Executives
Bill Walkowiak – SVP, IR
David Meister – CFO
Robert D’Loren –CEO
James Haran – EVP Operations and M&A
Analysts
Scott Krasik – C.L. King
Todd Slater – Lazard
Jody Kane – Sidoti & Company
Eric Beder – Brean Murray
Jim Chartier – Monness, Crespi, Hardt
Marc Cummins – Prime Capital
Mark Kaufman – MLK Investor Management
Mike [Gran] – [Geiker]
NexCen Brands Inc. (NEXC) Q4 2007 Earnings Call Transcript March 14, 2008 8:30 AM ET
Operator
Good morning my name is Marquita and I will be your conference operator today. At this time I would like to welcome everyone to the NexCen Brands’ fourth quarter 2007 earnings results conference call. (Operator instructions). It is now my pleasure to turn the floor over to your host, Bill Walkowiak. Sir, you may begin your conference.
Bill Walkowiak
Thank you operator and welcome to everyone joining us today. We truly appreciate your participation and interest. With us on the call are Chief Executive Officer Robert D’Loren, Executive Vice President of Operators and M&A, Jim Haran and Chief Financial Officer David Meister. NexCen issued a press release this morning containing financial results for 2007. This release is available on our website at nexcenbrands.com as well as various financial websites. However, if you would like a copy of the press release or any other information about NexCen Brands, please feel free to call me at 212-277-1150.
Before we begin, please keep in mind that this call will contain forward looking statements. All forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company’s SEC filings which are also available on our website. NexCen Brands does not undertake any obligation to publicly update or revise any forward looking statements whether as a result of new information, future events or otherwise. With that I will now turn the call over to our Chief Financial Officer, David Meister. Please go ahead Dave.
David Meister
Thank you Bill and welcome to NexCen Brand’s 2007 year end conference call. As you can see in today’s press release, we have presented both GAAP and certain non GAAP financial measures in order to provide additional insight into the performance of our business. In particular, we have provided EBITDA and non GAAP net income which reflects our cash flow generating potential. We believe that these measures when considered with our net deferred revenues best reflect our earnings potential. The most significant adjustments relate to stock compensation expense and deferred income taxes, both of which are non cash items.
Our press release includes a detailed reconciliation of these non GAAP results to the most directly comparable GAAP measures as required by SEC rules. Now to our results. For the full year, revenues were $34.4 million of which $15.3 million was from franchising royalties. Another $15.5 million was from licensing royalties and $3.5 million was franchise fees. For the fourth quarter, revenues were $10.3 million, up from $1.9 million from the fourth quarter of 2006 when we owned only one brand.
EBITDA for the full year was $8.8 million and for the fourth quarter EBITDA was approximately $2.6 million. In our brand operations, we achieved an EBITDA margin of 53% for the year excluding corporate overhead and 50% for the fourth quarter. As a result, our 2007 non GAAP earnings were $4.9 million or $0.09 per diluted share. Non GAAP earnings for the fourth quarter were approximately $330,000. As you know, we had expected earnings of $0.11 to $0.13 for 2007. The shortfall was due to delays in opening new stores and selling new franchises.
As we explained in the press release, we have $0.07 per share of net deferred revenue on our balance sheet which cannot be recognized as revenue until the corresponding stores are open even though we have already received the franchise fee payments. So the delay effects the timing of revenue recognition, pushing it into a later period. Please keep in mind that this was our first year of operation, so we made initial estimates of the timeframes needed to open stores.
With our franchise operating platform NexCen University, now up and running, we are working to reduce the time period from the sale of the franchise to the opening of the store and to better manage the overall pace of openings. For 2008, we are reaffirming our guidance of $0.27 to $0.30 per share on a non GAAP basis. You may recall that this guidance was increased at the end of January following the acquisition of Great American Cookies. This guidance is based on our pro forma full year earnings for 2007 plus our expected additional earnings from the acquisition of Great American Cookies. So we certainly believe our target is achievable. Now let me give an update on our operating metrics.
Our combined comparable store performance for the full year was up 7.1% driven mostly by TAF International which increased 21.5%. Domestically, TAF sales were down 6.2%. Sales in our premium ice creams concepts were up 1.3%. Within pretzels our combined comp sales were up 5.2% for the year. During the fourth quarter, comp sales were up 6.4% over the prior year. TAF International which constitutes 65% of our TAF stores posted a 25% increase. Domestically, sales were down 9.6% for the quarter. We believe this is mostly a reflection of softness in the retail segment of the US economy.
Many of the changes that we are making in TAF are designed to improve domestic sales at the store level. Sales in our premium ice cream concepts were up about 1.5%. Within pretzels, our comp sales were down 3% for the quarter as a result of slow traffic in US malls during the holiday season. However, in the first two months of 2008, our pretzel stores bounced back somewhat with comp sales up more than 2%. Turning to tax expense, GAAP accounting rules require us to book a non cash deferred tax expense even though it is highly unlikely that we will ever have to pay the tax.
This accrual amounted to $3 point million in 2007. The actual cash taxes paid for 2007 were approximately $700,000. This consists primarily of state, local and foreign taxes. We currently have about $766 million in operating loss carry forwards so it is unlikely that we will pay any significant Federal taxes in the foreseeable future. Our total assets increased by nearly $200 million in 2007 while our total liabilities increased by almost $150 million. So with that financial review, I would now like to turn the call over to our CEO, Bob D’Loren.
Robert D’Loren
Thank you David and good morning everyone. I’d like to start by stating that in 2007 our first year of brand management operations, our focus was on acquisition and integration and by any measure we’ve made tremendous progress. We have acquired and are near completion of the integration of nine companies that include diverse operations and different accounting systems. At the same time, we have built the infrastructure needed to manage and support the company going forward. This includes the facility that we call NexCen University in Atlanta.
NexCen University provides a full range of functions and services that support the needs of our growing family of franchisees. It is really a cradle to grave service provider and global sales center for all of our franchise concepts. In brand management, we’ve built a team of exceptional professionals that handle licensing and design, marketing and other key functions. All of this has been put in place with the capacity to double our volumes over the next two years as we acquire more businesses. We now have a strong platform for future growth and expansion. In 2008, we must now direct more of our efforts towards marketing, franchise sales and operational excellence.
Our existing franchisees now operate approximately 1,900 retail outlets in 50 countries. In addition, we have commitments to open 600 new stores worldwide. Franchisees are being added to this pipeline on a weekly basis. These additions will add to our future revenues through both franchise fees and ongoing royalties. In this regard, we are also making strong progress in penetrating global markets with all of our franchise brands and expect to make announcements throughout 2008.
We closed the acquisition of the Shoebox New York on January 15, 2008. Shoebox brings to us a very exciting opportunity in women’s multi-brand designer shoes and accessories that we believe can be expanded globally. In February we signed a master franchise agreement for South Korea. The agreement is for a minimum of 20 stores and is the first international expansion of Shoebox. We expect many more to come. At the Athlete’s Foot, we have introduced new fashion and performance store formats.
We have tested the new fashion format with stores in the US and Sweden with great success and six performance stores have been introduced both domestically and in China which are also doing extremely well. Four more of these performance stores are expected to open this month. We are also making steady progress on the growth and development of our two consumer brands, Bill Blass and Waverly.
Examples of this brand development at Bill Blass include the November licensing agreement with Camuto Group for women’s luxury shoes, the licensing agreement with Mondani Corporation to manufacture and distribute handbags and small leather goods and the agreement with Global Fur Group to manufacture and distribute luxury fur products. We expect additional announcements soon in the bridal category as well as in the men’s categories.
The very talented Michael Bastian joined us last year as creative director of men’s designs and is actively preparing for the launch of his Bill Blass men’s collection, including a new men’s fragrance. Peter Som, creative director of women’s design at Bill Blass showed a very successful fall clothing line at the recent fashion week in New York. Peter’s line is being well received by the retail community and we are beginning to open up markets in Europe and in Eastern Europe. At Waverly, we have been successful in renewing every licensing contract that has expired since we acquired this brand. We have just announced the renewed agreements with CR Gibson and the McCall Pattern Company and the direct license relationships with both Target and Lowes.
Waverly’s management team is actively working on creative new licensing opportunities and product categories for this well established 85 year old brand. For example, in January we added Access [Imax] to our growing list of key partners to expand the Waverly brand into new lifestyle categories. Access will be the Waverly licensee for decorative home storage and accessories, such as fabric hangers and closet organizers. Also, in January we signed an agreement with Welspun as the Waverly licensee for new home categories such as bath towels and accessories, comforters and blankets and pillow and mattress pads, significantly broadening our consumer offerings at retail.
We have forged a powerful celebrity relationship with Sandra Lee, the acclaimed life and style expert and star of The Food Network to promote the Waverly home products brand to a wider audience. Sandra is an extraordinarily powerful marketing partner for us. Finally, let me touch on the topic of our ability to finance future acquisitions since this is a question often asked. While the current market environment is extremely difficult and requires caution, we expect to continue to have access to capital. We are exploring a number of options to convert our BTMU credit facility into a long term fixed rate security.
Our management team is highly experienced in structuring and placing securities of this nature in both good and difficult climates similar in many ways to the current environment. If this long term financing is completed, the plan is to bring our BTMU credit facility down to zero and have it available for future acquisitions as well as identifying additional lines of credit to support future growth through acquisitions. With that, I will end my remarks and open the call to your questions. Operator, would you please begin the Q&A session?
Question-and-Answer Session
Operator
(Operator instructions). Our first question comes from Scott Krasik of C.L. King.
Scott Krasik – C.L. King
Hi guys, congratulations on completing a big year for you. David, can you give us the sales by retail franchise in QSR and licensing?
David Meister
Sure, for the year, TAF had nearly $9 million of sales, the ice creams had almost $7 million of sales, excuse me $8 million of sales and the pretzels had about $2.7 million of sales.
Scott Krasik – C.L. King
And then you know the branded piece, Waverly and Blass?
David Meister
Right, Blass had almost $10 million and Waverly about $5.5 million.
Scott Krasik – C.L. King
Okay, good, thank you. Okay this is good and then you know just talk about this $0.07 of net deferred revenue, I mean is that, is there some number that we should discount that by or you feel good about that whole amount at this point?
Robert D’Loren
Scott, the $0.07 is the net number and without getting too technical, as we sell franchises and collect the cash we can’t recognize that revenue until the store is physically opened. We book into deferred revenue the cash that we collect. We also book a related accrued expense against that. What we’re reporting is the net and that is a very solid number in terms of actual stores that will be opening going into this year.
Scott Krasik – C.L. King
Good, okay. And then David can you give us some idea, the $0.27-$0.30 guidance, what sort of expectations are there for store openings based on that in 2008?
David Meister
Within that guidance we have looked at a reasonable pace of store openings throughout the year based on what’s in the pipeline today, the status of these stores and where we realistically feel they can open. And we don’t give real detailed breakdown of that guidance but you can be assured that in 08 we, for 08 we took a very hard look at franchise fees and store openings.
Robert D’Loren
Scott one of the challenges for us in 2007 as we were integrating all of the franchise concepts which are now today seven, was really bringing our teams together and scheduling all of the required permit processes, the construction of those stores and the actual opening of the stores and with everything that was going on at NexCen U, it was difficult for us to get a handle on that openings schedule. There will be a natural cycle to our business in terms of what we think we can get open on a weekly, monthly basis. We think we have a good handle on that going into 2008 this year and are comfortable with where we are on the guidance in terms of the revenue we’ll be able to recognize in 08.
Scott Krasik – C.L. King
I mean at some point when you get that will you be able to communicate that because it’s hard to model without it.
Robert D’Loren
Yeah, we’d be happy to do that.
Scott Krasik – C.L. King
Okay, great. Alright and then just lastly what’s driving the TAF International business, it sounds great, the comps, you know is that sustainable, what is it a performance driven business internationally?
Robert D’Loren
It varies you know for instance in Australia it is 100% performance driven. In many of our markets in the Middle East and in Europe and other places around the world it’s 100% fashion driven. And what’s really driving it are very strong global economic in local environments as well as less dilutive markets. You know we were in a meeting yesterday with our Canadian franchisee in Marble Slab and they’re doing extraordinarily well up there and I was asking how are you doing this well because his average unit revenues were quite high. And he said well our markets are less dilutive, we have less malls and that’s part of it. So it really depends region by region but it’s doing extraordinarily well for us.
Scott Krasik – C.L. King
I guess also on a local currency basis it would be lower as well right?
Robert D’Loren
Yes.
Scott Krasik – C.L. King
Okay, alright guys thanks very much.
Operator
Our next question comes from Todd Slater of Lazard.
Todd Slater – Lazard
Thanks very much. Okay so on the store, I want to get back to store openings if I may because obviously the franchisees had some difficulty in opening stores in the fourth quarter based on your commentary. And I’m just curious what gives you comfort that in 08 the stores that you hope can open and in fact you know which the guidance is predicated on actually open.
In other words, what’s changing, what’s improving in 08, is it execution on your end is it liquidity on the franchisee end is it, whatever it may be, what gives you that sense in 08 that these stores will open and then if you could give us some color on of the 600 stores that are in your pipeline, could we expect 20% of those to open in 08? Is it 100 store, 200 store type of opportunity that we should be focused on this year?
Robert D’Loren
Sure, you know Todd quite frankly it’s really operational. During the last quarter a lot of our management team at NexCen was focused on getting NexCen U opened which is a powerful vehicle for us. And there were delays as a result of that in getting franchise stores opening. Also, we had to learn the natural cycle of store openings with our different concepts. I would say an Athlete’s Foot store is something that we can get open in as little as 60-90 days where an ice cream store can be as long as 9 months because of the local approval process with municipalities.
So it was just a matter of us really learning those natural cycles and our team getting more experience with how the natural cycle of the store openings work. With regard to what we think we can expect, the range for this year will be between 200-250 stores to open. The details of the month and the timing we’re modeling out now but we’re comfortable with our overall guidance number in terms of what we believe will be recognized as revenue.
Todd Slater – Lazard
So you’re saying the store openings shortfall if you will in the quarter was more a function of NexCen executional issues than external economic or other pressures and maybe if you could talk about what you think, if you think that these, all the issues we know about economically both domestically and maybe abroad, what impact that might have on the ability to open those 200-250 stores in 08?
Robert D’Loren
I don’t think there’s any domestic or global economic impact on us getting stores opened. Most of those stores are in various stages of construction, they’re financed for the franchisees, so it’s not a matter of economic environment that would delay the openings. There are things that are out of our control in terms of municipal approvals, contractor delays, that’s the nature of the franchise business.
We now have much more infrastructure and support in place for our franchise concepts to better empower our franchisees to stay on schedule and we didn’t have that before and quite frankly the companies that we acquired, given their size, didn’t have the teams in place to really do this in a timely way the way we would like it to happen. So we believe we have the teams in place to make it happen today.
James Haran
Let me just add that I don’t think there’s anything that’s operationally wrong, it’s more of a question of maybe we were a little bit over optimistic in estimating how long it would take a store to open when we gave our guidance and it’s taken a little bit longer than maybe our original guesses at how long this would take, the whole process. So if anything, it’s a problem with our initial estimates.
Todd Slater – Lazard
Okay. Fair enough and then secondly, what is the timing that we should expect on converting the credit facility?
David Meister
We’re in the market today [withsends]. We are in the process of getting the facility rated, Todd and we expect over the next 90 days, we’ll know more or less where we come in in terms of rating and with the rating in place we’re highly confident that we will be able to place those securities in the market.
Todd Slater – Lazard
So it may not even fall into the second quarter?
David Meister
We believe within the second quarter that we should be able to get through the rating and get a sense of where we’ll come out on this.
Todd Slater – Lazard
Okay and do you believe that any acquisitions, whether it’s three, four, five, two, one, could occur without, before that facility is completed or is that, probably wouldn’t…
Robert D’Loren
I think it is possible that we could get an acquisition done.
Todd Slater – Lazard
Without the completion of that?
Robert D’Loren
Yes.
Todd Slater – Lazard
Okay and sort of how would that occur?
Robert D’Loren
In the same way that we got the Great American deal done. We have a good partner in BTMU and we feel confident that if we have the right deal that we would get it done.
Todd Slater – Lazard
Okay, great, terrific, thanks very much.
Operator
Our next question comes from Jody Kane of Sidoti & Company.
Jody Kane – Sidoti & Company
Hi, thanks. Can you touch on the cost side of the business, when will we start to see some leverage on the cost side of the business, what you’re doing to reduce costs as you grow the business or if that’s the dynamic that is happening?
Robert D’Loren
Sure, we’ve built the infrastructure in 07 Jody to support much larger operations. You know for example at NexCen University, today we’re managing 1,900 units. We believe we can manage up to about 3,500 units without taking on any significant overhead there. So I think what we’ll see now is we’re on an annual basis running at about a 53-55% margin at the operating level. We believe this is a point where we can begin to leverage our infrastructure and increase margins as we go forward.
Jody Kane – Sidoti & Company
Alright. Revenue growing and expense sustained relatively flat?
Robert D’Loren
Yes and most of the fixed cost that we need to incur down at NexCen U are already in place and we have a similar structure in our home textile business at Waverly and a similar structure at Bill Blass on the brand side.
Jody Kane – Sidoti & Company
Alright and could you explain how you go about introducing new concepts to your international, say new customers, new guys that haven’t sort of looked at these brands before, how do you go about getting those into new countries?
Robert D’Loren
Well on the franchise side, first and foremost we have an international sales team. And we have sales people on the ground both in Europe, the Middle East and in Asia and Indonesia. And we participate in a variety of conferences and events around the world to promote our brands that are related to franchise opportunities and then of course many of our leads come in through internet portals.
And those all tie into our sales management systems and leads are then provided to appropriate personnel to follow up on. Having said all that, we do have a very strong existing network of partners around the world. We are working with our partners to replicate what we’ve done here in the US. We believe that the NexCen University approach is the right way to go when we’re talking to many of our partners about replicating that in a package deal with all of our brands.
Jody Kane – Sidoti & Company
Alright and then just finally on the acquisition side, despite the credit markets, you guys are still pretty active in the market right now looking at deals.
Robert D’Loren
We are very active, there are six full time M&A team members here. Our focus frankly has been on the franchise side. We will continue to look there. We have a lot of capacity down at NexCen U, the synergies are working the way we would like them to. So it makes a lot of sense for us to continue to look at franchise concepts. We are not taking our eye off the brand ball so to speak. But we like what we’re seeing in franchising.
Jody Kane – Sidoti & Company
So we should expect more of a sort of food franchising or does it really matter?
Robert D’Loren
Our focus is on food. We were successful in our strategy of becoming an industry leader in treats with ice creams, pretzels and cookies. And we will continue to look for coffee, donuts, we like sandwiches and we like wings. Those provide additional points of distribution for our treats and we will continue to look for those types of businesses. And on the brand side, we will continue to look for home textile and luxury brands.
Jody Kane – Sidoti & Company
Okay, thank you.
Operator
Our next question comes from Eric Beder of Brean Murray.
Eric Beder – Brean Murray
Good morning. I’d like to go over an answer you gave, you said that TAF did about $9 million, Maggie Moo’s $8 and Pretzel Time $2.7? That seems to be, I don’t know if I add up…
David Meister
TAF did almost $9, about $8.7, the ice creams did almost $8 million, the pretzels did $2.7.
Eric Beder – Brean Murray
If I add that up that’s like…
David Meister
Over $19.
Eric Beder – Brean Murray
Okay but that’s, you have $18.7 in royalty and franchise combined for the year on the combined statement here.
David Meister
We have…
Eric Beder – Brean Murray
$15.3 in royalty, $3.5 in franchise, that’s $18.8.
David Meister
We have total royalties of $15.3 and there’s franchise fees of $3.5, so those combined drive each brand’s revenues.
Eric Beder – Brean Murray
Right, okay, if I add those up its like $18.8 million and you just gave me three numbers that add up to like $19.5. Okay, well I guess we’ll just figure it out.
David Meister
Those are some other revenues there for licensing fees and rebates, things like that.
Eric Beder – Brean Murray
Okay and could you talk a little bit about the TAF Tech which you rolled out I would think this last month, how that’s going?
Robert D’Loren
Yes, we are having mixed results with TAF Tech across the system and we are now putting in place sales people that will penetrate our stores on a one on one basis. And the franchising business, sometimes franchisees are slow to adopt a concept.
We think that this will be a highly successful product within our stores. All of our new stores are carrying it and we will continue to make it a requirement in the new stores and we’re pushing very hard to get TAF Tech totally adopted across the existing store base. We’re also looking at opportunities with TAF Tech at retail, including penetrating health clubs and spas and other specialty distribution.
Eric Beder – Brean Murray
Alright, how many stores are right now in TAF are the new format and how is that going?
Robert D’Loren
We’ve opened six new stores for performance across the US, one in China, four will open this month. The stores are doing extremely well. We’ve opened three of the new TAF fashion stores, the black store. The black store is doing extraordinarily well, we opened one in Sweden, the store did one of the highest first day sales in the history of the company. People were lined up outside the store before it opened. It’s a very exciting concept and we are watching the black fashion store very, very carefully. It’s a hot concept.
Eric Beder – Brean Murray
And in terms of integrating the pretzels into the ice cream stores, where is that going and actually, how about the cookies too, what has been the response to that?
Robert D’Loren
We tested pretzels in a number of our stores, the test has gone well. We will begin now to roll those pretzel concepts into our ice cream stores. Cookies, it’s a little too early, we acquired the cookie business as you know in January. We believe that we will have very heavy penetration of the cookies into our doors and we’re beginning that process now.
Eric Beder – Brean Murray
And when are we going to start to see some of the centralization of the brands for the franchises?
Robert D’Loren
Can you repeat that question?
Eric Beder – Brean Murray
When are we going to start to see the brands become centralized under one name for the franchises?
Robert D’Loren
Pretzel Time and Pretzel Maker, you will see that by the end of the second quarter, we’ve begun that. And with our ice cream concepts we are working with our franchisees now to develop the best go forward scenario with the two brands. But for pretzels we’re in agreement as to what it should be, it will be Pretzel Marker and that will be done by the end of the second quarter.
Eric Beder – Brean Murray
And what are you seeing in terms of multiples and flows for potential deals. In terms of deal flow, what are you seeing the market?
Robert D’Loren
We’re seeing multiples coming down in the franchise sector and we’re hearing that there’s softening in the brand sector but we haven’t seen it. So we’re really focused on the franchise sector at the moment. We think there are better opportunities for us. We see significant softening, we believe that we’ll be able to acquire at better multiples and that’s where our focus is.
Eric Beder – Brean Murray
Okay and last question, you know we’re in somewhat of an economic slowdown, how does that affect your franchising operations, what historically has been, happened to franchisees and that kind of thing in an economic slowdown?
Robert D’Loren
If there’s an economic slowdown, there’s no doubt that there will be an impact in sales. They are in the retail business. The offset to that and it’s a bit counterintuitive is that as the economy softens and there are more people out there that are losing jobs, our inquiries for franchise opportunities increased and we see an uptick in our sales on the sales of stores.
Eric Beder – Brean Murray
Okay, thank you.
Operator
Our next question comes from Jim Chartier from Monness, Crespi and Hardt.
Jim Chartier – Monness, Crespi, Hardt
Good morning. Just curious where you are on the pouring rights deal?
Robert D’Loren
We are in the final stages of concluding it and that is why we expect that Pretzel Time and Pretzel Maker will be combined in the second quarter.
Jim Chartier – Monness, Crespi, Hardt
Okay and the proceeds from that deal, do you expect that to fund all of the initiatives as far as re-branding stores and things along those lines?
Robert D’Loren
Yes it’s not really re-branding, it’s just re-signing the stores Jim. Yeah that was the whole purpose of the program.
Jim Chartier – Monness, Crespi, Hardt
Right and then in the press release you indicated that you expect to make three to five acquisitions in both 2008 and 2009, does a three to five estimate for 08 include Great American Cookies or is that on top of that?
Robert D’Loren
It includes Great American Cookie.
Jim Chartier – Monness, Crespi, Hardt
Okay and then could you just give us an update on the Bill Blass denim, where you are in that process?
Robert D’Loren
Yes, our denim licensee has done an extraordinary job of repositioning the denim from a low price point to a better moderate price point and we are very happy with his progress and what he’s done with the denim business this year.
Jim Chartier – Monness, Crespi, Hardt
And then, when do you expect that that denim will be into the better department store channel?
Robert D’Loren
He’s shipping it now into various different channels. And they’re making great progress with it.
Jim Chartier – Monness, Crespi, Hardt
And then will 08 be kind of a big year for denim or should we wait until 09 to just see revenues ramp up there?
Robert D’Loren
I think we’re not going to see a ramp in revenue in his business, he’s spent a good part of 07 and now 08 in repositioning the product. Everything that we’ve done with Bill Bass has been to reposition the brand and I think we’re going to see the big ramp for him in 09.
Jim Chartier – Monness, Crespi, Hardt
Okay, thank you.
Operator
Our next question comes from Scott Krasik of C.L. King.
Scott Krasik – C.L. King
Yeah, hey, thanks. Two questions. Where are you guys on requiring or what’s your policy for people who are opening up ice cream stores, are they required now to put pretzels in or is it a choice?
Robert D’Loren
No, it’s a choice and you know Scott when we’re talking to an area developer it’s a different conversation. We’re trying to make deals on our package. For instance we have an area developer in one of our ice creams up in Canada. We’re trying to encourage them to take all seven of our franchise brands and replicate what we are here. And those conversations are going well and we’re having similar conversations around the world. If it’s an individual, we want our individual franchisees to focus on the business that they’re running and if it’s an ice cream store, certainly we’re going to encourage them to get their average unit revenues up by having cookies and pretzels in the store as well as a full beverage program.
Scott Krasik – C.L. King
So you present it to them both ways and then they basically make their choice?
Robert D’Loren
They make their choice.
Scott Krasik – C.L. King
Okay and then the guidance of $0.27-$0.30, David is that predicated basically in your branded businesses on minimums or is it a case by case basis and you’re assuming more than the minimums on some things?
David Meister
It’s really case by case basis, Scott. We evaluate each license and what we expect them to do in the year.
Scott Krasik – C.L. King
If things don’t improve in the second half of the year, could that be a swing factor or do you feel comfortable that you were conservative in your assumptions?
David Meister
I think it’s a realistic range. If you look at 07 on a pro forma basis, as if we owned the acquisitions we’ve made for the full year, we would have done about $0.17 on a non GAAP basis. If you then add Great American Cookies to that, that gets us well into the range of our guidance for 08. So we’re very comfortable with that.
Scott Krasik – C.L. King
Just along those lines, what would the pro forma revenue have been?
David Meister
About $43 million.
Scott Krasik – C.L. King
About $43 million. Okay, thanks guys.
Operator
Our next question comes from Marc Cummins of Prime Capital.
Marc Cummins – Prime Capital
I’m all set, all my questions have been answered, thank you.
Operator
(Operator instructions). Our next question comes from Mark Kaufman of MLK Investor Management.
Mark Kaufman – MLK Investor Management
Hi, gentlemen, I have question I guess it pertains in a sense to the NOL. That is, if you’re having growth overseas, have you been pursuing lending or borrowing overseas and basically to take advantage of the income that’s coming from there?
David Meister
I’m sorry, Mark, could you.
Mark Kaufman – MLK Investor Management
I guess I’m probably jumping too fast on that, I’m just saying that if you’re generating income from overseas and paying overseas taxes, doesn’t it make sense to raise money overseas you know to utilize the interest, the deductions there so this way you can bring money back and really maximize your NOL here in the US?
David Meister
The amount of foreign taxes we pay is very small in any case. In 07 it was about $200,000. And mostly that results from withholdings on royalty payments in various countries and the rates are very different. So we don’t pay income tax which is I think where you’re going with your question. You know it’s not a foreign income tax, really a foreign withholding tax on the royalties.
Mark Kaufman – MLK Investor Management
Okay and so my other question is you know with your stock price down like this and you know this is just theoretical, you know if any branded companies you know approached you, you know in essence to do a reverse acquisition and really I guess turbo charge your utilization of those tax loss carry forwards?
Robert D’Loren
We have not had those types of inquiries.
Mark Kaufman – MLK Investor Management
Or I guess the other question is have you guys thought about it to go after someone if that helps?
Robert D’Loren
No, we are focused on executing our plan of three to five acquisitions per year and we’re confident that we can execute. And we’re just not thinking along those lines.
Mark Kaufman – MLK Investor Management
Okay, thanks very much.
Operator
Our next question comes from Mike [Gran] of [Geiker].
Mike [Gran] – [Geiker]
Just wanted to chat a little bit more about the deferred revenue line. Is it possible that I guess just give us a little more color around that perhaps like the number of stores that are deferred right now and the other thing is, is now were two and a half months after the end of the fourth quarter, how many of those stores have now been completed and are up and running?
David Meister
Well as we’ve said earlier Mike, we have 600 stores in the pipeline and that represents agreements that we’ve entered into and that could be anything from a single store operator to an area developer who will open up many stores in that country. So that deferred revenue represents the fees that we’ve collected on each of those agreements.
Mike [Gran] – [Geiker]
Okay so the deferred revenue, that would include the money from Mr. Hark I think who’s doing the TAF stores and would also include the Korean Shoebox stores?
David Meister
Yes. That’s correct.
Mike [Gran] – [Geiker]
Okay so that deferred revenue line, in some cases might be realized over a very long period of time, is there a way to sort of give us a bit of color about what’s, how much of that deferred revenue is likely to be realized say over a one year timeframe versus a, in some cases I’ve forgotten how far out the Parks deal goes, but it’s a multiyear, maybe five even ten year type deal.
Robert D’Loren
Let me explain how it works. First the deal in Korea wasn’t a late deal so it’s not in the deferred revenue number. But the natural cycle in our business is we make sales through say July to August. Wherever we are through July of August on sales, most likely that will be all the revenue that we can recognize through the year, because we’re going to spend a good part of the third and fourth quarter opening all of those stores. So we’re going to have a natural balance in our deferred revenue number.
So all those stores that we sell late third quarter, fourth quarter should be up on our balance sheet again going forward. And what we had to establish in our first year of operations is what is that natural cycle of store openings, what is the natural balance in deferred revenue for store openings. So we’ve done our forecasting this year based on sales through July, store openings through year end, deferred revenue store openings that were on balance sheet at year end and then we’ll go forward into 09 the same way. Now if we accelerate store sales, that deferred revenue number is going to go up, because that’s the nature of how this works. And what we were trying to establish in year one is what is that natural cycle, what is the natural balance in that deferred revenue year to year?
Mike [Gran] – [Geiker]
Okay so if we look at the seven, [unintelligible] that you believe the deferred revenue line represents and level in your knowledge of the so called natural cycle, how much of that should be realized in 2008?
David Meister
We haven’t really given that granular detail on that. And you know realize too that we’ll be selling in 08 and those stores can open in 08 as well as well as 09. But you know we haven’t really given that granularity in the guidance.
Mike [Gran] – [Geiker]
Okay I mean I’m just, you know you’ve given us the $0.07 number so there must be something that we should be able to do with it, I mean if it’s $0.07 spread out over seven years, that’s not something meaningful to us, I’m just trying to look at that number and try to make something useful out of it.
David Meister
Sure, sure, I understand, most of that will be recognized in 08, some of it will fall into 09. But at the same time, we’re selling new agreements today and now and those will fall into the latter half of 08 as well as into 09. So you know expanding on what Bob was saying, there’s a cycle to this as we sell franchises, that deferred revenue number increases as we recognize the revenue upon the store opening, that deferred revenue line will then decrease.
Robert D’Loren
And let me help you to understand this too. With the area of development agreements, the way those work, if we sell a deal where we have an upfront payment of $1 million and it’s a 20 store deal in a territory, when the first store opens under that area of development agreement, store one, we recognize all the revenue. It’s not as though we recognized those as each store opens. Under that area of development agreement, all of that revenue is recognized as the first store is opene.
Mike [Gran] – [Geiker]
Okay.
Robert D’Loren
It doesn’t work quite the way you’re thinking. That’s why you know David is saying the majority of that deferred revenue will be recognized in 08.
Mike [Gran] – [Geiker]
Okay, great, that’s much more helpful, thank you.
Operator
Our next question comes from Todd Slater of Lazard.
Todd Slater – Lazard
Okay, thanks, just wanted to get some greater clarity on the key components of the guidance, the lion’s share of the $0.27-$0.30, it looks like, I just want to make sure I understand this, $0.17 from the base business, plus Great American Cookie which you said gets you close to the guidance.
David Meister
No I said it gets us well into the range of the guidance.
Todd Slater – Lazard
Well into the range, so that sounds like that adds another $0.10 plus?
David Meister
$0.10 to $0.12.
Todd Slater – Lazard
$0.10 to $0.12 in there, so now we’re already in the range but does this assume any organic growth from all those businesses or what they did just on an 07 pro forma basis?
David Meister
It’s relatively conservative because there’s some organic growth but obviously you know if you take the $0.17 pro forma we did in 07 and add the Cookies, you know it does get us well into the range. So we’re comfortable with the range in the guidance. We think it’s realistically achievable and has some organic growth in it.
Todd Slater – Lazard
So it has, sounds like very mild organic growth, it has no other acquisitions in it, is that correct?
David Meister
That’s correct.
Todd Slater – Lazard
And it includes, I’m assuming it also includes this recovery of some of the deferred revenue that you expect to hit in 08 or is that also potentially incremental?
David Meister
No, that’s included in there as well.
Robert D’Loren
It’s included in there because we don’t know Todd where we end up at the end of the year in terms of what the deferred revenue number will be.
James Haran
This will be an ongoing issue, as with deferred revenue we’re going to take in revenue that we have to defer and then recognize it when the stores are open so this could be a potential accounting progress for us.
Robert D’Loren
It’s just going to be a rolling number.
James Haran
Just think of it as a timeline.
Todd Slater – Lazard
Okay, no I got it, you’ve estimated how much you’re going to recognize in there, okay. And then and so the 200-250 store openings that you think will occur in 08 out of the 600 let’s say in the pipeline, that’s you know seems like a pretty strong organic growth number relative to your expectations in the guidance.
David Meister
It is, we’re selling a lot of stores and making a lot of progress with the franchise business.
Todd Slater – Lazard
Okay, sounds good, thanks.
Operator
Our next question comes from Jim Chartier of Monness, Crespit and Hardt.
Jim Chartier – Monness, Crespi, Hardt
Hi, just wanted to follow up on Michael Grant’s question. Now you’ve got defaulted deferred revenue listed under current liabilities and the definition I believe of current liabilities will be recognized in the next 12 months, correct?
David Meister
Correct.
Jim Chartier – Monness, Crespi, Hardt
So we should expect that all of that $4.65 million of deferred revenue will be recognized in 2008?
David Meister
Correct on that basis.
Jim Chartier – Monness, Crespi, Hardt
And then since the timeline for opening up a store is probably less than six months, you know the stores that you sell in the first half of this year should also be opened in the second half and therefore you’ll be recognizing franchise fee revenue in excess of that $4.6 million?
Robert D’Loren
It depends on what type of store. The ice creams generally take more than six months, Jim, because of municipal approvals. And if we do area development deals, while we received significant upfront payments, sometimes those take a little bit longer, given geography and the appropriate start dates. You know for instance with Shoebox stores, we basically have two windows to open given the seasonality of the footwear business. It’s a little different than the TAF business. So we are now forecasting all of those projected opening and start dates.
Jim Chartier – Monness, Crespi, Hardt
Okay so the minimum franchise fee revenue which you’ll see in 08 is $4.6 million?
Robert D’Loren
Correct.
Jim Chartier – Monness, Crespi, Hardt
Okay, thank you.
Operator
At this time there appear to be no further questions.
Robert D’Loren
Thank you.
Operator
Thank you, this does conclude today’s conference you may now disconnect.
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