those results with the long-time co-branding program we've had with Cold Stone Creamery.

The co-brands with Cold Stone and the co-brands with U-Swirl are going very well. We're seeing it takes a while to get the co-branding program off the ground when it first gets started.

We're seeing the same kind of start-up at U-Swirl that we saw at Cold Stone. You get a few early adopters that are very aggressive and go ahead and co-brand early, and a lot of the systems sits on the sidelines and watches how those co-brands do.

After the co-brands have been around a period of time, more people get confident in co-branding. And then you start to see some momentum.

The number of co-brands we have with Cold Stone is at 55 right now. And we should see, I think, a similar development pattern with U-Swirl.

Well, that's certainly exciting. And with Cold Stone, it seems as though that has gotten to the point where you have a significant number of the co-branded stores.

And I am assuming that you continue that trend of developing co-branded stores with Cold Stone. Is that an accurate assumption?

Yes. Cold Stone's in -- been on a nice annual cliff for the last 4 or 5 years, and we expect that to continue.

Thank you, operator. Again, I'd like to thank everybody for listening to our conference call this afternoon, and we look forward to talking to you at the end of our first quarter.

So have a good day, and thank you, again, very much. Goodbye.