Yocream Intl Inc (PINK:YOCM)

Sales for the three months ended July 31, 2010 increased 15.6% to $18.4 million compared to $16 million for the third quarter in fiscal 2009. Sales of the Company's core frozen yogurt business grew 50.2% in the third quarter following 52.1% in the second quarter.

International sales of frozen yogurt were up 199% for the 3 months ended July 31, 2010 and foreign market interest in securing real frozen yogurt is strong. YoCream selectively pursues this business, offering quality high culture frozen yogurt assuring food safety and product consistency. YoCream recently received approval and began shipments to China and anticipates continued growth in multiple emerging international markets.

Yocream Intl Inc reported 2010 first quarter financial results on March 15, 2010. EPS were down 12.5% to $0.35 on a slight increase in sales. Somewhat discouraging was news that one of their customers has picked up a secondary supplier. Normally we would remove YOCM from the GeoBargain list, but its stellar growth track record and encouraging company comments could infer that a resumption of EPS growth is around the corner:

• Frozen yogurt sales to the general foodservice market remain robust at a growth rate of 30.9%.
  
• The Company continues to work with large national accounts, and four more are presently in test with different products.
  
• The stock actually reacted well, trading up on the release, giving us some comfort.

Stay tuned for further developments.

Source: PR Newswire (March 15, 2010)

Excerpt from GeoBargain & Special Update - Performance Laggards Article

YoCream Intl Inc (PINK:YOCM)

YoCream had a been a great performer for the GeoTeam. However, the Company never really performed after we coded it as a GeoBargain, and momentum stagnated after it reported fiscal 2009 3rd qtr. on Aug 27. YoCream showed weaker growth than what the firm had reported for several of its past quarters.

In that press release the company offered some words of encouragement that could point to an interesting fourth quarter:

…"The third quarter merely saw us catch up with last year's roll out of smoothie sales to a major national account. In fact, sales of our core frozen yogurt products are up 66% in the third quarter. We continue to work with large national accounts. Four more are in test with different products right now. So we expect steady growth ahead for our core products as well as surges in sales should the national accounts approve the products in test."…

…"When asked about capacity to respond to additional surges in sales to large national accounts, Senior Director Matt Hanna reported that YoCream will complete $4 million in FY '09 plant infrastructure capital expansion. This will effectively double the capacity to pasteurize, culture, and package frozen yogurt mix. "We can now run in one shift what was taking us two shifts to produce," he stated. "We believe significant growth is coming and we are prepared to support our core business and new customers.”...

We still have not heard anything from the Company on this account so we are not sure what to expect.

YoCream also recently announced a special dividend. On one hand, this is good news indicating that cash flow remains strong. On the other hand, is the Company attempting to soften the blow of a weaker fourth quarter? We may be over thinking the situation, but we thought short-term investors would want to know. At any rate, we still are optimistic about the long term scenario and are likely willing to accept a few subpar quarters due to the Company’s historical success.

See discussion note from August 27, 2009.

Valuation Scenarios


Added to the GeoBargain List on May 29, 2009. ($31.00)

Data Inputs: (The GeoTeam® has now calculated trailing non-GAAP EPS figures)

Fiscal Year Ends in October

 ^a Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information .  The GeoTeam® non-GAAP figures may, from time to time,  differ from company supplied figures.

Short-Term Valuation Scenarios

THIRD QUARTER 2009 vs. 2008 FINANCIAL SNAPSHOT ENDED July 30

SECOND QUARTER 2009 vs. 2008 FINANCIAL SNAPSHOT ENDED APRIL 30

Source: See Release

^a Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information. The GeoTeam® non-GAAP figures may, from time to time,  differ from company supplied figures.

Yocream (Pink Sheets:YOCM) announced third quarter results below the GeoTeam's® expectations, even after adding back a one time non-cash stock compensation charge of $673K .  We were most disappointed in this quarter's revenue showing.

^a Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . The GeoTeam® non- GAAP figures may, from time to time,  differ from company supplied figures.

We had hoped that Yocream would provide a non-GAAP EPS number as opposed to leaving it up to investors to dig up this information.  Even so, after taking the charge into account, non- GAAP results were still unimpressive.  Although YoCream's core business was up nicely, it appears that sales through its  Custom manufacturing business did not grow at a brisk pace. 

The GeoTeam® is not sure how investors will react to today's news.  The Company did a good job of explaining that this quarter's performance was likely a temporary situation and indicated that robust growth will be resumed in subsequent quarters:

• "The third quarter merely saw us catch up with last year's roll out of smoothie sales to a major national account. In fact, sales of our core frozen yogurt products are up 66% in the third quarter. We continue to work with large national accounts. Four more are in test with different products right now. So we expect steady growth ahead for our core products as well as surges in sales should the national accounts approve the products in test."
• "When asked about capacity to respond to additional surges in sales to large national accounts, Senior Director Matt Hanna reported that YoCream will complete $4 million in FY '09 plant infrastructure capital expansion. This will effectively double the capacity to pasteurize, culture, and package frozen yogurt mix. "We can now run in one shift what was taking us two shifts to produce," he stated. "We believe significant growth is coming and we are prepared to support our core business and new customers."

Combined, these two factors could propel revenue growth, while significantly increasing profit margins.

We will keep Yocream on the GeoBargain list due to the positive commentary in its press release and long-term track record of superior earnings per share growth. What remains to be seen is how fast the Company can get back on the growth track, a situation that is highly dependent upon:

• When its new capacity will be put to work.
• If and when it locks in its customer accounts, currently in test mode.

We think this could be an interesting day for Yocream, possibly creating a buying opportunity for long-term investors if shares get hit hard.  Timing issues still remain for short-term investors who may be inclined to sell their shares.  So far shares are holding up fairly well.

Who knows? If Yocream is in the hands of savvy investors we may be pleasantly surprised. Once the press release is fully digested it is apparent that YoCream is still very confident that it can resume its above average growth trend.  With Geo Calculated non- GAAP trailing EPS of $2.90, the stock is selling at a modest P/E of 10, which could give the stock support.

Valuation Scenarios


Added to the GeoBargain List on May 29, 2009. ($31.00)

Data Inputs:

Fiscal Year Ends in October

The GeoTeam® is adjusting its earnings per share estimate for YoCream due to an increase in the company's diluted outstanding share count.  Please see filing, page 2, for more details regarding this event.  Valuation scenarios have been adjusted (Scenarios may be aggressive if short-term investors perceive this development as negative).

New GeoTeam® estimate based on: $2.3 million shares:   $2.88
Old GeoTeam® estimate based on  : $2.6 million shares:   $3.10

The  GeoTeam® is speculating, based on seasonality trends, that the fourth quarter may not show the earnings per share growth we were hoping for.  The long-term story remains intact

The GeoTeam® established a position in YoCream well over a year ago around $9.00. We never highlighted the company as its stock trades on the Pink Sheets. However, YoCream has put together seven straight quarters of superb EPS growth, with its lowest growth rate quarter coming in at plus 90%. The stock currently trades at a P/E of 12 x trailing EPS and a P/E of 10 x the GeoTeam® 2009 EPS estimate of $3.10. The stock, which recently hit a 52 week high, also weathered the recent market turmoil rather well.

The YoCream story is as simple as it gets. The 23 year-old public company (32 years in business) has taken a popular food category and established a reputation and marketing strategy that has taken its growth to new heights, surpassing GeoTeam® expectations. While the company has seen growth in the past, recent initiatives have helped to accelerate growth and position YoCream to meet opportunities that lie ahead.

Understanding YoCream

What Does YoCream Do?  YoCream produces, markets and sells frozen yogurt, ice cream and frozen custard mixes as well as fruit and dairy smoothies and frozen beverages. The frozen yogurt category comprises the majority of the company's revenues. The company sells its products primarily to food service companies.

We have broken down the YoCream revenue stream into three categories:

1. Food Service Non-Club Markets.
   
   
   • Specialty yogurt shops: single stores and chains
     
   • Quick serve and full service restaurants
     
   • Convenience stores
     
   • Business & Industry
     
   • Colleges & Universities
     
   • Government
     
   • Healthcare
     
     
2. Food Service Club (membership) Markets. Costco has been a significant and consistent customer since 1987. YoCream yogurt products are sold in all 400 Costco United States locations as well as in Korea, Taiwan, Australia and Mexico.  YoCream serves its markets in a variety of ways:
   
   • Company branded products - Customers sell the company's products that bear the YoCream signature.
     
   • Company licensee products- YoCream manufactures products that bear the licensor's name along with YoCreams's trademark. To this end YoCream has licensing rights to use the Jolly Rancher™, Twizzler™, Jarritos™, Rock Star™, Bubble Yum™ and Ice Breakers™ names for frozen beverage.  The Company also holds the exclusive rights to use the Hershey's® Kisses™, Heath™, York™, Mounds™ and Resse's™ brands for soft server frozen yogurt.
     
   • Custom manufacturing- YoCream provides expertise to the custom manufacturing and private label market. In addition to manufacturing, clients may also contract the use of the Company’s Research and Development and Logistics departments. Jack in the Box has been a private label customer since 2007 and has been a significant component of YoCream's recent growth.
   
   
3. Company Retail Owned Stores.  YoCream has one retail location that serves as its Company Showroom and training center for operators that want to open frozen yogurt stores.  The Company does not intend to expand retail operations because of its policy of not competing with customers.

Impetus for Recent Growth

What has propelled YoCream's current growth cycle? While YoCream had been a profitable firm with respectable growth in the recent past it reached a point, where in order to maintain and accelerate its growth rate, it had to address a specific road block: Capacity constraints.

By January 2006 the company achieved much of what it could out of its current manufacturing capacity and decided that in order to continue to grow it would spend money to increase production. This was also the time that the company voluntarily delisted itself from the NASDAQ, feeling that money was better spent on upgrading its capacity than on complying with costly Sarbanes Oxley rules.  By 2007, as stated in its 2007 annual report, the planned expansion was complete:

"Expansion of our production facilities was finalized providing for a number of simultaneous production lines, various packaging capabilities and extended storage capacity."

The decision has paid off as the company's new capacity enabled it to introduce new products, attract new customers, increase efficiency and jump start its growth. As YoCream has gained a solid reputation and as its customers have found success with its brand, more food service giants are seeing the opportunity to offer a soft serve product that taste like ice cream yet is still healthy.

One other major force opportunistically coincided with YoCream's expansion.  The benefits of probiotics in yogurt has received significant public attention, giving the company an additional angle with which to market its products.  In short, probiotics have shown that they may, in preliminary studies, help to manage lactose intolerance, potentially reduce the risk of colon cancer, lower cholesterol and high blood pressure, improve mineral absorption and are thought to help the immune system stave off certain kinds of infections.  This will also make the brand more recession resistant and has given a mature product new growth venues.

Investors should be aware that trading on the Pink Sheets often comes with a negative perception and lower stock valuation. The GeoTeam® is optimistic that the company may experience P/E expansion as investors find this story, especially if the company upgrades to a higher exchange which may legally have to occur if the number of shareholders reaches 300.  The company currently has approximately 250 shareholders.  Many shareholders hold their position in street name and for SEC purposes all of the shareholders at a single firm are counted as one.

Growth Opportunities

1. Growth by continuing to serve the proliferation of specialty yogurt shops.
   
2. Growing with Costco domestically and internationally.
   
3. Building on the success of its custom manufacturing business which currently comprises only 15% of total revenues.
   
4. The GeoTeam® feels there may be opportunity to build new relationships with food service companies that target the health-conscious consumer with quick service restaurants that are upgrading their menus with healthy but tasty products.
   
5. More opportunities exist to build on their licensee product concept.
   
6. While the Company's logistic system is such that it effectively distributes nationwide, much of its recent expansion has been in the west.  Distribution has intensified in the east, especially in the New York area.  Other emerging markets include Texas, the Southwest and Florida.  The Company also enjoys profitable overseas business, especially in Europe and the Pacific Rim.
   
7. With $6 million in cash and an ample credit line YoCream can seek acquisition opportunities.
   
8. More food service giants are seeing the value in the YoCream model.

The GeoTeam ® has started to accumulate YoCream shares once again. On May 27, 2009 the company reported its second quarter fiscal 2009 financial results. Sales increased 35% to $12.6 million, while EPS grew 90% to $0.76 . This gives us reasons to be optimistic about the remainder of its 2009 fiscal year as the company enters its seasonally strongest second half.

Over the last three years, the first half of YoCream's fiscal year has accounted for about 37% of its total revenue production. The GeoTeam® has applied this relationship to estimate that the company can potentially achieve EPS of around $3.10 on revenues of approximately $57 million for its fiscal 2009 year ending in October.

The growth trend for YoCream seems to be gaining traction and bodes well for a possible P/E expansion, despite trading on the Pink Sheets and being highly illiquid. The GeoTeam® is focused is on finding solid companies even if they happen to trade on the pink sheets, especially if they were once on a higher exchange and still seek to maximize shareholder value.

YoCream is still communicative with Wall Street, publishing press releases and financial reports accordingly. In YoCream's annual letters to shareholders, investors can realize that the company is focused on maximizing shareholder value.

The GeoTeam® also believes that YoCream could be a pretty interesting acquisition target.

Please see the GeoTeam's potential valuation scenarios for YOCM.