Good day and welcome to the PriceSmart Inc.'s Earnings Release Conference Call for the First Quarter of Fiscal Year 2015, the three-month period ending in November 30, 2014. 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 9, 2015. A digital replay of this call will be available through January 31, 2015 by dialing 888-203-1112 for domestic callers or 719-457-0820 for international callers. The passcode is 1818608. I will now like to turn the conference over to Mr. John Heffner. Please go ahead, sir.

Thank you, Hannah, and welcome to our earnings call for the first quarter of fiscal year 2015. As usual, we will be discussing the information that we provided in our earnings press release which we released yesterday, January 8, 2015, which also included our announcement of December sales. We also released our 10-Q yesterday. You can find the press release and the 10-Q filing on our Web-site, 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, 2014 filed with the Securities and Exchange Commission on October 30, 2014. We assume no obligation and expressly disclaim any duty to update any forward-looking statement 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.

Happy New Year and thank you for joining us today. Yesterday we released our results of operations for the first quarter of fiscal year 2015 with a net income of $0.68 per share compared to $0.71 per share a year ago, largely impacted by the preopening costs we incurred in the quarter in Colombia as we opened three new warehouse clubs in the period. We also announced our December sales. I will stick to our sales and membership activity as well as our new club openings and John Heffner will speak to some of the other items in our overall financial results in the period. Net warehouse sales in the quarter were $636 million, representing 7.9% total growth compared to prior year. This growth resulted from a 5.3% growth in transaction and a 2.5% growth in average ticket. We opened three new warehouse clubs in the quarter, all in Colombia; Bogota on October 29, Pereira on November 13, and Medellin on November 26. Our Q1 sales in the period benefited from all these openings. In terms of comparable sales, we have an increase of 2% for the 13-week period ended November 30, 2014. During the quarter, we passed the anniversary date of the opening of our sixth warehouse club in Costa Rica, Tres Rios, which we have previously indicated had caused some reduction of sales in our Zapote club which negatively impacted comps. As a result the cannibalization effect on comps in the current quarter was less than in the past two quarters at approximately 180 basis points. The Tres Rios club will be in our comparable sales reporting beginning in January, although we still have some impact from our second [indiscernible]. When we look at sales growth by region, Latin America sales were up 10.1% and Caribbean sales 3.3%.…

Thank you, Jose Luis. Let me highlight a few additional items with respect to our financial results of the first quarter based upon our release yesterday before we take your questions. Warehouse gross profit margins as a percent of sales were 15.3%, an increase of 82 basis points from the year ago period. We saw improvements in our cost of goods sold in a number of operational areas including distribution cost efficiencies and better than planned shrink and throwaways. We also had good demo activity and vendor support which contributed positively to margin. Warehouse club operating expenses as a percent of net warehouse sales increased 5 basis points with the new club depreciation and some statutory registration cost for capital in Colombia contributing negatively by 19 points offsetting positive gains in most other areas of our operating expense structure in our clubs. Pre-opening expenses were clearly significant in the quarter as a result of the spending associated with the three new club openings. This spending includes the cost associated with hiring and training new staff, the incremental cost associated with management supports of those openings, local pre-opening marketing and membership outreach activities, and in the case of the Bogota location the land rent cost for the site prior to the opening. In total we incurred $3.1 million in preopening expense in the quarter. Despite that additional expense with no corresponding sales offset, our operating income in the period was $36.3 million or 5.7% of sales. Jose Luis touched on the subject of currency. In the quarter we incurred a $2.6 million net currency loss, $2.3 million of which was associated with the Colombian peso devaluation in the period coupled with the large amount of U.S. merchandise and some fixed assets we were shipping in the Colombia throughout the quarter. These…

[Operator Instructions] We'll take our first question from Dave King with ROTH Capital.

I guess first off, in terms of the gross margin improvement you had in the quarter, warehouse club gross margin being up 80 basis points, et cetera, and John you talked about some of the drivers there and it sounds like a lot of those there are sustainable. I guess can you talk about what kind of benefit or what kind of flexibility that provide you kind of on a go-forward basis and ability to be able to not have to raise prices I guess is the best way of characterizing it to offset some of those currency pressures that you talked about Jose Luis in some of your prepared remarks, I guess with it being, warehouse gross margins being above your kind of targeted long term range, how much flexibility do you have on a go forward basis?

Let me jump in on this, Jose Luis, maybe you can join in. I mean obviously we focused a lot of attention consistently on reducing our cost and being more efficient and our distribution logistics operation is a key part of that as well as our buying activities and the work we do with our suppliers as well as I think the activity in the clubs around things like shrink and throwaways. So it's a real team effort to focus on what is our largest cost of goods sold. To the degree we can do that, we'll continue to move prices down. How that might help us vis-a-vis the significant devaluation, particularly in Colombia, I think the Colombia activity is probably more significant particularly to that market than we could offset through, completely through cost reductions in reducing our supply-chain efforts in Colombia. I think we benefit all of our members across most of our countries with the efforts we do there, but specific to Colombia I think we're going to need to do take some action there in Colombia to raise our prices there.

Yes, and we have been obviously trying to hold our prices as much as possible given the fact that we just want to increase them right away, but obviously to the degree that we will never sell below cost, so at some point we will have to start raising prices. I will probably see that in the whole economy in the country. There is a concern in that consumer spending because a lot of things will probably start going off, there is a lot of dependency in the industry, in the market that we have the pressure of the currency devaluation. So we'll do our best to keep our prices as sharp as possible and offer the best value but eventually we will have to start getting our margins in line.

Okay, that helps there, so appreciated. And then, Jose Luis, I appreciate all the color you gave in terms of membership growth during the quarter and it sounds like that exceeded expectations kind of across the board at all three clubs. I guess do you have any color on how that trended into the month of December and how are you kind of thinking about that on a go forward basis?

The month of December, not only the three clubs that we opened had a good preopening sign-ups, they actually continued with a good trend during the month of December. Particularly Bogota has been doing very good in terms of membership sign-ups. I think the expectation in those three cities has been very good. In addition, we have been getting more gains in terms of renewal. So some of the members that used to be shopping here in Barranquilla or Cali, for a period of time probably they stopped [indiscernible] those cities, they were probably not, obviously not using the membership and not – they didn't renew. We have seen some good renewals coming out of those members that are back. So I think we are set up for a good trend going forward with the membership growth in that particular market, and the rest of the markets will still see obviously 84% renewal rate which is pretty consistent with the last quarters. We want to continue raising it and our goal is to get it to a higher level. But at this point we feel we are accomplishing good results in terms of not only Colombia but the rest of the markets in membership renewal.

Okay, fantastic, and good luck with the rest of the year.

Our next question is from Jon Braatz with Kansas City Capital.

John, returning back to Colombia and your strategy in terms of raising prices, obviously you opened a couple of new stores, three new stores recently. Would you be willing to raise prices more in your established markets like Barranquilla and Cali as opposed to Bogotá and Medellin and Pereira, would you differentiate the markets a little bit in terms of trying to capture some of that higher prices?

No, I think we're driving – prices [indiscernible] Jon will be pretty much consistent. It's not our intension to drive prices higher in any of those markets. Actually to the contrary, we will do our best to keep offering the best value even in those existing markets, to the degree obviously that probably Barranquilla because of freight and everything is probably one of the markets where we have the advantage of or the ability to have the lowest prices actually because there is no additional freight component compared to both our Medellin, the other cities, again the merchandising.

So I guess the question though, [indiscernible] my paraphrase were, Jon, is given that we will be – as we land new merchandise and prices will go up, will we differentiate between – will we raise prices differently in the different markets specific to the devaluation?

No, sorry.

That we do have differentiated prices right now because of the cost of bringing product to those markets, that difference would remain.

Okay. I guess then on a big picture standpoint, on net do you think you will have to eat a little bit of the devaluation so to speak and see margins in Colombia, gross margins come down in that market a little bit?

Really in Q1 since most of the merchandise that has landed had already landed at a lower exchange rate, we were able to hold prices, but as new merchandise lands at the higher Colombian peso cost due to the devaluation, we will need to increase the prices on those goods as well all the retailers. So we will try our best to provide value to our members in Colombia and maybe more aggressive with our margins there during this period of volatility in the markets to the benefit of our members. So, we are certainly having those discussions right now and we may be a bit more aggressive on our margins there in this near term.

Okay. John, one last question, the 2.3 million currency loss that you took, are you trying to reduce that net exposure so that it might be less, I mean obviously depending on how the currency ends up for the quarter but have you reduced that exposure so everything else being equal, it would be less this quarter?

We're always trying to manage our currency. In fact last year I think we did a pretty good job generally speaking. The last year we actually had a net currency gain of $1 million over the course of the year. In the most recent quarter there were some really extraordinary events that resulted in that large loss. So the Colombian peso, the devaluation was pretty exceptional, 14%, at a time when we are really shifting just a tremendous amount of goods, a significant amount of U.S. merchandise to fill up three new warehouse clubs which we never had to do before in support of our opening. So while we had a number of strategies in place to hedge the risk, the devaluation rate was really more severe than we could have reasonably anticipated and it was I think a pretty extraordinary period. December was difficult as well. There was some ongoing devaluation in December. We hope to see some stabilization but I think our efforts are in place to minimize our exposure. So they are going forward and we'll see how things play out with how the currency moves.

Okay, thanks, John.

We'll take our next question from David Strasser with Janney Capital Markets.

This is Sarang Vora for David. My question is similar to one before, as you guys [indiscernible] a big picture and you were thinking out loud, your comps are slowing related to what it has been in the past but your gross margin is growing higher and you also seem to be raising prices going forward. Do you guys continue, is there a [indiscernible] to weigh gross profit per unit because the capacity of stores have maxed out? Or put it differently, is profit maximization going forward going to come from growth profit as opposed to productivity?

Our business models have profit growth, it is also sales volume growth, and we talk about price increases, Jose Luis you can jump in on this if I don't approximately it quite correctly, the price increases we're speaking of really just relate to the devaluation offset so we can maintain the low margins that are part of our business model. We are running a 14% overall margin and currency devalue 20%. If you don't change your prices, you'll end up selling your product at a 6% loss in those markets. So that's what the price – when we referred to I think price increases, that's what we were referring to, specific to those markets, which is a standard process that we do in most of our markets anyway.

Yes, we do that [indiscernible], just to reinforce that comment, we're definitely not changing the business model just Colombia particularly when you have a 24%, 26%, when you look at a 26% variation on currency devaluation, you got to move your prices, but the rest of the markets we are pretty consistent with our philosophy, and even for Colombia that philosophy hasn't changed, it's just an adjustment we're going to have to do. But no question that our focus will be to continue working on the top line which is the sales line and try to get those sales higher in comp and total sales growth so that we can capture more of the bottom line, but definitely it is not going to be through increasing prices.

I have a follow-up question. I know you shared ticket and traffic for the total sales. Is it possible to get ticket and traffic on a comp level just to understand how store level information on a comp basis?

We don't provide comp level transaction data. It's like total transaction as it goes and we provide some of the information [indiscernible] specifically I think over 10% in transactions, but average ticket was down and that was driven by the, we think mostly by the devaluation in those countries where we saw the devaluation. But at this point we are only providing comp sales in total but not transactional or average ticket comp information.

Okay, got it.

Our next question comes from Thomas Vester with LGM Investments.

Just the first question would be, can you give same store sales in December in local currency and going forward would there be any opportunity to report both dollar same-store sales and local currency same-store sales just to get more clarity on how the [indiscernible] is performing because I mean given you have so many function in currencies and it's just so many moving parts here?

I guess you say local currency, I guess the way to do that would be to say in constant currency, right, that is if the currency did not change from one year to the next given that is a market basket of different currencies, and it's clear that our comps if they are measured in a constant currency would be higher than how we deport them in U.S. dollars. However I think many factors could impact the sale over the course of the year, which is when you measure comps you are measuring a year ago to this year, and one of those things for example as we talked about here could be that we during the period there's also devaluation have increased the prices of our imported merchandise to offset that devaluation. So, yes, I guess it's clear that constant currency sales would be higher than U.S. dollars sales. So, yes, it's clear that's the case but we don't report it that way, we report in U.S. dollars, that's how we manage our business.

Okay. Then just I mean the inventory jump was rather steep and I mean you explained it with of course the stocking up for Colombia and then also the holiday sales in December. Can you give like the increase, how much was due to Colombia and how much was due to the holiday sales?

I don't have a breakdown of that specifically but I think they are probably pretty much in line with adding three new warehouses.

Yes, the biggest impact is definitely the addition of three new clubs and especially the holiday season that we definitely stock up and push a lot of merchandise for that holiday season. All these locations definitely had a good December and we're also getting ready for a good second quarter. As I mentioned in my initial comments, there is a lot of good merchandise flowing through the clubs and then you'll see some exercise health products, a lot going on for the upcoming carnival and [indiscernible] season in this country. So there isn't a breakdown that we can – I mean I guess if your question is more related to the increase in Colombia, that's definitely just driven by the fact that we have more warehouse clubs.

I think it's probably a little bit of a mixed issue there too, Thomas, that given that the new clubs in Colombia, that the growth there in Colombia, Colombia tends to have a slightly higher mix of U.S. merchandise than our other countries and it has a longer supply chain in terms of the freight to move to Colombia. So the combination of those things, we end up with a slightly higher inventory per club in Colombia just by virtue of the mix of business and the supply-chain. So that would have a weighted average impact I think on our total inventory as well.

Yes, okay, that was exactly where I was getting at. So going forward as Colombia is becoming bigger, one would increase the inventory days for your business all else being equal with some base I guess?

I think all else being equal, that's probably correct.

Yes, it is correct. Just the lead times on the percentage of imports will definitely drive a higher number.

Okay, and not matched by payables?

Again, our U.S. merchandise we tend to make – it's an investment in U.S. merchandise, we turn our local inventory and that's the net cash generator but our U.S. inventory is a net cash consumer given the supply line for it and the fact that we pay duties upon arrival at the port and you've got to get terms on duties and things like that. So that's consistent with how we run our business, that we invest money on the U.S. merchandise but we generate cash on the local turns and the net of that come out to about something like 80% I think for the Company of vendor finance for the total inventory.

Yes, okay. And just on the tax rate, you mentioned a higher tax rate due to the – able to utilize the benefit of the taxables in Colombia, is it carried forward or I mean can't you do that in Colombia?

Yes, there's tax laws carry-forwards in Colombia that we would have access to at some future point.

Okay. And then just finally, I mean all this volatility and pressure especially on commodity export in the countries and that's a fair amount of them in Latin America and also the oil exporting and feeling that in Colombia, I mean that would normally also open up for the timing of maybe looking for new opportunities because that's a time when land prices come under pressure, et cetera, and you can make a good deal. So my question is, I mean are you looking to scale up now where land prices in dollar terms in Colombia has become significantly cheaper, are you looking to cover a economy like Peru or something like that or is the agenda of the expansion of price not changed of cheaper and volatility in Latin America?

I will say specifically for Colombia, Thomas, that definitely we do realize there is a good timing and we're continuing our efforts. We never stop our efforts. Unfortunately I guess in terms of currency devaluation, it doesn't help for trading in a good economy in the short term but obviously we are investing on the long term in Colombia. We believe there is lot of opportunity in that market and we will continue our efforts to acquire land. Definitely we do recognize the impact of the currency devaluation helps in buying land, and as much as possible we will try to take advantage of that, and again we keep searching for opportunities in Bogota and other cities in the country knowing that they'll continue to [indiscernible], we are not changing that direction. I can't say for any other country at this point. We haven't visited any other country with that view. At this point we are really focusing on our existing countries and specifically in South America with the Colombia.

Okay, great. That was all for me and thank you very much also [indiscernible] in a tougher quarter, that's much appreciated.

Our next question comes from Edwin Johnston with Sandhill Investment Management.

Are you fully hedged on a currency basis in Colombia right now or how close can you get to being fully hedged? You obviously were starting the stores this quarter, so it's a little more difficult as inventory flows into the country, but John, maybe you can just highlight, has your exposure or will your exposure on a currency basis decrease over time because you're able to more clearly hedge as you are aware of your inventory and sales positions in Colombia?

Our exposure, yes we can improve and reduce our exposure as going forward, simply because we are now selling that merchandise that we brought into Colombia and the working capital buildup for the opening of those clubs is now turning and therefore reducing our exposure. In that way, we're able to then convert that in the U.S. dollars to offset new shipments that are coming in as well as manage our reduced – we maintain our NDFs, non-deliverable forwards. So our exposures are decreasing some, the peak of sort of late November or early December.

Okay. And how liquid are those hedging markets, are you able to do that, is it a problem for you to do it, whether you're spot or on a three-month forward or I just don't have a feel for how liquid those markets are?

The Colombian peso is a liquid market and we can access that. So that's the only country of our collection of countries that really has a market for us to hedge in that way.

Okay. On the macro environment there, is it all due to basically the commodity markets as has been discussed all oil just sort of talking about the macro situation there which is relative to both the currency and the health of the purchasing power with the Colombian peso, could you just maybe give a brief outline, is the country in recession, is it all oil driven, is it something else, just some nail-sketch six months going forward of what it looks like in Colombia currently?

Let me answer I guess on what we feel and what we get from the input in the country. I wouldn't say that it is in a recession. Definitely there is a pressure in the spending, and as I mentioned in my comments, for any country that has these currency situations, there is always a concern on the consumer spending and we saw that in Costa Rica only with a 10% impact on the currency. When you have something in like Colombia both trending to the level sometimes of 24%, 25%, there is always that concern and people are more cautious on their spending. I don't think it gets to the point of a recession at all. It will probably be a little bit more challenging environment in the next probably six months, three months, six months. I wish we knew where the currency is going exactly, but assuming things don't change much, it will still be a little challenging period for Colombia in the consumer spending. They will start seeing prices going up not only on imports as I mentioned also raw materials and a lot of things depend on imports. So there will be some challenges in the whole economy but I think I wouldn't qualify it as a recession at all, Edwin. I think just a little challenging and it's a good opportunity for us to be there for the members as I mentioned and try to offer the best value and be the best option for them to continue saving money and find good deals.

Okay. And just one more, will the mix in products there, you said it's more U.S. weighted right now which obviously hurts you on the currency side because you wanted to hold prices down as you open these stores, will that change, is that a factor of these new stores and the mix will change to more local over time or is this something that will remain in that particular mix and is endemic to what the Colombian consumer wants?

I think it's a combination of things, Edwin. Definitely we will not change dramatically at all our view of import. I mean one of the reasons we are there in Colombia is to offer differentiated merchandise. So that's definitely going to continue being our focus as it is in every other country. Now I will also have to add though that there are some good opportunities of merchandise producing Colombia that can be good opportunity for us, and I'll give you an example of recent items as we converted. We used to have a cooking oil that was coming out of Argentina, it is now being produced in Colombia. And like that we are looking at a couple of items that might be good opportunities given that the country has great vendors and great opportunities for manufacturers and we [indiscernible] I don't see those changing completely in our direction. I think as a company, we definitely will continue with differentiation on imports but again with good items that we can be finding opportunities, not only to having Colombia, we're even considering some of these items produced in Colombia may become exports for us to take to other markets and be more competitive with prices and good food items. So Colombia can play a very good role, a high role in that respect because again there are good vendors there with actually willing to produce items for us not only to buy there but also export. So that's kind of our direction going forward.

Okay, great, thank you. And I just want to say that given you had preopening expenses, pre-tax of 10 and a currency loss, pre-tax of 9, which is $0.19, what you delivered I thought you guys both did and the Company did an outstanding job in the quarter. Thank you very much.

It appears there are no further questions at this time. Mr. Heffner, I would like to turn the conference back to you for any additional or closing remarks.

Thank you, Hannah. This ends our call. Thank you all for participating with us today.

That concludes today's conference. Thank you for your participation.