Good day, everyone and welcome to the PriceSmart Incorporated earnings release conference call for the first quarter of fiscal year 2019, ending on November 30, 2018. All participants are currently in a listen-only mode. [Operator Instructions] After remarks from our Company representatives, Sherry Bahrambeygui, Interim Chief Executive Officer and Maarten Jager, Executive Vice President and Chief Financial Officer, you will be given an opportunity to ask question as time permits. [Operator Instructions] And as a reminder, this conference is being recorded today Thursday, January 10, 2019. A digital replay will be available through January 17, 2019, following the conclusion of the call by dialing 1-877-344-7529 for domestic callers or 1-412-317-0088 for international callers and entering replay access code 10126894. And I would now like to turn the conference over to Maarten Jager. Please go ahead, sir.

Thank you, and welcome to our earnings call for the first quarter of fiscal year 2019. We will be discussing the information that we provided in our earnings press release and our 10-Q, both of which we released yesterday, January 9, 2019. You can find both the press release and the 10-Q 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 risk detailed in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2018, filed with the Securities and Exchange Commission on October 25, 2018. 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 it over to Sherry Bahrambeygui, PriceSmart’s Interim Chief Executive Officer.

Good morning, everyone, and thank you for joining us today. This is my first official earnings call since I accepted the responsibility of Interim CEO on November 16. First, I'd like to share with you some of my activities over the last seven weeks along with some high level observations and then turn to the Q1 results. During these last seven weeks, I've immersed myself in a broad range of the Company's operations. My priorities have been first to broaden my knowledge base of all aspects of the business as quickly as I can; second, to evaluate talent and identify potential gaps and opportunities to fortify our talent; third, to determine the best way to execute on the right growth strategy supported by that talent, and fourth, to properly assess risk both in terms of avoidance and positive opportunities to expedite our growth. Since November, I visited our corporate offices in Miami to meet with the rest of our executive team and our offices in Bogota, Panama and Guatemala to meet with many members of senior management and staff as well as support functions and finance, legal and IT. I've seen our distribution center in Miami and visited our newest 166,000 square foot state-of-the-art regional distribution center in Costa Rica, which we believe will be an important part of how we improve on our efficiencies in the supply chain and also gain greater vendor support for better pricing. I spent time at the offices and operations in Costa Rica of the Company that we acquired in March, which we've been referring to as Aeropost, and I've met with our leadership team to advance our efforts to integrate the best capabilities to support and help grow our business. I've walked the clubs in Pereira, Medellin, Chia and Bogota, Colombia, as well…

Thank you, Sherry. Let me provide some additional financial details. I will attempt here to bring as much clarity on the impact of costs related to the departure of our former CEO as well as the impacts of the financials related to the activities, we have previously bundled underneath the heading of Aeropost. The key message that I hope to land with is that the performance of our core business is solid notwithstanding significant external headwinds that Sherry has already addressed. Our headline EPS number of $0.48 versus $0.74 a year ago is impacted by the $0.13 per share from CEO departure costs as well as another $0.13 per share impact from the cost bundled under the Aeropost heading. These two factors together represent $0.26 per share as Sherry mentioned. This quarter also had a beneficial impact of $0.05 per share from tax reform. I will come back to Aeropost a bit later. Merchandise margins for the period came in at 14.2% versus 14.5% a year ago. Total gross margins increased to 16.2% from 15.9% a year ago, mainly due to higher margins on non-merchandise revenue from our Aeropost subsidiary contributing 60 basis points. In addition to reclassification of shared income generated from co-branded credit cards contributed approximately 20 basis points to our total gross margins. And in Colombia, merchandise margins have increased to 13.0% of warehouse sales versus 12.7% last year. SG&A of the total business was 13.1% versus 11.6% a year ago. SG&A accounted for its Aeropost represented $9.5 million of that or 120 basis points of the increase. The separation and other related termination cost for our former CEO represented $3.8 million or 50 basis points. The core business warehouse, operations and other expenses leveraged by 10 basis points. Operating income was $24.7 million versus $33.2 million…

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And the first questioner today will be Jon Braatz with Kansas City Capital. Please go ahead.

Good morning, Maarten and Sherry.

Good morning.

Good morning, happy New Year.

Happy New Year to you. Returning to Aeropost, I know you've only had it for a while, but have you seen any traction yet? Let's say in the month of December in terms of your online activities and what you're trying to promote in terms of online. Did you see anything in the month of December?

Actually, Jon, we have. First, I'd like to say that it really is early on in the process as we're trying to understand where the greatest value is to be unlocked from this acquisition and how to best apply it and integrate those technological capabilities and the talent into the very core of our business at PriceSmart. One thing through aeropost.com that we've been able to do is test certain things and get kinks out so that as we transfer capabilities over to pricesmart.com, there's a much smoother transition and a better experience for the members. And we started to see sales on pricesmart.com in December. They also have some basic functionalities, the ability to – we're starting to have the ability for people to renew their membership or sign up for membership online. But this is really very early in the process. But we have a plan, aeropost.com gives us the opportunity to gain intel on what consumers are buying, expose us to customers that are not currently PriceSmart members, see what trends are and help us make intelligent decisions about how to have an effective platform.

Sure. Do you think going forward that you might disclose in Aeropost revenues, what might be facilitated revenue versus online transaction revenues?

I don't know that I can answer that question quite yet. It's really a more complex than that. A lot of work what we're doing with Aeropost is allowing for transactions that may occur, for example, in the club that are fulfilled directly with the member and whether you count that as part of pricesmart.com or Aero – so it's not as simple as looking on it that way, if you wouldn't mind, I'm sure we're going to be able to articulate it in a much clearer fashion if you give us a little bit more time.

Okay. And then when you look at the pace of investments that you're making in Aeropost, would you anticipate that pace to level off here to ratchet up, decline a little bit. How would you view Aeropost spending going forward?

Well, let me share with you an observation. If you look at what retailers are doing to meet the expectations of shoppers, and what they're investing in ecommerce, and omnichannel and digital transformation, I think we're taking a very measured approach. We certainly saw value in Aeropost, which is the reason why we acquired them, but that doesn't mean that it was just a plug and play, that was going to be the answer to all of our ecommerce and omnichannel needs. And as we're going through this process, we're making those decisions about where to invest. Yes, do I anticipate additional investments? Absolutely. At this point, it's difficult for me to quantify because we're in the stage of trying to make those evaluations, but I can tell you, we're being very measured, we are looking for opportunities just as we do with our business philosophy to take no frills approach and make sure that the results are going to be closely aligned with the investments that we will be making.

Okay. One last question on some of your visit to stores, you mentioned that there were some disappointments and so on. Were they more things that should be done locally or is it more of a going back to the corporate – sort of a corporate position or is it just a local thing that has to be corrected?

I think there was equal opportunity to be honest with you. Based on what I saw, there were things that all aspects of our Company could contribute to improvements in making all of our clubs look as good as what many of our clubs do.

Okay.

Back to the Six Rights.

Yes. I mean the Six Rights really is – it was – I had learned and by the way, I think, I left out one of the Six Rights that I was just going through which is the right place. But it really came back to fundamentals, when we were walking through a lot of the things that we saw that were just suboptimal, we’re like this correlates directly back to the Six Rights, reminder and a refresher and maybe that's why I took the time to lay it out on this call, that it's good for us to go back to our basics and make sure that we're applying that discipline stringently, and so – but the good news is, I saw a lot of opportunity with – that wouldn't take a tremendous amount of effort to improve those things.

Okay. One last question, anything new on the CEO search?

Well, the CEO search is something that's being handled by the Board and I'm not in a position to answer any questions about that other than the fact that it's something that the Board is taking responsibility for.

Okay. Thank you.

You are welcome.

[Operator Instructions] And the next questioner will be Pedro Leduc with JPMorgan. Please go ahead.

Hi. It's actually Newfoundland Capital Management, Pedro Leduc, yes. Thank you very much for taking the question. First on Colombia specifically, we saw recent measures there, but the government trying to limit the payable days for small, midsize suppliers. Just wondering how that would impact you if you do source locally? And if yes, I imagine many small suppliers, but just want to make sure the average size there hard works out? And then second of the market factors that you mentioned were impacting activity be it macro and social, et cetera. Have this any reverted has gotten any better any particular markets that you would highlight? Thank you.

Hi, Pedro and thanks for being on the call. And we got the two questions. So I think that on the first question, honestly, I'm going to have to follow-up with you, with some more details on that. On the second question, I'm sure that Sherry can add to my perspective, which is that we still see continued challenges in the markets that we've been calling out in the past quarters and I'm sure that you also are reading about and seeing, and we are managing through those, particularly in Nicaragua, in Costa Rica and in Panama, even in Barbados, we see some pressures. The good thing is that we do operate a portfolio of markets and we do have markets that are strong, but as has been said before, on the prior call, and on this call, right now, it feels like we have a somewhat more market simultaneously representing headwinds to our business than in the past. Sherry, would you like to add a little bit from your trips?

I think that's a good summary of market that I did not visit, which is obviously an area that we're focused on is Nicaragua and we're monitoring that very closely. The political and economic climate there is obviously challenging, the NICA Act was signed by President Trump on December 20 that includes sanctions. So that is a market that we're watching closely. Our first priority is to keep our members and our employees safe. And for a while early on, when there was some violence and strife in the markets, we curtailed hours, we increase security, those things abated, but it is a fluid and dynamic situation and now with the signing of the NICA Act that's something that we're paying close attention too.

And I will add Sherry to that that in Costa Rica, Pedro, the tax reform has passed, which hopefully will set the stage for recovery. But of course that's – it remains to be seen, but at least that has passed.

Interesting. Thank you, Sherry and Maarten. Now that just a follow-up on the gross margins, you've mentioned that has been expanding from non-merchandise revenues, the merchandise rough flats by the down from the visits Sherry that you've made. How do you feel your price points are at this point, should we maybe consider investing part of the non-merchandise margin gains into the merchandise business, trying to maybe increase the renewal rate. Just thinking how you guys are going to balance this one? Thank you.

That is certainly one of the areas that we are focused on. We have our routine comp shopping and analysis of how we compare to our competitors in the market. But as you know, and it seems you're familiar that our model is to try to maximize efficiencies and by as best we can so that we can reinvest that in lowering prices and being as competitive as possible to drive volume to give our members the best value. So that is an area that we're looking into. It's not a one-size-fits-all answer though, it's a very involved process where products, imports, locals, everything has to be looked at and analyzed on a very detailed basis to see what makes sense and what's right to do.

Great. Thank you very much, both.

And the next questioner today will be Ronald Bookbinder with IFS Securities. Please go ahead.

I guess it's good morning out there. Thank you for taking my question. First, I was wondering, you mentioned what categories were doing well. What were the weaker categories? And what is being done to help improve those or edit those categories going forward to help drive comps?

I think the category that we've probably are most focused on in terms is hardlines. It's a very challenging category. We haven't been doing as well as we'd like to be doing in that area. And we are addressing that in terms of looking at all aspects of our vendor relations, our buying, logistics, and again, I'm going to refer back to the Six Rights and applying those with great discipline with regard to hardlines.

Okay. And you've got a new buying team. What adjustments have they been making?

Excuse me for interrupting, I want to make sure I understood what you just said, because I don't know if it's what I said.

No. You have a new fixed buyer and they bought in some peaceful and so I was just wondering, what are they seeing as areas of opportunity and adjustments that they're making, which could help drive comp?

Again, well there's a few things we're doing, one is in terms of the vendor relations and going back to the vendors and negotiating for the best possible value, we are looking for ways that we can partner with our vendors. So as to make their lives easier and their ability to deliver more efficiently improve on that, that's part of why we're investing in these regional distribution centers because we see an opportunity there and product selection and also we're reviewing margins.

Okay. And moving over to Jamaica. What is the foreign exchange loss there? Was that primarily a non-cash loss?

Yes, it's unrealized, but it just has to do with our net U.S. dollar asset position there. And as you know, Jamaica, historically has typically devalued and it just all of a sudden took an appreciation turn. So it represented some exposure, but it's unrealized and to the extent that the currency would go back to its historical pattern of devaluing that should have been – that would then represent a favorable impact for us going forward. But that remains to be seen obviously, we don't know how currencies will fluctuate.

Okay. And one, the new smaller clubs in Panama and the Dominican they're not opening till the spring, but I was wondering, are you getting that feedback from the community that they're excited about it or how they're going to end up differing, whether they're rural or urban compared to your sort of legacy stores?

Well, the format that we're opening in Panama is one that we know that there's a strong support in terms of members wanting to be able to access PriceSmart in an area that's more convenient for them. So the new format that we're looking at in terms of the DR, that's going to be more of an urban concept. We have not gone out with any big announcements quite yet because we are working on making sure that this is going to be a concept that we're proud to introduce in terms of the capabilities and the ways that we expect our members should be able to shop in a smaller physical setting, and still realize the value, and the benefits, and the treasure hunt, and the excitement that our traditional clubs offer. And that's one that has more unknowns to it in terms of how we're going to be executing on these new concepts. And so until we get everything pinned down, we're not going to be getting ahead of ourselves. So there will be an advanced time where we will market to for new memberships, and at that time, we'll be announcing more of the specifics of the attributes.

Okay. And lastly on Aeropost, does there – I would think that their business has seasonality just like any other retail or such that during holiday, or Christmas, or Semana Santa, I don't know if Semana Santa, I would imagine it's still a sizable impact for them. Should we see seasonality in that revenue as we go through this? And sort of what magnitude of seasonality should we expect?

When you talk about that business, it's a loaded question because as Maarten explained, Aeropost has the Casillero what we refer to as a Casillero business, which is the freight forwarding business and packages that are being sent and that obviously, I think it's logical that that would have seasonality to it. There's the aeropost.com site, which like is basically a retail source and I would imagine that also has seasonality to it. But again the business that we acquired is primarily for us to build our business for pricesmart.com and omnichannel capabilities to be able to sell PriceSmart merchandise to our members in the most efficient way. I don't think that has seasonality to it.

Okay. Well, great. Thank you for taking my questions and good luck in the New Year.

Thank you.

Thank you.

And the next questioner today will be Thomas Vester with LGM Investments. Please go ahead.

Hi. Thank you for the call. Just firstly, I noticed in the 10-Q that you now showing club openings for the next two years instead of just one year. Can you say anything on since management chains has there been put any emphasis on let's say steepening the curve on the club opening front, so being slightly more aggressive in sourcing new sites? And perhaps also on that the [$220,000] number of two new openings is that – do you think that's final or do you still hope you can squeeze one or two more into that?

Yes, Thomas, thank you for the question. I don't think that we've really changed the way that we report. What we do is we announce new clubs when we have closed on the purchase or on the lease. And it just so happens that the four that we've announced right now, two have those fall in this fiscal year, right, which ends up an August 31 and the other two, number three and number four fall into the subsequent fiscal year – fiscal year 2020, which starts on September 1. So that's why maybe you notice that it's not necessarily a deliberate change and how we want to provide our outlook. Although we recognize that you and others are interested kind of in what are our forward-looking approaches and stance is in terms of buildings. We look at our markets. We evaluate opportunities as they come, we go through that very diligently to make sure that the growth opportunity is there, but also that the bottom line return opportunity is there and we are continuing to do that. So by no means do these four represent all we are looking at. We are actively looking at others, but we are not prepared at this point to discuss those or to disclose those because we haven't closed on any of those. And I would like to turn this to Sherry to add some more color.

Yes, I'd like to express that generally as I mentioned earlier, talking about driving growth with our new format concept is a major area of focus for me, and for management, and the company. As it has been discussed in the past, one of the major obstacles or deterrence to being able to expand quicker it has been real estate and identifying appropriate properties in the size that our traditional clubs required in the markets where we think we would be successful has been a challenge both in terms of locating them and the cost. So part of the whole strategy behind the new format concept is, this is a way for us to, we believe, create a shopping opportunity for our members that requires less real estate, less of an upfront investment in real estate would open up more opportunities for locations that are appropriate and assuming this works that will give us a great deal of momentum in being able to expand quicker. And that's a goal that we have and we're very focused on that.

And can you give anything on the timeframe for what you see today when you think you are at the place where you can pull the trigger on that and ramp it up? I mean, I don't expect any in precise state, but is this one quarter out or two quarter out or is it multiple years out? I mean, just any direction would be great?

Well, I'll give you some facts. We're currently looking at this new concept is opening in perhaps late spring and as we said in the past, we're going to open when we're ready because it's very important to us to do it right. I've been in the seat for seven weeks. So if you wouldn't mind giving me a little bit more time and also allowing us to see how this new format is accepted and received, I think we can give you a much better answer on a subsequent call.

Okay. And just on Aeropost, I am not sure I have read the numbers correctly here. So forgive me if I'm doing it wrong, but sales in Aeropost was down quite substantially from Q4 to Q1. Is that correct?

We’ll follow-up with you on that.

Okay. And then on the management, I appreciate your comment earlier Sherry that's the board issue which I fully understand, but again can any light be shed on the timeframe here to when [clarity] is expected?

As to what's expected?

On management structure for PriceSmart going forward.

Really I can't shed anymore light other than the fact that, that it is top of mind for the Board and that really this is a Board question, especially for me being in this position that I'm in right now. So I don't think it would be appropriate for me to give any further information on that.

Fully understand that. So thank you so much for your great effort in the last seven weeks, and best of luck.

Thank you.

Thank you.

Okay, operator, I don't think there are any more questions in the queue.

Thank you. Yes. And this will conclude our question-and-answer session and also today's conference call. Thank you all for attending today's presentation. And you may now disconnect your lines.