PriceSmart, Inc. (PSMT) Q1 2018 Earnings Report, Transcript and Summary

Good day and welcome to PriceSmart, Inc.'s Earnings Release Conference Call for the First Quarter of Fiscal Year 2018, the three-month period ending on November 30, 2017. All participants are currently in a listen-only mode. After remarks from Jose Luis Laparte, PriceSmart's President and Chief Executive Officer; and John Heffner, PriceSmart's Executive Vice President and Chief Financial Officer, you will be given an opportunity to ask questions as time permits. [Operator Instructions] As a reminder, this conference call is being recorded on Friday, January 05, 2018. A digital replay will be available through January 12, 2018, following the conclusion of the call by dialing 877-344-7529 for domestic callers or 412-317-0088 for international callers, and entering replay access code 10114245. I would now like to turn the conference over to John Heffner. Please go ahead, sir.

Thank you, Austin, and welcome to our earnings call for the first quarter of fiscal year 2018. We will be discussing the information that we provided in our earnings press release and our 10-K, both of which we released yesterday, January 04, 2018. This morning we also released our report on December warehouse sales. You can find our press releases and the 10-K filing on our Website, www.pricesmart.com. Please note that statements made during this call may contain forward-looking statements concerning the company's anticipated future plans, revenues and related matters. These forward-looking statements include, but are not limited to, statements containing the words; expect, believe, will, may, should, estimate and similar expressions. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risks detailed in the company's annual report on Form 10-K for the fiscal year ended August 31, 2017, filed with the Securities and Exchange Commission on October 26, 2017. We assume no obligation and expressly disclaim any duty to update any forward-looking statements to reflect the occurrence of events or circumstances which may arise after the date of this call. Now I will turn this over to Jose Luis Laparte, PriceSmart's President and Chief Executive Officer.

Good morning, everyone. Happy New Year and thank you for joining us today. We finished our first quarter of our fiscal year 2018 with net warehouse sales of $745.4 million an increase of 4.1% compared to the first quarter last year. We saw a reduction in consolidated operating profit in the quarter compared to the first quarter a year ago, resulting from lower merchandize gross margins and higher operating expenses from both the addition of our new warehouse club and the ongoing investments, which we recorded in corporate G&A, associated with a specific initiative that at near-term costs, but we believe will help drive additional growth and efficiencies in the future. As reported, net income for the quarter was $22.5 million or $0.74 per share compared to $24.9 million or $0.82 per share a year ago. Colombia continues to have good overall results with double-digit sales growth, improved margins, more membership accounts and $1.2 million additional operating profit compared to a year ago. Let me provide some further details on sales from this quarter. I will speak to our December sales results later in my remarks. Our 4.1% sales growth for the quarter was an improvement over recent quarters, resulting from a 4.6% increase in transactions and a 0.5% decrease in average ticket. We had positive sales growth in each of our segments. Warehouse sales in our Central America segment grew to 3.1% to $443 million with the addition of the new warehouse club, which opened on October 05, 2017 and good merchandising. Costa Rica, a very large and important market for us returned to positive sales growth after several quarters of negative growth and exceeded plan. Panama, our second largest market from a sales perspective was essentially flat with last year. We are seeing a general slowdown in the Panama economy after several years of robust growth. All other Central America countries saw sales growth including Honduras, which has experienced some political unrest in recent weeks. The Caribbean had a sales increase of 3.7% when compared to the first quarter of last year and good result after recording a 0.7% increase in Q4 for fiscal year 2017 and a 0.6% the quarter before that. Trinidad, our largest market in that segment was essentially flat, reflecting the ongoing difficult economic conditions of that country; although this too was an improvement from a 2.1% decline in Q4 fiscal year 2017 and an overall decline of 4.9% for last fiscal year in total. All the other countries in the Caribbean region showed sales growth with Jamaica and USVI recording double-digit growth in the quarter. USVI, as you may be aware, got hit by the two hurricanes that swept across the Caribbean in early September. This was a very difficult period for the people of St. Thomas and our employees who live on the island. We sustained some damage to our facility, mostly cosmetic and an interruption of business for multiple days in September resulting in a 16.5% decline in sales for September the year before. However, the dedicated efforts of our USVI employees, many of whom were dealing with damage to their own homes, along with the help of several individuals from our other warehouse clubs allow us to resume operation ahead of many other retailers and support our member’s basic needs. Business rebounded during October and November, resulting in 15% overall sales growth for the quarter. It is clear that we were able to capture incremental business due to the fact that other competitors in the island either lost their building, like Cost U Less, or were closed for many days in the quarter. These strong results continue into December as a result of PriceSmart taking a bigger share of the market, which we think will continue for the next several quarters. Colombia again recorded total sales growth of 10.1% and a 13-week comp growth of 11.3%. The [Tres Ríos] [ph] warehouse club entered the comp calculation in November. The currency has remained relatively stable, moving in only a small band around the 3,000 pesos to the dollar level. Warehouse sales in the current quarter were translated back to U.S. dollar at an average rate of 2,966 compared to 2,984 a year ago. Comparable warehouse club sales for the 13-week period ended December 04, was 2.2%. The successful opening of Santa Ana Warehouse Club in Costa Rica led to an expected transfer of sales primarily from our Escazu Warehouse Club. We estimate that this transfer of sales negatively impacted our Central America comps by 150 basis points and the overall company comps by 95 basis points. In terms of merchandise categories, we saw good results in the fresh and the softlines area, with departments like the gourmet deli and fashion apparel, showing double-digit growth. In hardline, tires, batteries, automobile and hardware showed also solid comp growth. Seasonal candy had double-digit growth showing their symptoms of our seasonal programs in that category. Some challenges and slight decreases were seen in areas like juices, snacks, electronics and small appliances and [indiscernible]. Warehouse margins in that period were generally in line with the prior three quarters, but down 51 basis point from Q1 a year ago, at somewhat unusually high margin quarter. The decrease of 51 basis points is driven by a decrease of 31 basis points in Central America and 26 basis points in the Caribbean and some additional costs in our U.S. distribution operation compared to a year ago. Colombia's margin increased 62 basis points. The reduction in margins at the segment level is primarily related to aggressive pricing targeting our Central America and Caribbean markets to drive sales along with some reduction in end cap promotional funds compared to last year. In markets like USVI, we had restrictions to change -- restrictions to change prices in items due to government regulation to maintain prices for all consumers in the island. That apply even for categories like produce or fresh where price changes happen often. On membership, we had a good result this quarter. We finished the quarter with more than 1,543,000 accounts, up 3% from a year ago and membership income was up by 5.7%. A 12-month renewal rate at the end of November was 85%. Excluding Colombia, the renewal rate was 87%. We're encouraged by the steadily improving trends in the renewal rate for Colombia. We finished with a renewal rate of 78% compared to 68% for the same quarter a year ago. As I mentioned in the last earnings call, we launched our platinum membership card in two additional markets, Panama and Dominican Republic, both of them during this first quarter and so far, we're seeing a good acceptance of this program and seeing upgrades of existing members of this new level of membership ahead of our expectations. Let me say a few words about the initiative that I spoke on our last call. As mentioned, the Board has authorized $3 million to $5 million of funds during this fiscal year, specifically focused toward the future growth and success of the company. The innovation area, as we call it is working on different initiatives to better serve our members on the online space and create a seamless Omnichannel experience for our members. There will be additional investments for those efforts in the upcoming quarters. In additional, we continue with our efforts in the selection of a new global enterprise resource planning system ERP, which will also require additional investments. One the decision is made on the right tool to help us with our long-term initiative. During the quarter, these efforts resulted in expenses of approximately $735,000. Let me highlight a few other items associated with the quarter before I address our December sales results, which were released the morning. Despite the unfortunate events in the month of September with the storms that affected the Caribbean region, other than USVI, all our other locations came out okay from that included our Miami DC, which only suffered some minor damage. We saw some interruptions of flow of merchandise a few weeks after the storms, but again were happy to report that we didn't experience any other significant damages. As we continue with our plans on expansions of building in some of our countries, we're making progress in Pradera location in the City of Guatemala and also in our Kingston location in Jamaica. Both of those extensions will be completed during Q3 of this fiscal year and although we had some challenges with the parking lots during the expansion, we're still seeing good results in those clubs. Our construction in the City of Santo Domingo in the Dominican Republic is moving as planned and our San Isidro location should be opened during spring 2018. Although we don't have anything official announced today, we continue to push forward on sites with additional clubs in a few of our markets. The timelines for permits and approvals as always are taking longer than we would like, but we feel optimistic about the projects that we have in the pipeline for official warehouse club openings. As I always do during the month of December, I had a change to visit four different countries that I plan every year with senior members of our buying and operations team. This is to assess our readiness for the holiday season and identify together opportunities to continually improve our sales and member service/ I always come back excited after seeing how hard our teams are working on serving our members, which resulting in a good month of December. Let me now spend a few minutes covering our difficult situation in Honduras. During December we saw significant unrest in the country as a result of the presidential elections that occurred during the last days of November. There initially was uncertainty regarding the outcome of the elections followed by a disputed result. A street protest that turned violent in many cases were the byproduct. These protests resulted in growth closures and government mandated curfew hours, which limited the hours of operation of our clubs over a number of days early in the month and created hardships for our employees and our members. In addition, the shipment of merchandise from the ports and the delivery of local merchandise to our clubs was curtailed as roadblocks made the transportation of goods too dangerous due to the lighting. Toward the middle of December, we saw a calming of tension and I returned to some political semblance of normalcy, which we hope will remain although there is still political uncertainty, which could fuel further unrest. Now December sales; as announced earlier this morning, total sales for the month of December were $344.2 million, an increase of 4.9% from a year ago. All of our warehouse clubs including Honduras once things settled down, performed well during this important month and I wish to recognize not only Lion Club person who’ll make good things happen on a daily basis, but also the efforts of our merchandising and distribution teams who skillfully work to ensure we have sufficient levels of exciting merchandise and make the holiday season a success for our members and our company. The comparable warehouse club sales for the four weeks ending 12/31/2017 for the 39 clubs opened at least 13.5 months was 6.4% It is important to highlight that these four-week periods had an extra day of sales compared to last year's four-week period due to the timing of New Year's Day, which fell into our December comp period last year, but will be in our January comp period this year. All of our warehouse clubs are closed on New Year's Day. We estimate that this provide an additional 240 basis points to our comps in the month. We will see the turnaround effect of this when we report our January comps. Thanks again for joining us today. After John's remarks, we will take your questions. Thank you.

Thank you, Jose Luis. Let me cover a few additional items including our initial assessment of the impact of the recently enacted U.S. Tax Reform Legislation and what that will have on our financials going forward as we understand it. Selling, general and administrative expenses in total increased $6.4 million or 7.7% to 11.6% of net warehouse sales of 11.2% a year ago. Warehouse club operations expenses of $69.5 million increased 6.2% and included the new warehouse club in Costa Rica as well as extraordinary operating costs associated with the post-hurricane efforts in USVI. While Columbia operating cost decreased as a percent of sales, expenses increased $544,000 to support that growing business. As Jose Luis mentioned, we report expenses associated with our future focused investment in general and administrative expenses, which contributed to growth in that area from a year ago. Foreign exchange transactions and the revaluation of monetary assets and liabilities resulted in a $278,000 currency gain in the quarter compared to $928,000 loss in Q1 last year. We are beginning to see some positive sales trends in Trinidad, although the illiquidity conditions and lack of availability of tradable currencies, which we have spoken about over the past year remains. Unlike last year, we did not limit shipments to Trinidad to any great degree and had good sales results in December. However, we continue to be mindful of the situation and are carefully managing our exposure to the negative impact of any sudden devaluation of the TT dollar. That exposure at the end of November was $12.1 million. The effective tax rate for the period was 31.0% compared to 31.5% a year ago. The improvement was largely related to Colombia due to improved operating performance and the reversal evaluation allowances on intercompany transactions between Colombia and the U.S. From a balance sheet perspective, the company ended the quarter with cash and equivalents of $129.2 million, a decrease of $33.2 million during the quarter. Operating activities including the buildup of inventory for the holiday season and the related trade accounts payable added $29.9 million. Inventories grew $61.5 million offset by merchandise-related accounts payable of $21.4 million for a net cash use of $40.1 million. We invested $19.70 million in various capital projects, including the construction activity associated with the Santa Ana, Costa Rica club and a Santa Domingo Dominican Republic club and the work we are doing to expand our Pradera warehouse club in Guatemala and our Kingston Jamaica club among other projects. Finally, we had a net cash use of $5.3 million in financing activities and a positive plus $2 million effect of exchange rates on our cash balances. Let me speak now about the U.S. tax reform legislation. We've been analyzing the impact of the U.S. tax reform legislation. We have more work to do in conjunction with our external tax advisers to fully understand the various elements to ensure we are in compliance. However, I wanted to provide some basic information as we best understand it. First, the reduction of the U.S. corporate tax rate. As you all know, the U.S. corporate tax rate will decrease from 35% to 21% starting in January 2018. There are two elements of this for us. There's a one-time impact. We will likely take a one-time non-cash expense currently estimated to be approximately $1 million to be booked in the second quarter of fiscal year 2018 to reduce the value of certain deferred tax assets, which we have been carrying at 35%, which are now valued at 21%. There's also an ongoing impact. On an ongoing basis this rate reduction is expected to have a favorable impact on the company's overall effective tax rate. However, substantially all of the company's revenues are from foreign sources, much of which attracts foreign withholding taxes. In the past, the company has generally been able to recover all of these foreign tax credits or FTCs generated by these withholdings against our U.S. taxes payable at the 35% rate. The company currently estimates that foreign tax credits will be higher than 21% of our U.S. taxable income resulting in the need to expense some of the FTCs. Therefore, the company expects to benefit from the reduction of tax rates, but not to the full extent of the rate reduction as excess foreign tax credits will have to be expensed. We currently estimate that the net impact of the reduction in rates less the unused and expense FTCs will result in an effective tax rate in the U.S. of somewhere between 25% and 30%, and an overall improvement of approximately 1% to 2% in our consolidated effective tax rate. There is also a one-time tax on accumulated foreign profits. This one-time tax on accumulated foreign profits will result in a tax expense being recorded for the full amount of that tax in our second quarter of fiscal year 2018, while the cash payment will be spread evenly over eight years. The calculation of this tax is quite complex and the measurement dates and requirements subject to further IRS guidance. We’re working diligently with our tax advisors to refine this calculation in accordance with the regulations as they are released. We currently estimate the charge to tax expense in our fiscal second quarter to be between $10 million and $20 million for this item. However, from a cash perspective, the company expects to be able to offset some of this charge by FTCs accumulated prior to January 1, 2018. We currently estimate we will have approximately $5 million of FTCs, which will reduce the cash payment we will be required to make over the eight-year period. Again, let me reiterate, this is all new information and our current understanding may not be 100% correct, and what the final rates may be different than what we are currently working with. But we think we have a pretty good handle on the basic elements. With that, we'd be happy to take your questions. Austin?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Ronald Bookbinder with IFS Securities. Please go ahead.

Good morning. One, the comps over the past several months seem to be picking up momentum ending with December up about 6.4% or even 4% on adjusted basis. So, no matter how you look at December, it’s still the best comp you’ve had in years. So what macro events, do you think is driving this? Is it the improving U.S. economy? Is it improving oil prices? Is it both? What are your macro thoughts on your regions?

Okay, Ronald. A couple of comments on that, regarding -- because we obviously have been noticing the same thing. I feel there are a lot of variables I guess, that where we have seen improvement. First of all, I think obviously in the last couple of years, we keep working on, I guess improving our merchandising efforts, improving our merchandising excitement, trying to figure out how to keep our members back in the clubs and buying merchandise. So, I have to definitely credit some of those numbers -- some of those results to that effort. On the other hand, I think what you mentioned or I mean, there are a couple of countries where we have in the last couple of years some challenges. Trinidad being one, where we saw a very soft economy. We saw a little bit of that in Costa Rica in the last year, year and a half. Costa Rica was pretty soft. So, little by little, some of these countries are recovering and definitely we are taking advantage of that. In addition, I think obviously Colombia is playing a good role in helping push, compared to last fiscal year, where Colombia didn't actually pull us down. This year it’s pulling us up in the general results. So, when we look at how we ended the quarter at 2.2% and with the results of December, we definitely didn't have any -- only with the exception of Q3 in fiscal year 2017, that we had a 2.2% increase. The rest of the quarters last year were 0%, 2.1% and 1.9%. So, I think we're following a good trend and hopefully all the things will continue in terms of the economies being helped, I guess helping us now. With the exception of Honduras, where we have a little bit of uncertainty right now of what's going to happen, we think that the rest of the countries will probably have a good performance during that calendar year now.

Okay. And so, if we back out that Costa Rican new store impact on comps, was there any country or territory this past quarter that was negative or was everything flat to up?

Everything was flat to up. We have that slight -- I’ll tell you yes everything was flat. Panamas, I think, I’ve mentioned in my report had flat growth for the quarter. Other than that, all the other countries actually resulted on a positive. Panama and Trinidad were the only two flat. But we didn't have any country with a decrease on sales versus last year for the quarter. They were all positive.

And on the merchandise price cuts, is that just part of your ongoing strategy that you've been using for the past couple of decades to drive volume?

Yeah.

Or was that to clear merchandise?

No, it is definitely one of our continuous efforts to keep I guess driving the volume. We rather see it on the sales line versus some increase in our margin and I don't recall anything in particular with markdowns. Like any other year, we definitely will have some that we will do in that this Q2, especially between December and January to clear, I guess some seats on our merchandise. But for the most part, we don't expect anything drastic on those markdowns and again, it's more our trend to try to push the top-line.

Okay. And just lastly…

Sure.

And then, I’ll jump back in the queue. Trinidad, Trinidad seems to really be improving faster than you guys can convert out of the TT's. And so, but with the improvement in oil prices, is there any talk of the government losing -- loosening the constraints on currency conversion into dollars?

As far as we know or we have heard, we haven’t had that kind of signal from the government. I think they will -- they are still concerned on the amount of, obviously the lack of U.S. dollars in that market and they're actually pushing hard on exports and other initiatives to try to get more dollars in the country. So, it's going to probably be another rough year in terms of getting those dollars in our hands. In the meantime, as you are saying, yes things are improving little by little on the sales and the economy in general seems to have a better flow right now with oil and everything going on in the country. But I think we were still a little worried that it will still be hard to get our hands on the dollars right now.

Okay. Thank you. I'll get back into queue.

Sure. Thank you, Ronald.

[Operator Instructions] The next question is from Thomas Vester with LGM Investments. Please go ahead.

Hi, Jose Luis and hi, John and congratulations on the good December. And can you talk a little bit about, Jose Luis, in terms of your operating leverage you have seen as also the question just asked, indicated an uptick in your revenue growth. You also mentioned that in your opening statement and in the same-store sales. When do you expect that to start converting into a pickup in your operating margin up to the more historic level of around 500 to 550 basis points? If you can give any indication on that or point to anything to observe or anything like that, that will be very helpful? Then on the -- on the Miami area distribution, do you still carry the full rent of the old facility, and can you remind us how much that is and when you expect that to be sublet? And then you made the comment on, on new sites. Most appreciated, that’s difficult. And is there any updates on -- if you have increased your search in new markets on top of the countries you're already in or is that still focusing on mainly new sites in I guess Colombia and some of the other more successful markets you’re in?

Okay. I'll try to remember all your questions Thomas. Happy New Year, first of all. I guess on the first one, I think if I understood the question, I think between, Q2 will probably be a -- we’ll see a slight recovery on our margins and the way we used to be pretty much getting on much more leverage. Definitely this is the year of investment and a lot of initiatives. So, it would probably be more on until Q3 or Q4, when we will get more of that leverage. I think I believe, we're doing the right investments in different areas and again as I mentioned on the online channel, it's on the – definitely on the ERP. It is on volume where we also did some important investments to add some people and to add some resources to get better results from sales. So, we believe that all the things are the right things to do and hopefully would get us back in the -- in I guess in the way we would will like to see the results and not only increasing the top line but at the same time getting the leverage we need on our expenses. So hopefully that will happen. In terms of the Miami Distribution Center, I believe John, we are still carrying some of...

Yeah. We’ve sublet some Thomas. We have sublet some space. However, we do have some we do have underutilized space and I think in the quarter it was about $300,000 of space that we’re carrying and so that sort of the operating amount I think on a quarterly basis of underutilized space that we’ve got at this point.

Yeah. So, hopefully we’ll get that, although we as started our New Year we’re looking forward to trying to get that space completely subleased so that we can stop that expense. And then on opening new clubs we're obviously busy, busy working on getting the approvals. I think hopefully that by then our next call, we will be able to announce more sites and more things going on in that market -- in that respect. We definitely have a lot of efforts going on in every, you mentioned Columbia, we have efforts going on in that country in particular. We have efforts in a lot of different countries not only Colombia. So, we’re not stopping that. We really believe there is a good opportunity in those markets, especially again Colombia where we are having double-digit growth and we are seeing good results and a good acceptance of our concept. We want to go back and keep adding warehouse clubs in that country and at the same time all the countries in the region. So, we definitely having to stop our efforts and we’re working as hard as ever and trying to get more clubs open and keep adding to the pipeline.

Fair. That’s most appreciated and are you -- in terms of the efforts you’re doing with the investments you mentioned to enhance revenues, are you testing anything also in terms of any add-ons in clubs, because clearly one of the I guess the key difference still to PriceSmart from the established U.S. Clubs is probably a bigger offering around the club in terms of other add-ons optical offering etcetera. Is there anything you’re testing or is it -- that is not in the pipeline?

No, it is actually I mentioned it on my last call, I didn’t put it again on my script this time, but we have optical actually we launched it at the opening of our Santa Ana club in Costa Rica. We then added another one in Escazú and we are now expanding that to all our clubs in Costa Rica. So that's one of our first intentions of having some add-on services I guess to our clubs. We also have our initiative on travel that we’re final -- we actually -- we recently going to be launching on travel and we did a small kiosk on café in -- we started with a test in Colombia in our Salitre Club in Bogota City and we're looking at expanding that one to two more locations. So, there are some different initiatives that I referred to in my last earnings call and they are still small obviously in the scheme of things, but definitely are getting our members -- we're trying to become more of our membership -- part of their membership life. So, there are different efforts in that respect, Thomas.

That's great. Sorry I was not on your last call, so apologies there.

I'm glad you brought it up.

I heard from the last call that you're retiring John. So, I'm not sure when it is, but best wishes for that and I guess congratulations when the day comes.

Good. Thank you, Thomas.

Thank you, Thomas.

Our next question is a follow-up from Ronald Bookbinder with IFS securities. Please go ahead.

Thank you. One on your, your online strategy, will the online be focused on the larger more mature markets like Costa Rica and Panama first, where you've been building out regional DCs to support it and then from there would you -- would you build out to sort of ancillary countries?

That’s -- we are working on that strategy, but we are kind of describing it Ronald. That’s exactly what you are looking at doing, obviously between Costa Rica, Panama, Colombia, some of the bigger markets, obviously to start. And then, as we learn on those markets, we will be able to expand it in the other islands, I guess all the smaller markets, but that's a little bit what we're trying to put together in our strategy and hopefully, we will be launching something in the next, probably towards the end of the year, so that we can explain more in detail what we're doing, but that's a little bit of the effort we’re looking at doing.

Okay. And, and John on your retirement, is there any updates as to timing. We're all going to miss you. How many more quarters are we going to have with you onboard, how is the transition going?

Well, I should probably let Jose Luis speak to the process as that he's intimately involved in at this point in terms of the recruiting effort and the sourcing of some good candidates.

Yeah. We’re, we're actually working Ronald on that transition and we don't have anything to announce yet, but we’re thinking that probably during the month of January we will finish that decision of the transition and the new CFO and obviously we’ll work with John on the exact date and try to have a smooth transition. And so, hopefully won't be later than the end of January when we’ll come up with a name and assign someone for that new role.

Okay. Well, John we all wish you the best as you move into retirement. But I'm sure we will be talking more in the future.

Yeah. It’s not happening in the next two weeks. So, there is some more time here.

All right.

Your next question is from Jon Braatz with Kansas City Capital. Please go ahead.

Good morning, Jose, John.

Good morning, John.

Online competition, are you facing any online competition or any significant online competition at this moment in your markets?

It varies by market John, but we are obviously, I would say first of all, in some of our markets or pretty much in every market, we face the competition of all the U.S. online retailers. You name either Amazon, Target, Walmart, all of those are in some way competing in our countries, because members can actually purchase some goods and use postal service addresses and there are different ways that members in Costa Rica -- we know members in Costa Rica, in the Caribbean, in Panama, in different countries use these postal service addresses and get goods mostly from Amazon probably and obviously other – any other retailer that they want. They pay their duties when they have to and they get them and pick them up in their country. So that's one competition that we know we have that exist over there. And then in addition, there are some countries more developed, I would say probably Colombia is the one that is most developed with exit of Avila retailers that have been working on that and obviously they have more offering. In every -- in the other countries, there is some online competition more I will say on the grocery shopping. There is – there are a lot of, I guess apps and a lot of retailers that are getting into that grocery shopping mode. And they basically buy, you can buy the groceries and get them delivered either in two hours, three hours, it’s becoming very popular, similar to what is happening in the U.S. with some supermarket and using Instacart or other applications like that. So that, that is happening. But we don’t see a lot of online shopping get from, I guess, all the retailer's hub. I’d say Columbia is the one that has the most of, although we see little-by-little an increase that in every country and everybody trying to get some effort or putting together some plans to get in that space. No, that’s why we’re working on the same token.

Okay. Do you envision PriceSmart having groceries shopping apps and delivery capabilities?

We’re discussing that, but nonetheless, sorry, we’re not sure that’s going to be our focus right away at the grocery shopping, I mean, we do have, eventually, we may have that ability, but I don’t think we’re going to get in that space. We know that some apps are using us for sure in Panama, in Columbia. There are a couple of very popular apps that actually use PriceSmart and we see the drivers shopping in our clubs and delivering merchandise to their customers. So, it’s kind of a virtual warehouse member, warehouse business, a virtual -truck business member. I guess, in the past, we used to have supermarket shopping for month on reselling merchandise in other places. Now, it’s just, I guess these apps that basically shop and deliver to our some of our members or customers now. So, it is happening. I’m not sure we’re going to get into that space of complicated deliveries in 2 hours on in the next day complicated deliveries in two hours on in next – in next day deliveries, some of that. Maybe not, but we’re still studying how we approach that, John.

Okay. And then, Jose could you refresh my memory again as to how much you’ll be spending this year on – on the online development and will it carry – will there then be a incrementally additional expenses in – in the following year, can you give me a little sense on – on the spending program?

Yes. We are looking at maybe $3 million to $5 million and that we haven’t figured out how much in the next upcoming year, but definitely we will continue investing, until we figure out how to get on that space and create out omni-channel experience. So, we’re looking at that as an investment for the future, John. And as our countries are getting more into this online concept, we definitely believe it’s the right thing to do. But yeah, this year is $3 million to $5 million in this fiscal year of 2018.

How much did you spend this in the first quarter?

$735,000 I think…

Okay.

$735,000 is what I described.

Right.

Okay.

There is some money there from I guess our ERP efforts, but mostly its online initiatives or the innovation initiatives.

Yeah.

Okay. Thank you very much.

Thank you, Jon.

Thanks, Jon.

Our next question is a follow-up from Thomas Vester with LGM Investments. Please go ahead.

Yeah. I’m did have a few more – yeah, yeah. Sorry for that, but…

I’m sorry.

I just had a few more. You mentioned the ERP a couple of times, can you – can you just talk a little bit about – I mean it’s something that has especially in what can I say more – more emerging jurisdictions cost, a big number of company’s problems, when they change ERP systems and clearly, I mean, your logistics is everything to your operation. So, just talk a little bit about the implementation there if you can and if it’s too early its fine. And then, I just had a question on the Colombia membership fee and you raised it, but it's still below the sort of $35 equivalent you target, correct? And if I'm correct, what is the outlook for bringing it up to par, because it seems like you were pretty successful bringing it up there, when you raised it and didn't see an impact on membership? And then I guess the last question would just be on, on the cost side. I mean, I mean clearly, it's much appreciate do you spend where you should be spending, also to develop these, these new lines such as the omni-channel and ERP etcetera and sometimes clearly you need to invest to, to harvest in the future. But do you see any opportunity on the cost side that you're not capturing yet or is that just on a daily basis to, to squeeze efficiency the way you can, so there's no like in produce in the pipeline that could, could help bring back free up dollars to reinvest into prices for members or improve margin?

Okay. Well, let me go. I'm going to -- I'm going to go out of order to answer your questions. I'm going to start with the middle question and John refer to ERP, the efforts on ERP, but I'm going to first take the one on membership. We went from 65,000 pesos to 75,000 pesos a year ago. I believe we did that in March 2017, so yeah, we do realize we’re still at a lower level from the $35 mark, I’ll call it that way our average that we have in the other countries. It is due to the exchange rate. I don't think it's right now Thomas, we’re considering raising it again this year, we definitely don't want to send a message to our members that this, this is an increase that we do every year. I think we’ll probably wait until next calendar year before we even do something on the membership. Even though, we do realize it is still low, we have to keep in mind that for that local Colombian consumer it is – they make Colombian pesos, so if we keep raising it, it will probably be a little bit out of control in terms of – it will probably be a little expensive on pesos. When we think in dollars, it doesn’t matter, if you think, if you make dollars and you get it that way, but when you're thinking Colombian pesos, it will be hard to for -- I don't think, it will be the right thing to do to raise it again. So, we're prepared to lead right now with a lower – I believe that our exchange rate are now, we will be about $22, $23 depending on the exchange rate, but I think we're better off, if things are staying like that and obviously getting more members and eventually we'll get back to that price. In terms of our cost, if I understood your question there are different efforts, where we're trying to keep lowering our prices. Obviously, the Miami and the new Miami D.C. and initiatives we’re doing there are important. We just started actually last December, we started a new initiative where we’re packaging, what we call the business development and we're packaging a couple of items on our own with the intention of lowering our prices, so we got a couple of Del Monte items that in the past we were buying in a pack that wasn't necessarily the appropriate package. So, we’re now doing the packaging ourselves and saving obviously some money for our members and reducing our prices. So that's one way we're looking at – obviously increasing the top line and making sure we get some of those cost down. In addition, in the next -- in the next quarter, I will give a more accurate update, but we’re going to open our next Costa Rica regional distribution center, which also is looking at doing some of those things on reducing cost. We’re going to take some of our direct shipments from the U.S. or from Asia, directly to Costa Rica trying to save money on freight, potentially duties and again trying to reduce our prices. We are also opening very soon in a couple of months, we will be opening a produce distribution center in Panama that will do the same thing instead of buying through distributors who are buying directly from the – producers, the growers and reducing our prices. We did that study and will probably reduce prices 20% to 25%. Another effort again to reduce obviously cost and try to increase our prices and be more price leader – more of a price leader in those categories. The same thing will happen in Costa Rica. We are a little behind in terms of the building we were looking at doing, but we are definitely pursuing that same effort in our big market. So those are some of the things that hopefully will give you some color on the different initiatives we have to increase our – to reduce our prices and reduce our cost.

So, let me -- Taimur, let me jump in on the ERP activity. We’ve been operating with the legacy system for a quite some time now, that we need to move forward to a new system for a number of reasons. One is, it’s costing us a lot to maintain that which we have. In fact, we are even finding it hard to hire people in our IT group who can support the languages behind the system we’re operating right now and we are going through a pretty rigorous evaluation at this point, three different options. We haven't made a selection yet, but there's a dedicated team that has been focused on working with the three more significant vendors in this space and we expect in the next two months or so to be able to make a selection and understand the implementation process and the return and the support that's required to make that happen. So, we're, we're actively involved in it, but not the point of having made a selection, but it's clear we need to, we need to move forward, given where we are right now and it needs to be something that can support these new initiatives that we're talking about going forward.

And to your point Thomas, we are definitely aware of the challenge that is implementation and we're also talking to other I guess retailers and other clients or customers from the software companies to learn a little bit much -- how we can run implementation without hurting our supply chain, without hurting obviously deliveries, without hurting our replenishment. A lot of things that when you hear stories out there from ERP implementations, there are a lot of things happening. And so, we're trying to learn from the mistakes that other ones have made.

Great. Thanks a lot for your, for your time and help.

Thank you, Thomas.

And the next question is from Charlie Carter with Ceredex Value Advisors. Please go ahead.

Yes. Just wanted to clarify the tax reform implications, I think John you had said it was like a go-forward corporate income tax, would be somewhere between 25% and 30%. Just wanted to confirm that you had said something about a reduction in the consolidated rate of one to two percentage points. I was a little bit turned off by kind of what the go-forward corporate income tax rate might look like and I understand that you’re still working through the -- the policy change but just, just wanted to clarify on what you, what you were saying?

Sure, Charlie, you have to keep in mind that of our total tax expense for the company only about 20% to 25% of it is associated with the U.S. The majority of the taxes we pay are in the countries in which we operate and they didn't undergo any U.S. tax reform. So, they have their own tax regimes such that, we will see a benefit in our U.S. taxes, the tax we pay here although not to the full extent of the 21%, it'll be more than that, let’s say 25% or 30%. When you put that into the equation of all the taxes that we pay against the pre-tax income that we recognize across all of our jurisdictions, it will have about a 1% or 2% impact on our consolidated results. So, over a 31% this last -- this past quarter we would expect once it worked through that we'd probably be at the 20% to 30% consolidated tax rate.

Understand. And would you -- your strategy for repatriating cash, would that change with the new tax policy, just given, yeah, given there’d be more incentive to, to bring it back versus to maybe reinvest.

Well there is a couple of things I would say there. One is that in most of the countries we operate in, any dividends that we would pay back to the U.S. parent, which is the structure we have in place, would result in withholding tax in these countries of anywhere between 10% and 20% in most cases. So, it may not fundamentally change while it would improve what the tax situation here is in the U.S. there is taxes that we might not be able to recover in that. So, it’s still under review and understanding. But I think that’s more behind our whether we bring repatriate cash back to the U.S. is we have our investments and our operations are really outside the U.S. and we use that cash for the -- for opening new clubs and expansions and growing our business in those -- in those markets which is where we generate that cash.

So, the dividend is funded by your U.S. earnings in other words?

That’s correct. Dividends are provided -- are funded by the U.S. and we have mechanisms to bring cash back in the normal course to meet our dividend, based upon whatever the Board believes is the right dividend for the company.

Okay. Thanks very much.

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

Well, thank you, Austin. I don’t have any specific closing remarks. We will end our call and thank you for your participation today. Thank you.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.